<PAGE>

                                                                      EXHIBIT 99

THIS SOLICITATION IS BEING CONDUCTED TO OBTAIN SUFFICIENT ACCEPTANCES OF A
JOINT CHAPTER 11 REORGANIZATION PLAN PRIOR TO THE FILING OF VOLUNTARY
REORGANIZATION CASES UNDER CHAPTER 11 OF TITLE 11 OF THE UNITED STATES CODE.
BECAUSE NO CHAPTER 11 CASES HAVE YET BEEN COMMENCED, THIS DISCLOSURE STATEMENT
HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT AS CONTAINING "ADEQUATE
INFORMATION" WITHIN THE MEANING OF SECTION 1125(a) OF THE BANKRUPTCY CODE.
FOLLOWING THE COMMENCEMENT OF THEIR CHAPTER 11 CASES, ENCOMPASS SERVICES
CORPORATION AND ITS SUBSIDIARIES EXPECT TO SEEK PROMPTLY AN ORDER OF THE
BANKRUPTCY COURT APPROVING THIS DISCLOSURE STATEMENT AND THE SOLICITATION OF
VOTES AND CONFIRMING THE JOINT PREPACKAGED REORGANIZATION PLAN DESCRIBED HEREIN.

                             DISCLOSURE STATEMENT

                            DATED OCTOBER 18, 2002

                       PREPETITION SOLICITATION OF VOTES
           WITH RESPECT TO THE JOINT PREPACKAGED REORGANIZATION PLAN

                                      OF

                        ENCOMPASS SERVICES CORPORATION

                                      AND

                               ITS SUBSIDIARIES

                              FROM THE HOLDERS OF

                 BANK DEBT UNDER THE EXISTING CREDIT AGREEMENT

                                      AND

                           SENIOR SUBORDINATED NOTES

NEITHER THIS DISCLOSURE STATEMENT NOR THE PLAN DESCRIBED HEREIN HAS BEEN FILED
WITH OR REVIEWED BY, AND THE NEW SECURITIES TO BE ISSUED ON OR AFTER THE
EFFECTIVE DATE WILL NOT HAVE BEEN THE SUBJECT OF A REGISTRATION STATEMENT FILED
WITH, THE SECURITIES AND EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY
AUTHORITY OF ANY STATE UNDER THE SECURITIES ACT OR UNDER ANY STATE SECURITIES
OR "BLUE SKY" LAWS. THE PLAN HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, AND
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED HEREIN. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED.

<PAGE>

   UNLESS OTHERWISE DEFINED IN THE GLOSSARY, WHICH IS ATTACHED HERETO AS
ANNEX I, OR ELSEWHERE IN THIS DISCLOSURE STATEMENT, CAPITALIZED TERMS USED
HEREIN HAVE THE MEANINGS ASCRIBED TO THEM IN THE PLAN, WHICH IS ATTACHED HERETO
AS EXHIBIT A.

   FOR PURPOSES OF THIS DISCLOSURE STATEMENT, THE FOLLOWING RULES OF
INTERPRETATION SHALL APPLY: (I) WHENEVER THE WORDS "INCLUDE," "INCLUDES" OR
"INCLUDING" ARE USED THEY SHALL BE DEEMED TO BE FOLLOWED BY THE WORDS "WITHOUT
LIMITATION," (II) THE WORDS "HEREOF," "HEREIN," "HEREBY" AND "HEREUNDER" AND
WORDS OF SIMILAR IMPORT SHALL REFER TO THIS DISCLOSURE STATEMENT AS A WHOLE AND
NOT TO ANY PARTICULAR PROVISION, (III) SECTION AND EXHIBIT REFERENCES ARE TO
THIS DISCLOSURE STATEMENT UNLESS OTHERWISE SPECIFIED, AND (IV) WITH RESPECT TO
ANY DISTRIBUTION UNDER THE PLAN, "ON" A DATE MEANS ON OR AS SOON AS REASONABLY
PRACTICABLE THEREAFTER.

   THE DEBTORS ARE FURNISHING THE SOLICITATION PACKAGE TO EACH RECORD HOLDER OF
ELIGIBLE CLAIMS AS OF THE VOTING RECORD DATE IN CONNECTION WITH THE DEBTORS'
SOLICITATION OF ACCEPTANCES OF THE PLAN DESCRIBED HEREIN PURSUANT TO SECTION
1126(b) OF THE BANKRUPTCY CODE. THIS DISCLOSURE STATEMENT IS TO BE USED BY EACH
SUCH HOLDER OF ELIGIBLE CLAIMS SOLELY IN CONNECTION WITH ITS EVALUATION OF THE
PLAN; USE OF THIS DISCLOSURE STATEMENT FOR ANY OTHER PURPOSE IS NOT AUTHORIZED.
THIS DISCLOSURE STATEMENT MAY NOT BE REPRODUCED OR PROVIDED TO ANYONE OTHER
THAN ADVISORS TO THE RECIPIENT WITHOUT THE PRIOR WRITTEN CONSENT OF ENCOMPASS.

   THE DEBTORS HAVE NOT COMMENCED REORGANIZATION CASES UNDER CHAPTER 11 OF THE
BANKRUPTCY CODE AS OF THE DATE OF THIS DISCLOSURE STATEMENT. IF, HOWEVER, THE
DEBTORS RECEIVE PROPERLY COMPLETED BALLOTS (THAT ARE NOT SUBSEQUENTLY REVOKED)
INDICATING ACCEPTANCE OF THE PLAN IN SUFFICIENT NUMBER AND AMOUNT TO MEET THE
VOTING REQUIREMENTS PRESCRIBED BY SECTION 1126 OF THE BANKRUPTCY CODE, THE
DEBTORS INTEND TO FILE (BUT HEREBY EXPRESSLY RESERVE THE RIGHT NOT TO FILE)
WITH THE BANKRUPTCY COURT VOLUNTARY PETITIONS FOR RELIEF UNDER CHAPTER 11 OF
THE BANKRUPTCY CODE, AND TO SEEK, AS PROMPTLY THEREAFTER AS PRACTICABLE,
CONFIRMATION OF THE PLAN. THE EFFECTIVE DATE OF THE PLAN IS EXPECTED TO OCCUR
SHORTLY AFTER THE BANKRUPTCY COURT'S ENTRY OF THE CONFIRMATION ORDER.

   IN THE EVENT THAT THE REQUISITE ACCEPTANCES ARE NOT RECEIVED OR, IF
RECEIVED, ARE SUBSEQUENTLY REVOKED PRIOR TO TERMINATION OF THE SOLICITATION,
THE DEBTORS HEREBY RESERVE THE RIGHT TO USE ANY AND ALL BALLOTS ACCEPTING THE
PLAN THAT WERE RECEIVED PURSUANT TO THE SOLICITATION AND NOT SUBSEQUENTLY
REVOKED TO SEEK CONFIRMATION OF THE PLAN (OR OF ANY MODIFICATION THEREOF THAT
DOES NOT MATERIALLY AND ADVERSELY AFFECT THE TREATMENT OF THE CLASSES OF CLAIMS
WITH RESPECT TO WHICH SUCH BALLOTS WERE CAST) PURSUANT TO SECTION 1129(b) OF
THE BANKRUPTCY CODE. SEE SECTION IV.M.4--"SUMMARY OF THE PLAN--ACCEPTANCE OR
REJECTION OF THE PLAN--NONCONSENSUAL CONFIRMATION."

THE VOTING DEADLINE TO ACCEPT OR REJECT THE JOINT PREPACKAGED REORGANIZATION
PLAN IS 5:00 P.M., EASTERN TIME, ON NOVEMBER 18, 2002, UNLESS EXTENDED BY THE
DEBTORS. IN ORDER TO BE COUNTED, BALLOTS MUST BE RECEIVED BY THE SOLICITATION
AGENT BY THE VOTING DEADLINE.

                                   * * * * *

<PAGE>

   BECAUSE ACCEPTANCE OF THE PLAN WILL CONSTITUTE ACCEPTANCE OF ALL THE
PROVISIONS THEREOF, HOLDERS OF ELIGIBLE CLAIMS ARE URGED TO CONSIDER CAREFULLY
THE INFORMATION REGARDING TREATMENT OF THEIR CLAIMS CONTAINED IN THIS
DISCLOSURE STATEMENT.

   THE CONFIRMATION AND EFFECTIVENESS OF THE PLAN IS SUBJECT TO MATERIAL
CONDITIONS PRECEDENT. SEE SECTION IV.N--"SUMMARY OF THE PLAN--CONDITIONS
PRECEDENT; WAIVER." THERE CAN BE NO ASSURANCE THAT THOSE CONDITIONS WILL BE
SATISFIED.

   THE DEBTORS PRESENTLY INTEND TO SEEK TO CONSUMMATE THE PLAN AND TO CAUSE THE
EFFECTIVE DATE TO OCCUR PROMPTLY AFTER CONFIRMATION OF THE PLAN. THERE CAN BE
NO ASSURANCE, HOWEVER, AS TO WHEN AND WHETHER CONFIRMATION OF THE PLAN AND THE
EFFECTIVE DATE ACTUALLY WILL OCCUR. PROCEDURES FOR DISTRIBUTIONS UNDER THE
PLAN, INCLUDING MATTERS THAT ARE EXPECTED TO AFFECT THE TIMING OF THE RECEIPT
OF DISTRIBUTIONS BY HOLDERS OF CLAIMS AND EQUITY INTERESTS IN CERTAIN CLASSES
AND THAT COULD AFFECT THE AMOUNT OF DISTRIBUTIONS ULTIMATELY RECEIVED BY SUCH
HOLDERS, ARE DESCRIBED IN SECTION IV.J--"SUMMARY OF THE PLAN--PROVISIONS
GOVERNING DISTRIBUTIONS."

   THE BOARDS OF DIRECTORS OF ENCOMPASS AND ITS SUBSIDIARIES HAVE APPROVED THE
PLAN AND RECOMMEND THAT THE HOLDERS OF ELIGIBLE CLAIMS VOTE TO ACCEPT THE PLAN
IN ACCORDANCE WITH THE VOTING INSTRUCTIONS SET FORTH IN SECTION XI--"THE
SOLICITATION; VOTING PROCEDURES" AND IN THE BALLOT. TO BE COUNTED, YOUR BALLOT
MUST BE DULY COMPLETED, EXECUTED, AND ACTUALLY RECEIVED BY THE VOTING DEADLINE.
HOLDERS OF ELIGIBLE CLAIMS ARE ENCOURAGED TO READ AND CONSIDER CAREFULLY THIS
ENTIRE DISCLOSURE STATEMENT, INCLUDING THE PLAN ATTACHED HERETO AS EXHIBIT A.

                                   * * * * *

   IF THE REQUISITE ACCEPTANCES ARE NOT RECEIVED, THE DEBTORS BELIEVE THAT THEY
MAY HAVE TO FILE TRADITIONAL, NON-PREPACKAGED PETITIONS UNDER CHAPTER 11 OF THE
BANKRUPTCY CODE. THERE CAN BE NO ASSURANCE, HOWEVER, THAT THE DEBTORS WILL BE
ABLE TO EMERGE FROM CASES UNDER CHAPTER 11 OF THE BANKRUPTCY CODE IN SUCH
CIRCUMSTANCES, AND THE DEBTORS MIGHT BE FORCED INTO LIQUIDATION UNDER CHAPTER 7
OF THE BANKRUPTCY CODE. THE DEBTORS CURRENTLY DO NOT HAVE A COMMITMENT FOR A
DIP FACILITY AND THERE CAN BE NO CERTAINTY THAT THEY WILL HAVE SUCH A
COMMITMENT AT THE TIME THAT THEY COMMENCE REORGANIZATION CASES UNDER CHAPTER 11
OF THE BANKRUPTCY CODE. THE DEBTORS BELIEVE THAT IF THEY ARE LIQUIDATED UNDER
CHAPTER 7, THE VALUES OF THE ASSETS AVAILABLE FOR PAYMENT TO CREDITORS WOULD BE
SIGNIFICANTLY LOWER THAN THE VALUES OF THE DISTRIBUTIONS CONTEMPLATED BY AND
UNDER THE PLAN. SEE SECTION VIII.C--"FEASIBILITY OF THE PLAN AND THE BEST
INTERESTS OF CREDITORS TEST--LIQUIDATION ANALYSIS."

                                   * * * * *

   THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE
PLAN, STATUTORY PROVISIONS, DOCUMENTS RELATED TO THE PLAN, ANTICIPATED EVENTS
IN THE DEBTORS' CHAPTER 11 CASES, AND FINANCIAL INFORMATION. ALTHOUGH THE
DEBTORS BELIEVE THAT THE PLAN AND RELATED DOCUMENT AND STATUTORY PROVISION
SUMMARIES ARE FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT
THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY
PROVISIONS. FACTUAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN
PROVIDED BY MANAGEMENT, EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED. THE

<PAGE>

DEBTORS ARE UNABLE TO WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED
HEREIN, INCLUDING THE FINANCIAL PROJECTIONS AND OTHER FINANCIAL INFORMATION, IS
WITHOUT ANY INACCURACY OR OMISSION.

   IN DETERMINING WHETHER TO VOTE TO ACCEPT THE PLAN, HOLDERS OF ELIGIBLE
CLAIMS MUST RELY ON THEIR OWN EXAMINATION OF THE DEBTORS AND THE TERMS OF THE
PLAN, INCLUDING THE MERITS AND RISKS INVOLVED. THE CONTENTS OF THIS DISCLOSURE
STATEMENT SHOULD NOT BE CONSTRUED AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL,
OR TAX ADVICE. EACH SUCH HOLDER SHOULD CONSULT WITH ITS OWN LEGAL, BUSINESS,
FINANCIAL, AND TAX ADVISORS WITH RESPECT TO ANY SUCH MATTERS CONCERNING THIS
DISCLOSURE STATEMENT, THE SOLICITATION, THE PLAN AND THE TRANSACTIONS
CONTEMPLATED THEREBY. SEE SECTION X--"CERTAIN FACTORS TO BE CONSIDERED" FOR A
DISCUSSION OF VARIOUS FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE
PLAN.

                                   * * * * *

   ENCOMPASS AND ITS SUBSIDIARIES ARE RELYING ON SECTION 3(a)(9) OF THE
SECURITIES ACT AND SIMILAR STATE LAW PROVISIONS, AND TO THE EXTENT APPLICABLE,
ON THE EXEMPTION FROM THE SECURITIES ACT AND EQUIVALENT STATE LAW REGISTRATION
REQUIREMENTS PROVIDED BY SECTION 1145(a)(1) OF THE BANKRUPTCY CODE, TO EXEMPT
FROM REGISTRATION UNDER THE SECURITIES LAWS THE OFFER AND SALE OF NEW
SECURITIES IN CONNECTION WITH THE SOLICITATION AND THE PLAN. SEE SECTION
VI.B--"CAPITAL STRUCTURE OF THE REORGANIZED DEBTORS--NEW SECURITIES" FOR A
DESCRIPTION OF THE NEW SECURITIES.

   THIS DISCLOSURE STATEMENT CONTAINS PROJECTED FINANCIAL INFORMATION REGARDING
THE REORGANIZED DEBTORS AND CERTAIN OTHER FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT, ALL OF WHICH ARE BASED ON VARIOUS ESTIMATES AND ASSUMPTIONS. SUCH
INFORMATION AND STATEMENTS ARE SUBJECT TO INHERENT UNCERTAINTIES AND TO A WIDE
VARIETY OF SIGNIFICANT BUSINESS, ECONOMIC, AND COMPETITIVE RISKS, INCLUDING
THOSE SUMMARIZED HEREIN. SEE SECTION X--"CERTAIN FACTORS TO BE CONSIDERED."

   WHEN USED IN THIS DISCLOSURE STATEMENT, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "WILL," "MAY," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH THE DEBTORS BELIEVE THAT THEIR
PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS
ARE REASONABLE, THEY CANNOT BE SURE THAT THEY WILL BE ACHIEVED. FORWARD-LOOKING
STATEMENTS IN THIS DISCLOSURE STATEMENT INCLUDE THOSE RELATING TO THE PAYMENTS
ON THE DEBTORS' CURRENT AND FUTURE DEBT INSTRUMENTS. THESE FACTORS ARE NOT
INTENDED TO REPRESENT A COMPLETE LIST OF THE GENERAL OR SPECIFIC FACTORS THAT
MAY AFFECT THE DEBTORS OR THE REORGANIZED DEBTORS. IT SHOULD BE RECOGNIZED THAT
OTHER FACTORS, INCLUDING GENERAL ECONOMIC FACTORS, SURETY BONDING AVAILABILITY
AND BUSINESS STRATEGIES, MAY BE SIGNIFICANT, PRESENTLY OR IN THE FUTURE, AND
THE FACTORS SET FORTH IN THIS DISCLOSURE STATEMENT MAY AFFECT THE DEBTORS TO A
MATERIALLY GREATER EXTENT THAN DESCRIBED HEREIN AND MAY CAUSE FUTURE RESULTS TO
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD LOOKING STATEMENTS
HEREIN. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE DEBTORS OR PERSONS
ACTING ON THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS SET FORTH IN THIS DISCLOSURE STATEMENT. EXCEPT AS
REQUIRED BY LAW, THE DEBTORS UNDERTAKE NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. FORWARD-LOOKING STATEMENTS ARE

<PAGE>

PROVIDED IN THIS DISCLOSURE STATEMENT PURSUANT TO THE SAFE HARBOR ESTABLISHED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, TO THE EXTENT
APPLICABLE, SECTION 1125(e) OF THE BANKRUPTCY CODE AND SHOULD BE EVALUATED IN
THE CONTEXT OF THE ESTIMATES, ASSUMPTIONS, UNCERTAINTIES, AND RISKS DESCRIBED
HEREIN.

   EXCEPT AS SET FORTH IN SECTION XI.J--"THE SOLICITATION; VOTING
PROCEDURES--FURTHER INFORMATION; ADDITIONAL COPIES," NO PERSON HAS BEEN
AUTHORIZED BY THE DEBTORS IN CONNECTION WITH THE PLAN OR THE SOLICITATION TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN
THIS DISCLOSURE STATEMENT AND THE EXHIBITS ATTACHED HERETO OR INCORPORATED BY
REFERENCE OR REFERRED TO HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEBTORS.
THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

   THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE
DATE HEREOF, AND NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT NOR THE
DISTRIBUTION OF ANY NEW SECURITIES PURSUANT TO THE PLAN WILL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF. ANY ESTIMATES OF CLAIMS OR
EQUITY INTERESTS SET FORTH IN THIS DISCLOSURE STATEMENT MAY VARY FROM THE
AMOUNTS OF CLAIMS OR EQUITY INTERESTS ULTIMATELY ALLOWED BY THE BANKRUPTCY
COURT.

   THE SUMMARIES OF THE PLAN AND OTHER DOCUMENTS CONTAINED IN THIS DISCLOSURE
STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN ITSELF, THE
EXHIBITS ATTACHED THERETO AND ALL DOCUMENTS DESCRIBED THEREIN. TO THE EXTENT OF
ANY INCONSISTENCY BETWEEN THIS DISCLOSURE STATEMENT AND THE PLAN, THE TERMS OF
THE PLAN SHALL GOVERN. THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT,
INCLUDING THE INFORMATION REGARDING THE HISTORY, BUSINESSES, AND OPERATIONS OF
THE DEBTORS, THE HISTORICAL AND PROJECTED FINANCIAL INFORMATION OF THE DEBTORS
AND THE LIQUIDATION ANALYSIS RELATING TO THE DEBTORS ARE INCLUDED HEREIN FOR
PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN. AS TO ANY JUDICIAL PROCEEDINGS
IN ANY COURT, INCLUDING ANY ADVERSARY PROCEEDINGS OR CONTESTED MATTERS THAT MAY
BE FILED IN THE BANKRUPTCY COURT, SUCH INFORMATION IS NOT TO BE CONSTRUED AS AN
ADMISSION OR STIPULATION BUT RATHER AS STATEMENTS MADE IN SETTLEMENT
NEGOTIATIONS AND SHALL BE INADMISSIBLE FOR ANY PURPOSE ABSENT THE EXPRESS
WRITTEN CONSENT OF THE DEBTORS AND THE PARTY AGAINST WHOM SUCH INFORMATION IS
SOUGHT TO BE ADMITTED.

                                   * * * * *

   AS OF THE DATE OF THE DISCLOSURE STATEMENT, ENCOMPASS HAD NOT FILED ITS
QUARTERLY REPORT ON FORM 10-Q (THE "10-Q") FOR THE QUARTER ENDED SEPTEMBER 30,
2002. THE 10-Q WILL CONTAIN, AMONG OTHER THINGS, UNAUDITED FINANCIAL
INFORMATION WITH RESPECT TO THE DEBTORS AS OF AND FOR THE THREE-AND SIX-MONTH
PERIODS ENDED SEPTEMBER 30, 2002. THE DEBTORS URGE THE HOLDERS OF ALL ELIGIBLE
CLAIMS TO OBTAIN AND REVIEW THE 10-Q PRIOR TO THE DATE ON WHICH SUCH HOLDER
VOTES TO ACCEPT OR REJECT THE PLAN. A COPY OF THE 10-Q MAY BE OBTAINED FREE OF
CHARGE FROM THE SOLICITATION AGENT AT 877-750-2689 OR MAY BE VIEWED AT
WWW.ENCOMPASS.COM.

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                              <C>
I. INTRODUCTION AND EXECUTIVE SUMMARY...........................................   1
    A. General..................................................................   1
    B. Summary of Anticipated Distributions Under the Plan......................   3
    C. Other Elements of the Plan...............................................   8
       1. DIP Facility..........................................................   8
       2. New Senior Credit Agreement...........................................   8
       3. Employee Incentive Programs...........................................   8
       4. Asset Disposition Program.............................................   9
    D. Estimated Post-Restructuring Capitalization..............................   9
    E. The Confirmation Hearing.................................................  10
    F. Summary of Post-Confirmation Operations..................................  10
    G. Reasons for the Solicitation; Recommendation.............................  10
    H. Summary of Voting Procedures.............................................  11
II. GENERAL INFORMATION REGARDING THE DEBTORS...................................  12
    A. Background...............................................................  12
    B. Events Leading to Chapter 11 Cases.......................................  12
    C. Restructuring Professionals..............................................  15
    D. Estimated Pre-Restructuring Indebtedness and Preferred Stock.............  16
    E. Litigation...............................................................  17
III. MANAGEMENT AND CORPORATE STRUCTURE OF THE REORGANIZED DEBTORS..............  17
    A. The Board of Directors and Executive Officers of the Reorganized Debtors.  17
       1. Reorganized Encompass.................................................  17
       2. Reorganized Subsidiaries..............................................  20
    B. Employee Incentive Programs..............................................  20
    C. Employment Agreements....................................................  20
IV. SUMMARY OF THE PLAN.........................................................  20
    A. Introduction.............................................................  20
    B. Schedule of Treatment of Claims and Equity Interests.....................  21
    C. Treatment of Unclassified Claims.........................................  21
       1. Administrative Expense Claims.........................................  22
       2. Priority Tax Claims...................................................  22
    D. Treatment of Classified Claims and Equity Interests......................  22
       1. Class 1-- Other Priority Claims.......................................  22
       2. Class 2 -- Intercompany Claims........................................  22
       3. Class 3 -- Subsidiary Interests.......................................  22
       4. Class 4 -- Secured Tax Claims.........................................  23
       5. Class 5 -- Other Secured Claims.......................................  23
       6. Class 6 -- Existing Credit Agreement Claims...........................  23
       7. Class 7 -- Senior Subordinated Note Claims............................  23
       8. Class 8 -- Junior Subordinated Notes Claims...........................  23
       9. Class 9 -- General Unsecured Claims...................................  23
       10. Class 10 -- Litigation Claims........................................  24
       11. Class 11 -- Mandatorily Redeemable Convertible Preferred Stock.......  24
       12. Class 12 -- Existing Common Stock and Section 510(b) Claims..........  24
       13. Class 13 -- Existing Other Equity Interests..........................  24
    E. Allowed Claims...........................................................  24
</TABLE>

                                      i

<PAGE>

<TABLE>
<S>                                                                                           <C>
    F. Postpetition Interest................................................................. 24
    G. Alternative Treatment................................................................. 25
    H. Tax Allocation........................................................................ 25
    I. Means for Implementation of the Plan.................................................. 25
       1. Continued Corporate Existence; Authorized Capital Stock............................ 25
       2. Restructuring Transactions......................................................... 25
       3. Substantive Consolidation for Purposes of Treating Impaired Claims................. 26
       4. Corporate Action; Cancellation of Securities....................................... 26
       5. Directors and Executive Officers................................................... 27
       6. New Securities..................................................................... 27
       7. New Senior Credit Agreement........................................................ 27
       8. Stock Option Plan.................................................................. 28
       9. Revesting of Assets................................................................ 28
       10. Preservation of Rights of Action; Settlement of Litigation Claims................. 28
       11. Effectuating Documents; Further Transactions...................................... 28
       12. Exemption from Certain Transfer Taxes............................................. 29
    J. Provisions Governing Distributions.................................................... 29
       1. Distributions for Claims Allowed as of the Effective Date.......................... 29
       2. Disbursing Agent................................................................... 29
       3. Surrender of Securities or Instruments............................................. 29
       4. Instructions to Disbursing Agent................................................... 30
       5. Services of Indenture Trustee...................................................... 30
       6. Notification Date for Distributions................................................ 30
       7. Means of Cash Payment.............................................................. 30
       8. Calculation of Distribution Amounts of New Common Stock............................ 30
       9. Delivery of Distributions; Undeliverable or Unclaimed Distributions................ 30
       10. Withholding and Reporting Requirements............................................ 31
       11. Setoffs........................................................................... 31
    K. Procedures for Resolving Disputed, Contingent, and Unliquidated Claims................ 31
       1. Objections to Claims and Equity Interests; Disputed Claims and Equity Interests.... 31
       2. No Distribution Pending Allowance.................................................. 32
       3. Distributions After Allowance...................................................... 32
    L. Treatment of Executory Contracts and Unexpired Leases................................. 32
       1. Assumed Contracts and Leases....................................................... 32
       2. Payments Related to Assumption of Contracts and Leases............................. 32
       3. Rejected Contracts and Leases...................................................... 33
       4. Claims Based on Rejection of Executory Contracts or Unexpired Leases............... 33
       5. Compensation and Benefit Plans and Treatment of Retirement Plans................... 33
    M. Acceptance or Rejection of the Plan................................................... 33
       1. Classes Entitled To Vote........................................................... 33
       2. Acceptance by Impaired Classes..................................................... 33
       3. Elimination of Classes............................................................. 33
       4. Nonconsensual Confirmation......................................................... 34
    N. Conditions Precedent; Waiver.......................................................... 34
       1. Conditions to Confirmation......................................................... 34
       2. Conditions to Effective Date....................................................... 34
       3. Waiver of Conditions............................................................... 36
    O. Modifications and Amendments; Withdrawal.............................................. 36
    P. Retention of Jurisdiction............................................................. 36
    Q. Compromises and Settlements........................................................... 37
</TABLE>

                                      ii

<PAGE>

<TABLE>
<S>                                                                                             <C>
    R. Miscellaneous Provisions................................................................ 37
       1. Bar Dates for Certain Claims......................................................... 37
       2. Payment of Statutory Fees............................................................ 38
       3. Severability of Plan Provisions...................................................... 38
       4. Successors and Assigns............................................................... 38
       5. Discharge of the Debtors and Injunction.............................................. 38
       6. Releases by the Debtors.............................................................. 39
       7. Other Releases....................................................................... 39
       8. Exculpation and Limitation of Liability.............................................. 40
       9. Term of Injunctions or Stays......................................................... 40
       10. Binding Effect...................................................................... 40
       11. Revocation, Withdrawal, or Non-Consummation......................................... 40
       12. Committees.......................................................................... 41
       13. Plan Supplement..................................................................... 41
       14. Notices to Debtors.................................................................. 41
       15. Indemnification Obligations......................................................... 41
       16. Governing Law....................................................................... 41
       17. Prepayment.......................................................................... 42
       18. Section 1125(e) of the Bankruptcy Code.............................................. 42
V. ANTICIPATED EVENTS DURING THE CHAPTER 11 CASES.............................................. 42
    A. Commencement of the Chapter 11 Cases.................................................... 42
       1. Designation as Complex Chapter 11 Cases.............................................. 42
       2. Administrative Expense Status to Postpetition Undisputed Obligations................. 42
       3. Payment of Prepetition Employee Wages, Compensation and Employee Benefits............ 43
       4. Authority to Pay Prepetition Claims of Critical Vendors.............................. 43
       5. Continuation of Existing Investment Practices........................................ 43
       6. Adequate Assurance to Utility Companies.............................................. 43
       7. Honoring Prepetition Warranty Claims and Customer Obligations........................ 44
       8. Payment of Prepetition Sales and Use Taxes........................................... 44
       9. Payment of Prepetition Insurance Charges and Other Charges........................... 44
       10. Retention of Professionals Utilized in Ordinary Course of Business.................. 44
       11. Procedures for Interim Compensation and Reimbursement of Expenses of Professionals.. 44
       12. Schedules and Statement of Financial Affairs........................................ 44
       13. Approval of Prepetition Solicitation and Scheduling of Confirmation Hearing......... 44
       14. Cash Management System.............................................................. 44
       15. Retention of Professionals.......................................................... 45
       16. Joint Administration................................................................ 45
    B. Debtor In Possession Financing.......................................................... 45
       1. Structure............................................................................ 45
       2. Interest Rates and Fees.............................................................. 46
       3. Security and Guarantees.............................................................. 46
       4. Covenants............................................................................ 46
       5. Maturity and Amortization............................................................ 46
       6. Alternatives to the DIP Facility..................................................... 46
    C. Anticipated Timetable for the Chapter 11 Cases.......................................... 47
VI. CAPITAL STRUCTURE OF THE REORGANIZED DEBTORS............................................... 47
    A. Estimated Post-Restructuring Indebtedness............................................... 47
    B. New Securities.......................................................................... 47
       1. New Common Stock..................................................................... 47
       2. New Preferred Stock.................................................................. 48
</TABLE>

                                      iii

<PAGE>

<TABLE>
<S>                                                                                                            <C>
       3. New Options......................................................................................... 48
       4. Securities Law Matters.............................................................................. 48
    C. New Senior Credit Agreement............................................................................ 49
       1. New Term Loan....................................................................................... 49
       2. Exit Facility....................................................................................... 51
VII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN...................................................... 53
    A. Introduction........................................................................................... 53
    B. Consequences to Holders of Claims or Interests......................................................... 53
       1. Realization and Recognition of Gain or Loss in General.............................................. 53
       2. Holders of Allowed Administrative Claims (Unclassified) and Allowed Other Priority Claims
            (Class 1)......................................................................................... 54
       3. Holders of Allowed Other Secured Claims (Class 5)................................................... 54
       4. Holders of Allowed Existing Credit Agreement Claims (Class 6)....................................... 54
       5. Holders of Allowed Senior Subordinated Note Claims (Class 7)........................................ 55
       6. Holders of Junior Subordinated Note Claims (Class 8), Litigation Claims (Class 10),
            Mandatorily Redeemable Convertible Preferred Stock Equity Interests (Class 11), Existing
            Common Stock Equity Interests and Section 510(b) Claims (Class 12), and Existing Other
            Equity Interests (Class 13)....................................................................... 56
       7. Holders of Allowed General Unsecured Claims (Class 9)............................................... 56
       8. Allocation of Consideration to Interest............................................................. 56
       9. Tax Treatment of Gain Recognized on Subsequent Sale of Certain Stock................................ 56
       10. Withholding........................................................................................ 56
    C. Consequences to Debtors or Reorganized Debtors......................................................... 57
       1. Discharge-of-Indebtedness Income Generally.......................................................... 57
       2. Attribute Reduction................................................................................. 57
       3. Utilization of Net Operating Loss Carryovers........................................................ 58
       4. Consolidated Return Items........................................................................... 59
       5. Alternative Minimum Tax............................................................................. 59
VIII. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST........................................ 59
    A. Feasibility of the Plan................................................................................ 59
    B. Best Interests Test.................................................................................... 60
    C. Liquidation Analysis................................................................................... 61
    D. Valuation of the Reorganized Debtors................................................................... 62
IX. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN................................................. 64
    A. Commencement of a "Traditional" Chapter 11 Case........................................................ 64
    B. Alternative Plan(s).................................................................................... 64
    C. Liquidation under Chapter 7 or Chapter 11.............................................................. 64
X. CERTAIN FACTORS TO BE CONSIDERED........................................................................... 65
    A. Bankruptcy Proceedings and Debtors' Circumstances...................................................... 65
    B. Business and Industry Risks............................................................................ 67
       1. Debt and Cash Flow.................................................................................. 67
       2. Facilities Services Industry Competition............................................................ 67
       3. Cyclical Market Conditions.......................................................................... 67
       4. Dependence Upon Key Personnel and Skilled Labor Force............................................... 68
       5. Nature of Industry Contracts........................................................................ 68
       6. Reliance Upon Depressed Industry Sectors............................................................ 69
       7. Performance Bonding Requirements.................................................................... 69
       8. Unfavorable Weather or Seasonal Variations.......................................................... 70
       9. Integration of Acquired Businesses.................................................................. 70
</TABLE>

                                      iv

<PAGE>

<TABLE>
  <S>                                                                      <C>
      C. Transactions with Affiliates..................................... 70
         1. Directors' Affiliation with Apollo............................ 70
         2. Acquisition of Encompass Indebtedness and Equity Interests.... 70
         3. Management Transactions....................................... 70
      D. Failure to Receive Requisite Acceptances......................... 71
      E. Failure to Confirm the Plan...................................... 71
      F. Failure to Consummate the Plan................................... 72
      G. New Stock Risks.................................................. 72
      H. Claims Estimations............................................... 72
      I. Certain Tax Considerations....................................... 72
      J. Inherent Uncertainty of Financial Projections.................... 73
  XI. THE SOLICITATION; VOTING PROCEDURES................................. 73
      A. Voting Deadline.................................................. 73
      B. Voting Procedures................................................ 73
      C. Special Note for Holders of Senior Subordinated Notes............ 74
         1. Beneficial Owners............................................. 74
         2. Nominees...................................................... 74
         3. Securities Clearing Agencies.................................. 75
         4. Miscellaneous................................................. 75
      D. Fiduciaries and other Representatives............................ 75
      E. Parties Entitled to Vote......................................... 76
      F. Agreements Upon Furnishing Ballots............................... 76
      G. Waivers of Defects, Irregularities, Etc.......................... 77
      H. Withdrawal of Ballots; Revocation................................ 77
      I. Delivery of Extinguished Securities.............................. 77
      J. Further Information; Additional Copies........................... 78
  XII. RECOMMENDATION AND CONCLUSION...................................... 78
</TABLE>

                             TABLE OF ATTACHMENTS

<TABLE>
<C>         <S>
ANNEX I     Glossary
EXHIBIT A   The Plan
EXHIBIT B-1 Encompass Service Corporation's Form 10-K for the year ended December 31, 2001
EXHIBIT B-2 Encompass Service Corporation's Form 10-K/A for the year ended December 31, 2001, as
              filed on April 30, 2002
EXHIBIT B-3 Encompass Service Corporation's Form 10-K/A for the year ended December 31, 2001, as
              filed on July 1, 2002
EXHIBIT B-4 Encompass Service Corporation's Form 10-Q for the quarter ended June 30, 2002
EXHIBIT C   Liquidation Analysis and Best Interests Test
EXHIBIT D   Financial Projections
EXHIBIT E   List of Subsidiaries
</TABLE>

                                       v

<PAGE>

                    I.  INTRODUCTION AND EXECUTIVE SUMMARY

A.  General

   This Disclosure Statement has been prepared to comply with section 1125 of
the Bankruptcy Code and is hereby transmitted by the Debtors pursuant to
section 1126(b) of the Bankruptcy Code for use in the Solicitation of
acceptances of the Plan, a copy of which is attached hereto as Exhibit A. At
this time, the Debtors have not commenced cases under chapter 11 of the
Bankruptcy Code, but the Debtors are soliciting acceptances of the Plan from
holders of Eligible Claims. If sufficient votes for acceptance of the Plan are
received, the Debtors expect to commence chapter 11 cases and to seek promptly
Confirmation of the Plan by the Bankruptcy Court. The Debtors believe that this
prepetition Solicitation will significantly simplify, shorten, and reduce the
cost of the administration of, and minimize disputes during, their Chapter 11
Cases and minimize the disruption of their businesses that could result from a
traditional bankruptcy case, which could be contested and protracted. Further,
in a lengthy bankruptcy case, the Debtors believe that there is a substantial
risk that recoveries by holders of Eligible Claims would be of significantly
less value than the values of the proposed recoveries under the Plan. If, inter
alia, the Debtors do not receive the Requisite Acceptances on or before the
Voting Deadline, the Debtors will be forced to evaluate other available
options, including filing one or more traditional, non-prepackaged chapter 11
cases.

   The primary purpose of the Plan is to effectuate the Restructuring of the
Debtors' capital structure in order to bring it into alignment with the
Debtors' present and future operating prospects and to provide the Debtors with
greater surety bonding capacity and liquidity. Presently, the surety bonding
capacity available to the Debtors is inadequate and the funds expected to be
generated by the Debtors will not be sufficient to meet the Debtors' debt
service requirements and satisfy its debt obligations unless the Restructuring
is consummated. The Debtors believe that the Restructuring will substantially
reduce uncertainty with respect to their future and better position them to
obtain necessary surety bonding capacity and develop and maintain new customers.

   The Restructuring will reduce the amount of the Debtors' outstanding
indebtedness and accrued interest thereon by approximately $751.7 million
(based upon approximate balances as of September 30, 2002).

   A substantial portion of the Debtors' indebtedness will be converted into
equity of Reorganized Encompass through the transfer of Existing Credit
Agreement Claims (including any amounts that may be drawn under letters of
credit issued and outstanding as of the Petition Date under the Existing Credit
Agreement) to the Debtors in exchange for indebtedness of Reorganized Encompass
under the New Term Loan and shares of New Common Stock and the transfer of
Senior Subordinated Note Claims to the Debtors in exchange for shares of New
Common Stock. The Debtors estimate that their outstanding indebtedness will be
reduced by approximately $747.6 million (based upon approximate balances as of
September 30, 2002) as a result of such transfers. By offering the holders of
indebtedness under the Existing Credit Agreement and under the Senior
Subordinated Notes equity of Reorganized Encompass, the Debtors intend that
such holders will participate in the long-term potential appreciation of the
Debtors' business, which the Debtors expect will be enhanced by the reduction
of the Debtors' debt obligations.

   In addition to the indebtedness converted into equity, the Restructuring
will also reduce Encompass' outstanding indebtedness by an additional amount of
approximately $4.1 million through the cancellation of all of the Junior
Subordinated Note Claims.

   The Restructuring will also reduce amounts owed by Encompass by cancelling
the Mandatorily Redeemable Convertible Preferred Stock Equity Interests and any
accrued dividends that would otherwise be due and payable with respect to such
stock beginning February 22, 2003. As of September 30, 2002, the face amount of
the outstanding Mandatorily Redeemable Convertible Preferred Stock was $309.0
million, including accrued and unpaid dividends thereon as of such date of
approximately $52.8 million. All other Equity Interests in Encompass also will
be cancelled and the holders of such Equity Interests will not receive or
retain any property or interest on account of such Equity Interests.

                                      1

<PAGE>

   The following table shows the expected effects on the Debtors'
capitalization from the consummation of the Plan.

<TABLE>
<CAPTION>
                                                                                     Estimated
                                                                                 Post-Restructuring
                                                   Pre-Restructuring Adjustments        Debt
($ in millions)                                    ----------------- ----------- ------------------
<S>                                                <C>               <C>         <C>
Revolver..........................................     $  203.2*      $  (203.2)       $  0.0
Term Loan A Facility..............................        125.2          (125.2)          0.0
Term Loan B Facility..............................        163.7          (163.7)          0.0
Term Loan C Facility..............................         96.5           (96.5)          0.0
New Term Loan.....................................          0.0           200.0         200.0
                                                       --------       ---------        ------
   Total Existing Bank Debt.......................     $  588.6**     $  (388.6)       $200.0
Other Secured Debt................................          0.6             0.0           0.6
                                                       --------       ---------        ------
   Total Secured Debt.............................     $  589.2       $  (388.6)       $200.6
Senior Subordinated Notes.........................        335.0***       (335.0)          0.0
Junior Subordinated Notes.........................          4.1            (4.1)          0.0
                                                       --------       ---------        ------
   Total Debt.....................................     $  928.3       $  (727.7)       $200.6
Mandatorily Redeemable Convertible Preferred Stock        309.0          (309.0)          0.0
                                                       --------       ---------        ------
   Total Debt and Preferred Stock.................     $1,237.3       $(1,036.7)       $200.6
</TABLE>
--------
*   Pre-Restructuring balance excludes $25.4 million of issued and undrawn
    letters of credit. The estimated post-Restructuring balance assumes that no
    drawings have been made on the Exit Facility availability of up to $100.0
    million.
**  Excludes approximately $3.1 million of accrued and unpaid interest as of
    September 30, 2002. Also excludes approximately $6.2 million of swap
    obligations.
*** Excludes $14.7 million of accrued interest as of September 30, 2002.

   The Debtors currently anticipate that all or most of the Subsidiaries will
commence chapter 11 cases (except that certain inactive Subsidiaries may be
liquidated either pursuant to state law or pursuant to chapter 7 under the
Bankruptcy Code). The Subsidiaries will continue to operate their businesses in
the ordinary course during any proceedings under the Bankruptcy Code. However,
certain Subsidiaries and their respective assets may be divested by Encompass
during such proceedings and/or subsequent to the consummation of the
Restructuring with the proceeds from such divestitures being used, at least in
part, to repay outstanding indebtedness. See Section I.C.5-- "INTRODUCTION AND
EXECUTIVE SUMMARY--OTHER ELEMENTS OF THE PLAN--ASSET DISPOSITION."

   For voting and confirmation purposes, the Plan is premised on the
administrative and procedural consolidation of all of the Estates. For
distribution purposes, the Plan is premised on the substantive consolidation of
the holders of Impaired Claims to whom distributions are proposed to be made.
On the Effective Date, (i) Impaired Claims against any Debtor and all
guaranties by any Debtor of such Impaired Claims shall be treated as a single
Claim against all of the Debtors, and any Impaired Claims for joint and several
liability against two or more Debtors shall be treated and Allowed as a single
Impaired Claim against the consolidated Debtors, and (ii) each holder of a
Claim in an Impaired Class of Claims that files a Claim in the Chapter 11 Case
of any Debtor shall be treated as one such Claim for distribution purposes;
provided that the holders of the Impaired Claims specified in (i) and (ii) are
the holders of Impaired Claims to whom distributions are proposed to be made
under the Plan. See Section IV.I.3-- "SUMMARY OF THE PLAN--MEANS FOR
IMPLEMENTATION OF THE PLAN--SUBSTANTIVE CONSOLIDATION FOR PURPOSES OF TREATING
IMPAIRED CLAIMS."

   This Disclosure Statement sets forth certain detailed information regarding
the Debtors' history, their projections for future operations, and significant
events expected to occur during the Chapter 11 Cases. This Disclosure Statement
also describes the Plan, alternatives to the Plan, effects of Confirmation of
the Plan, and the manner in which distributions will be made under the Plan. In
addition, this Disclosure Statement discusses the Confirmation process and the
voting procedures that holders of Eligible Claims must follow for their votes
to be counted.

                                      2

<PAGE>

   Although Encompass has presented an outline of the material terms of the
Plan to certain representatives of the Senior Lenders, Encompass has not
engaged in any substantive negotiations with any of its creditors or their
representatives with respect to the Plan. None of Encompass' creditors have
indicated that they intend to support or vote for the Plan.

B.  Summary of Anticipated Distributions Under the Plan

   Under the Plan, Claims against and Equity Interests in the Debtors are
divided into Classes. Certain Claims, including Allowed Administrative Expense
Claims, Priority Tax Claims, Other Priority Claims, Secured Tax Claims, Other
Secured Claims and General Unsecured Claims will receive payment in full in
Cash prior to the Effective Date or on the Distribution Date, as such claims
are liquidated, or in installments over time, as permitted by the Bankruptcy
Code, or as agreed with the holders of such Claims. All other Allowed Claims
and Equity Interests will receive the distributions and recoveries (if any)
described in the table below.

   The table below summarizes the classification and treatment of the
prepetition Claims and Equity Interests under the Plan. Estimated Claim amounts
are based upon estimated balances as of September 30, 2002. Estimated recovery
percentages are based upon Houlihan Lokey's calculations using an assumption of
$425 million of post-Restructuring equity value* of the Reorganized Debtors and
the estimated values of Claims as of September 30, 2002 (see Section
VIII.D--"FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS
TEST--VALUATION OF THE REORGANIZED DEBTORS"). The actual Allowed amount and
recovery percentage may vary materially depending upon the nature and extent of
Claims actually asserted. This summary is qualified in its entirety by
reference to the provisions of the Plan.
--------
*  Post-Restructuring equity value was determined using a variety of standard
   valuation methodologies including a market multiple approach and a
   discounted cash flow approach. Such valuation is based on information and
   projections provided to Houlihan Lokey by Encompass' management. Houlihan
   Lokey assumed and relied upon the accuracy and completeness of the
   information provided to them and has not independently verified the accuracy
   and completeness of the information provided by the Debtors. The trading
   values of Encompass' debt and equity securities post-Restructuring may
   differ materially from Houlihan Lokey's valuation estimates.

<TABLE>
<CAPTION>
   Class Description                     Treatment Under the Plan                 Recovery%
------------------------   ----------------------------------------------------   ---------
<C>                        <S>                                                    <C>
  Administrative Expense     Each holder of an Allowed Administrative               100%
  Claims                   Expense Claim will receive, on the latest of (i) the
                           Distribution Date, (ii) the date on which its
                           Administrative Expense Claim becomes an
                           Allowed Administrative Expense Claim, and (iii)
                           the date on which its Administrative Expense
                           Claim becomes payable under any agreement
                           relating thereto, Cash equal to the unpaid portion
                           of its Allowed Administrative Expense Claim.
                           Notwithstanding the foregoing, (a) any Allowed
                           Administrative Expense Claim based on a liability
                           incurred by the Debtors in the ordinary course of
                           business during the Chapter 11 Cases will be paid
                           in the ordinary course of business, in accordance
                           with the terms and conditions of any agreement
                           relating thereto and (b) any Allowed
                           Administrative Expense Claim may be paid on
                           such other terms as may be agreed on between the
                           holder of such claim and the Debtors.

                             Pursuant to section 1123(a)(1) of the
                           Bankruptcy Code, holders of Administrative
                           Expense Claims are not entitled to vote.
</TABLE>

                                      3

<PAGE>

<TABLE>
<CAPTION>
 Class Description                 Treatment Under the Plan                Recovery%
------------------- ------------------------------------------------------ ---------
<C>                 <S>                                                    <C>
Priority Tax Claims On the later of (i) the Distribution Date and (ii) the   100%
                    date such Priority Tax Claim becomes an Allowed
                    Priority Tax Claim, each holder of an Allowed
                    Priority Tax Claim will receive in full satisfaction,
                    settlement, release, and discharge of and in
                    exchange for such Allowed Priority Tax Claim, in
                    the sole discretion of the Debtors, (a) Cash equal to
                    the unpaid portion of such Allowed Priority Tax
                    Claim, (b) deferred Cash payments over a period
                    not exceeding six (6) years after the date of
                    assessment of such Allowed Priority Tax Claim, of
                    a value, as of the Effective Date, equal to such
                    Allowed Priority Tax Claim, or (c) such other
                    treatment as to which the Debtors and such holder
                    will have agreed upon in writing; provided,
                    however, that the Debtors reserve the right to
                    prepay any Allowed Priority Tax Claim, or any
                    remaining balance of any Allowed Priority Tax
                    Claim, in full at any time on or after the
                    Distribution Date without premium or penalty;
                    provided further, however, that no holder of an
                    Allowed Priority Tax Claim will be entitled to any
                    payments on account of any pre-Effective Date
                    interest accrued on or penalty arising after the
                    Petition Date with respect to or in connection with
                    such Allowed Priority Tax Claim.

</TABLE>
<TABLE>
<C>                   <S>                                                    <C>
                      Pursuant to section 1123(a)(1) of the Bankruptcy         100%
                      Code, holders of Priority Tax Claims are not
                      entitled to vote.

  Class Description                  Treatment Under the Plan                Recovery%
--------------------- ------------------------------------------------------ ---------
Class 1               On the later of (i) the Distribution Date and (ii) the   100%
                      date on which its Other Priority Claim becomes an
Other Priority Claims Allowed Other Priority Claim, each holder of an
                      Allowed Other Priority Claim will receive, in full
                      satisfaction, settlement, release, and discharge of,
                      and in exchange for, such Allowed Other Priority
                      Claim, Cash equal to the full amount of its
                      Allowed Other Priority Claim.

                      Holders of Other Priority Claims are unimpaired,
                      are deemed to have accepted the Plan, and are not
                      entitled to vote.
</TABLE>

                                      4

<PAGE>

<TABLE>
<CAPTION>
 Class Description                  Treatment Under the Plan                 Recovery%
-------------------- ------------------------------------------------------- ---------
<C>                  <S>                                                     <C>
Class 2              The legal, equitable and contractual rights of the        100%
                     holders of Allowed Intercompany Claims are
Intercompany Claims  unaltered by the Plan, or such Allowed
                     Intercompany Claims will otherwise be rendered
                     unimpaired pursuant to section 1124 of the
                     Bankruptcy Code.

                     Holders of Intercompany Claims are unimpaired,
                     are deemed to have accepted the Plan, and are not
                     entitled to vote.

 Class Description                  Treatment Under the Plan                 Recovery%
-------------------- ------------------------------------------------------- ---------
Class 3              The legal, equitable, and contractual rights of the       100%
                     holders of Allowed Subsidiary Interests are
Subsidiary Interests unaltered by the Plan, or such Allowed Subsidiary
                     Interests will otherwise be rendered unimpaired
                     pursuant to section 1124 of the Bankruptcy Code.

                     Holders of Subsidiary Interests are unimpaired, are
                     deemed to have accepted the Plan, and are not
                     entitled to vote.

 Class Description                  Treatment Under the Plan                 Recovery%
-------------------- ------------------------------------------------------- ---------
Class 4              Except to the extent that a holder of an Allowed          100%
                     Secured Tax Claim has been paid by the Debtors
Secured Tax Claims   prior to the Effective Date or agrees to a different
                     treatment, each holder of an Allowed Secured Tax
                     Claim will receive, at the sole option of the
                     Reorganized Debtors, (i) Cash in the amount of
                     such Allowed Secured Tax Claim, including any
                     interest required by section 506(b) of the
                     Bankruptcy Code, on the later of the Effective
                     Date and the date on which such Allowed Secured
                     Tax Claim becomes an Allowed Secured Tax
                     Claim, or as soon thereafter as is practicable, or (ii)
                     equal annual Cash payments in an aggregate
                     amount equal to such Allowed Secured Tax Claim,
                     together with interest at a fixed annual rate equal
                     to 7.0% over a period through the sixth
                     anniversary of the date of assessment of such
                     Allowed Secured Tax Claim, or upon such other
                     terms determined by the Bankruptcy Court to
                     provide the holder of such Allowed Secured Tax
                     Claim deferred Cash payments having a value, as
                     of the Effective Date, equal to such Allowed
                     Secured Tax Claim.

                     Holders of Secured Tax Claims are unimpaired,
                     are deemed to have accepted the Plan, and are not
                     entitled to vote.
</TABLE>

                                      5

<PAGE>

<TABLE>
<CAPTION>
      Class Description                     Treatment Under the Plan               Recovery %
      -----------------       ---------------------------------------------------- ----------
<C>                           <S>                                                  <C>
Class 5                       The legal, equitable, and contractual rights of the     100%
                              holders of Allowed Other Secured Claims are
Other Secured Claims          unaltered by the Plan, or such Allowed Other
                              Secured Claims will otherwise be rendered
                              unimpaired pursuant to section 1124 of the
                              Bankruptcy Code.

                              Holders of Other Secured Claims are unimpaired,
                              are deemed to have accepted the Plan, and are not
                              entitled to vote.

      Class Description                     Treatment Under the Plan               Recovery %
      -----------------       ---------------------------------------------------- ----------
Class 6                       On the Effective Date, each holder of an Allowed       90.3%*
                              Existing Credit Agreement Claim will receive, in
Existing Credit               full satisfaction, settlement, release and discharge
  Agreement Claims            of and in exchange for such Allowed Existing
                              Credit Agreement Claim, (i) a Pro Rata amount of
Estimated Amount:             indebtedness under the New Term Loan and all
  $594.8 million, plus any    rights related to such indebtedness under the New
  accrued interest as of the  Term Loan and (ii) a Pro Rata distribution of
  Petition Date ($3.1 million 34,000,000 shares of the New Common Stock.
  as of September 30, 2002)   Holders of Existing Credit Agreement Claims are
                              Impaired and entitled to vote.
Estimated Issued and
  Undrawn Letters of
  Credit:
  $25.4 million
                              * Assumes that the issued and outstanding letters
                                of credit are not drawn.

      Class Description                     Treatment Under the Plan               Recovery %
      -----------------       ---------------------------------------------------- ----------
Class 7                       On the later of (i) the Effective Date and (ii) the    24.3%
                              date on which its Senior Subordinated Note Claim
Senior Subordinated Note      becomes an Allowed Senior Subordinated Note
  Claims                      Claim, or, in each case, as soon as practicable
                              thereafter, each holder of an Allowed Senior
Estimated Amount of Senior    Subordinated Note Claim will transfer to the
  Subordinated Note Claims:   Debtors such Allowed Senior Subordinated Note
  $335 million, plus any      Claim and will receive from the Debtors in
  accrued interest as of the  exchange therefor and in full satisfaction,
  Petition Date ($14.7        settlement, release, and discharge of such Claim, a
  million as of September     Pro Rata distribution of 8,500,000 shares of New
  30, 2002)                   Common Stock.
                              Holders of Senior Subordinated Note Claims are
                              Impaired and entitled to vote.

      Class Description                     Treatment Under the Plan               Recovery %
      -----------------       ---------------------------------------------------- ----------
Class 8                       On the Effective Date, all Junior Subordinated            0%
                              Note Claims will be cancelled, and the holders of
Junior Subordinated Notes     all Junior Subordinated Note Claims will not
  Claims                      receive any distribution under the Plan.
                              Holders of Junior Subordinated Notes Claims are
Estimated Amount of Junior    Impaired, are deemed to have rejected the Plan,
  Subordinated Notes Claims:  and are not entitled to vote.
  $4.1 million, plus any
  accrued interest as of the
  Petition Date
</TABLE>

                                      6

<PAGE>

<TABLE>
<CAPTION>
    Class Description                   Treatment Under the Plan               Recovery %
    -----------------     ---------------------------------------------------- ----------
<C>                       <S>                                                  <C>
Class 9                   Except to the extent that a holder of an Allowed        100%
General Unsecured Claims  General Unsecured Claim has been paid pursuant
Estimated Amount:         to the Critical Vendor Order or otherwise, the
$105.9 million            legal, equitable and contractual rights of the
                          holders of Allowed General Unsecured Claims will
                          be unaltered by the Plan, or such Allowed General
                          Unsecured Claims will otherwise be rendered
                          unimpaired pursuant to section 1124 of the
                          Bankruptcy Code.
                          Holders of General Unsecured Claims are
                          unimpaired, are deemed to have accepted the Plan,
                          and are not entitled to vote.

    Class Description                   Treatment Under the Plan               Recovery %
    -----------------     ---------------------------------------------------- ----------
Class 10                  Except to the extent that a holder of an Allowed          0%
Litigation Claims         Litigation Claim has been paid by the Debtors
                          prior to the Effective Date or agrees to a different
                          treatment, the holders of Litigation Claims will not
                          receive or retain any property on account of
                          Litigation Claims.
                          Holders of Litigation Claims are Impaired, are
                          deemed to have rejected the Plan, and are not
                          entitled to vote.

    Class Description                   Treatment Under the Plan               Recovery %
    -----------------     ---------------------------------------------------- ----------
Class 11                  On the Effective Date, all Mandatorily                    0%
Mandatorily Redeemable    Redeemable Convertible Preferred Stock and the
  Convertible Preferred   accrued and unpaid dividends thereon will be
  Stock                   cancelled, and the holders of Mandatorily
                          Redeemable Convertible Preferred Stock will not
                          receive or retain any property on account of their
                          Mandatorily Redeemable Convertible Preferred
                          Stock.
                          Holders of Mandatorily Redeemable Convertible
                          Preferred Stock are Impaired, are deemed to have
                          rejected the Plan, and are not entitled to vote.

    Class Description                   Treatment Under the Plan               Recovery %
    -----------------     ---------------------------------------------------- ----------
Class 12                  On the Effective Date, all Existing Common Stock          0%
Existing Common Stock and will be cancelled, and the holders of Existing
  Section 510(b) Claims   Common Stock and Section 510(b) Claims will not
                          receive or retain any property on account of their
                          Existing Common Stock and/or Section 510(b)
                          Claims.
                          Holders of Existing Common Stock and Section
                          510(b) Claims against the Debtors are Impaired,
                          are deemed to have rejected the Plan, and are not
                          entitled to vote.
</TABLE>

                                      7

<PAGE>

<TABLE>
<CAPTION>
  Class Description               Treatment Under the Plan              Recovery %
  -----------------   ------------------------------------------------- ----------
<C>                   <S>                                               <C>
Class 13              On the Effective Date, all Existing Other Equity      0%
Existing Other Equity Interests will be cancelled, and the holder of
  Interests           Existing Other Equity Interests in Encompass will
                      not receive or retain any property on account of
                      their Existing Other Equity Interests.
                      Holders of Existing Other Equity Securities are
                      Impaired, are deemed to have rejected the Plan,
                      and are not entitled to vote.
</TABLE>

C.  Other Elements of the Plan

1.  DIP Facility

   It is a condition to the Confirmation of the Plan that Encompass secure a
DIP Facility, which Encompass anticipates will provide for a revolving credit
facility with a maximum borrowing capacity of up to $100 million in order to
provide additional liquidity prior to the Effective Date of the Plan. Although
Encompass has informed certain representatives of the Senior Lenders that
Encompass will require the DIP Facility during the pendency of the Chapter 11
Cases, Encompass has not engaged in any substantive negotiations with the
Senior Lenders or any other potential financing source with respect to the DIP
Facility, and Encompass has received no commitments for the DIP Facility from
any potential lender. Encompass expects that the Debtors will be permitted to
use up to the total commitment amount of the DIP Facility for letters of
credit. The obligations, liens and guarantees in respect of the DIP Facility
will prime, and be senior to, the obligations, liens and guarantees in respect
of the Existing Credit Agreement. If the holders of the Allowed Existing Credit
Agreement Claims vote as a Class to accept the Plan, all holders of such Claims
will be deemed to have consented to the priority of all obligations, liens and
guarantees in respect of the DIP Facility. See Section V.B--"ANTICIPATED EVENTS
DURING THE CHAPTER 11 CASE--DEBTOR IN POSSESSION FINANCING."

2.   New Senior Credit Agreement

   The Plan contemplates that indebtedness under the Existing Credit Agreement
will be restructured in a New Senior Credit Agreement to provide for an
aggregate New Term Loan in the amount of approximately $200 million, subject to
increase as a result of any drawings upon prepetition letters of credit issued
and outstanding under the Existing Credit Agreement as of the Petition Date. In
the event that prepetition letters of credit issued and outstanding under the
Existing Credit Agreement are drawn after the Petition Date, the principal
amount of the New Term Loan will be increased in an amount equal to such
drawing. Indebtedness under the New Term Loan will be junior to the
indebtedness under the Exit Facility.

   It is a condition to the Confirmation of the Plan that the Debtors secure an
Exit Facility in the amount of up to $100 million. Although Encompass has
informed certain representatives of the Senior Lenders that Encompass will
require the Exit Facility upon consummation of the Plan, Encompass has not
engaged in any substantive negotiations with the Senior Lenders or any other
potential financing source with respect to the Exit Facility, and Encompass has
received no commitments for the Exit Facility from any potential lender. The
Debtors anticipate that the Exit Facility will be part of the New Senior Credit
Agreement and will provide for revolving loans of up to $100 million, with all
of the committed credit under the Exit Facility available for the issuance of
letters of credit. The Exit Facility will provide liquidity for working capital
and other general corporate purposes to Reorganized Encompass and its
Reorganized Subsidiaries following the conclusion of the Chapter 11 Cases. See
Section VI.C--"CAPITAL STRUCTURE OF THE REORGANIZED DEBTORS--NEW SENIOR CREDIT
AGREEMENT."

3.  Employee Incentive Programs

   The Plan contemplates the adoption of a Stock Option Plan by Reorganized
Encompass that is intended to provide incentives to employees to continue their
efforts to foster and promote the long-term growth and performance of the
Reorganized Debtors. Under the Stock Option Plan, Reorganized Encompass may
grant to employees of the Reorganized Debtors New Options to purchase up to an
aggregate amount of shares of New

                                      8

<PAGE>

Common Stock equal to fifteen percent (15%) of the outstanding New Common Stock
on a fully diluted basis as of the Effective Date. On the Effective Date,
Reorganized Encompass will issue New Options to purchase up to 7% of the
outstanding New Common Stock, and the remaining New Options will be available
for future grants at the discretion of Reorganized Encompass' Board of
Directors. The terms of the New Options, including, without limitation, vesting
provisions and exercise price, will be established by Reorganized Encompass'
Board of Directors. See Section III.B--"MANAGEMENT AND CORPORATE STRUCTURE OF
THE REORGANIZED DEBTORS--EMPLOYEE INCENTIVE PROGRAMS."

   The Debtors also intend to adopt employee bonus programs pursuant to which
the Board of Directors of each of the Reorganized Debtors may authorize
employee bonus awards designed to provide incentives for employees to promote
the financial performance of the Reorganized Debtors. Encompass expects that
bonuses under the program will be in the form of cash awards and that the Board
of Directors of the Reorganized Debtors will set employee performance goals and
expectations for awards under the program at their discretion. See Section
III.B--"MANAGEMENT AND CORPORATE STRUCTURE OF THE REORGANIZED DEBTORS--EMPLOYEE
INCENTIVE PROGRAMS."

4.  Asset Disposition Program

   Encompass anticipates that, in the eighteen to twenty-four months following
the date hereof, it will sell certain of its non-core or underperforming
assets. Encompass is currently in the process of evaluating which of its
Subsidiaries it will make available for such sales.

   Although Encompass has not completed its evaluation of which assets it is
likely to make available for sale, Encompass expects that proceeds in excess of
$50 million would be generated from such sale process. Encompass anticipates
that, prior to the quarter ended December 31, 2004, an aggregate of $50 million
of net cash proceeds from such sales (excluding any such proceeds from sales of
inventory or obsolete or worn-out property in the ordinary course of business
of Encompass, transfers resulting from casualty or condemnation and other
customary exceptions to be agreed upon) would be required to be used by
Reorganized Encompass to prepay indebtedness under the New Senior Credit
Agreement. See Section V.C.1--"CAPITAL STRUCTURE OF THE REORGANIZED
DEBTORS--NEW SENIOR CREDIT AGREEMENT--TERM LOAN FACILITIES."

D.  Estimated Post-Restructuring Capitalization

   The estimated post-Restructuring share capitalization is as follows.

<TABLE>
<CAPTION>
                                                      Post-Restructuring
                                                      Share Capitalization
                                                      --------------------
                                                       Common Equity
                                                      Ownership/(1)/
                                                      --------------------
                                                        Shares       %
                                                       ----------    ----
          <S>                                         <C>           <C>
          New Stock:
          Holders of Existing Credit Agreement Claims 34,000,000     80%
          Holders of Senior Subordinated Note Claims.  8,500,000     20%
                                                       ----------    ----
                 Total............................... 42,500,000    100%
</TABLE>
--------
/(1)/ Reorganized Encompass will reserve 7,500,000 additional shares of New
      Common Stock for issuance pursuant to the Stock Option Plan. Reorganized
      Encompass will grant New Options for up to 3,500,000 shares of New Common
      Stock as of the Effective Date, the terms of which will be determined by
      Reorganized Encompass' Board of Directors. This table does not include
      the dilution effect from the issuance of New Options pursuant to the
      Stock Option Plan.

                                      9

<PAGE>

                                   Estimated
                            Post-Restructuring Debt
                            (As of March 31, 2003)

<TABLE>
<CAPTION>
                                            (Millions)
                         <S>                <C>
                         Exit Facility.....   $  0.0*
                         New Term Loan.....    200.0**
                         Other Secured Debt      0.6
                                              ------
                            Total Debt.....   $200.6
</TABLE>
--------
*  Assumes that no drawings have been made on Exit Facility availability of
   $100 million as of March 31, 2003. In the event there are any issued and
   outstanding letters of credit under the DIP Facility as of the Effective
   Date, the commitments for those letters of credit will be deemed to be
   issued and outstanding under the Exit Facility as of the Effective Date.
** Excludes approximately $25.4 million of issued and undrawn letters of credit
   under the Existing Credit Agreement as of September 30, 2002 that, if drawn
   on or after the Petition Date, will increase the principal amount of the New
   Term Loan in an amount equal to such drawing.

E.  The Confirmation Hearing

   If the Debtors receive the Requisite Acceptances with respect to the Plan,
the Debtors intend to file voluntary petitions to commence the Chapter 11 Cases
in the United States Bankruptcy Court for the Southern District of Texas,
Houston Division, or another appropriate forum, and request that the Bankruptcy
Court schedule, as promptly as possible, a Confirmation Hearing to approve this
Disclosure Statement and the Solicitation as being in compliance with section
1126(b) of the Bankruptcy Code and to confirm the Plan. The Debtors will
request Confirmation of the Plan, as it may be modified from time to time,
under section 1129(b) of the Bankruptcy Code. The Debtors reserve the right to
modify the Plan, to the extent, if any, that confirmation pursuant to section
1129(b) of the Bankruptcy Code requires modification and to use all Ballots
accepting the Plan that were received pursuant to the Solicitation, and not
subsequently revoked, to seek confirmation of the Plan (or of any modification
thereof that does not materially and adversely affect the treatment of the
Classes of Claims and Equity Interests with respect to which such Ballots were
cast) pursuant to section 1129(b) of the Bankruptcy Code.

F.  Summary of Post-Confirmation Operations

   Attached hereto as Exhibit D are the Financial Projections, which project
the financial performance of the core businesses of the Reorganized Debtors
through December 31, 2007. The Financial Projections have been prepared by the
management of Encompass and are based on the current business plan for the
Reorganized Debtors, information available as of September 30, 2002 and
numerous assumptions, including the availability of adequate surety bonding
capacity, that are an integral part of the Financial Projections, many of which
are beyond the control of the Reorganized Debtors and some or all of which may
not materialize. See Section X.J--"CERTAIN FACTORS TO BE CONSIDERED--INHERENT
UNCERTAINTY OF FINANCIAL PROJECTIONS."

G.  Reasons for the Solicitation; Recommendation

   The Solicitation is being conducted at this time in order to obtain the
Requisite Acceptances prior to the filing of voluntary petitions for
reorganization of the Debtors under chapter 11 of the Bankruptcy Code. The
Debtors anticipate that by conducting the Solicitation in advance of commencing
the Chapter 11 Cases, the duration of the Chapter 11 Cases will be
significantly shortened and the administration of the cases, which otherwise
can be lengthy, complex and extremely expensive, will be significantly
shortened, greatly simplified, and much less costly.

                                      10

<PAGE>

   In light of the benefits to be attained by the holders of Eligible Claims
pursuant to consummation of the transactions contemplated by the Plan, the
Debtors' Boards of Directors recommend that such holders of Eligible Claims
vote to accept the Plan. The Debtors' Boards of Directors have reached this
decision after considering the alternatives to the Plan that are available to
the Debtors and the likely effect on the Debtors' business operations,
creditors and shareholders of such alternatives. These alternatives include
liquidation under chapter 7 of the Bankruptcy Code or a reorganization under
chapter 11 of the Bankruptcy Code without a prepetition solicitation. The
Debtors' Boards of Directors believes, after consulting with financial and
legal advisors, that the Plan would result in a distribution of greater values
to creditors and shareholders than would a liquidation under chapter 7 or any
other chapter 11 reorganization. For a comparison of estimated distributions
under chapter 7 of the Bankruptcy Code and under the Plan, see Section
VIII.C--"FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS
TEST--LIQUIDATION ANALYSIS." The Debtors' Boards of Directors also concluded
that initiating a chapter 11 case without a prepetition solicitation could
result in (i) a significant delay in confirmation of a plan, (ii) higher fees
and expenses, and (iii) an increased possibility that the reorganization cases
would damage the Debtors' business, resulting in an increased possibility that
the Debtors would not be able to reorganize successfully and therefore be
forced to liquidate. For all of these reasons, the Debtors' Boards of Directors
support the Plan and urge all holders of Eligible Claims to accept and support
the Plan.

H.  Summary of Voting Procedures

   The Solicitation Package is being furnished prior to the commencement of the
Chapter 11 Cases to holders of Eligible Claims whose names (or the names of
whose Nominees) appear as of the Voting Record Date in the records maintained
by the Debtors, Bank of America, N.A., as Administrative Agent under the
Existing Credit Agreement, the securityholders list maintained by the Debtors'
indenture trustee, and the list of participants provided by The Depository
Trust Company. IF SUCH NOMINEES OF THE HOLDERS OF ELIGIBLE CLAIMS DO NOT HOLD
FOR THEIR OWN ACCOUNT, THEY SHOULD PROVIDE COPIES OF THE SOLICITATION PACKAGE
TO THE BENEFICIAL OWNERS OF THE ELIGIBLE CLAIMS.

   All votes to accept or reject the Plan must be cast by using the Ballot
enclosed with this Disclosure Statement or, in the case of a Nominee, the
Master Ballot provided to such Nominee (or manually executed facsimiles
thereof). No other votes will be counted. Consistent with the provisions of
Federal Rule of Bankruptcy Procedure 3018, the Debtors have fixed October 16,
2002 as the Voting Record Date for the determination of holders of record of
Eligible Claims entitled to receive the Solicitation Package. Ballots must be
received by the Solicitation Agent no later than the Voting Deadline, which is
currently set at 5:00 p.m., Eastern time, on November 18, 2002. Except to the
extent requested by the Debtors or as permitted by the Bankruptcy Court
pursuant to Federal Rule of Bankruptcy Procedure 3018, Ballots received after
the Voting Deadline will not be counted or otherwise used in connection with
the Debtors' request for Confirmation of the Plan (or any permitted
modification thereof). The Debtors reserve the right to use acceptances of the
Plan received in the Solicitation to seek Confirmation of the Plan under any
other circumstances, including a plan proposed in one or more non-prepackaged
chapter 11 cases filed by the Debtors.

   The Debtors reserve the right to amend the Plan either before or after the
Petition Date. Amendments to the Plan that do not materially and adversely
affect the treatment of Claims may be approved by the Bankruptcy Court at the
Confirmation Hearing without the necessity of resoliciting votes. In the event
resolicitation is required, the Debtors will furnish new Ballots to be used to
vote to accept or reject the Plan, as amended.

   Although the Solicitation relates to voluntary petitions for reorganization
of the Debtors under chapter 11 of the Bankruptcy Code, no such filings have
yet been made. The Debtors intend to file their respective chapter 11 petitions
when the Requisite Acceptances have been received or when the Debtors otherwise
determine that such filing is necessary or appropriate to protect their
property and interests. In addition, the Debtors expressly reserve the right to
extend the Voting Deadline, by oral or written notice to the Solicitation
Agent, until the Requisite Acceptances have been received.

                                      11

<PAGE>

                 II. GENERAL INFORMATION REGARDING THE DEBTORS

A.  Background

   Encompass, a Texas corporation formed in 1997, is one of the largest
providers of facilities systems and solutions in the United States. With
revenues of approximately $3.8 billion in 2001 and estimated revenues in excess
of $3 billion in 2002, Encompass provides electrical, mechanical and cleaning
systems services to commercial, industrial and residential customers
nationwide, including construction, installation and maintenance. Through its
network of subsidiary business units, Encompass has over 28,000 employees as of
September 30, 2002, with operations in over 200 locations, serving customers in
all 50 states and in each of the 100 largest cities in the United States.
Existing Common Stock is traded on the over-the-counter market and is quoted on
the pink sheets.

   Encompass, through its Subsidiaries, provides services primarily through
three operating business segments: (i) Commercial/Industrial Services, (ii)
Residential Services, and (iii) Cleaning Systems. As part of its proposed asset
disposition program, Encompass may consider selling all or any portion of the
assets comprising the foregoing business segments. Encompass intends to
evaluate its assets for such sale based upon numerous factors, including the
amount of proceeds such assets would generate (including anticipated tax
benefits) as well as the suitability of such assets for the Reorganized
Debtors' proposed business operations.

   The core capabilities of the Commercial/Industrial Services group include
the technical design, installation, maintenance, repair, replacement and
upgrade of the electrical, heating, ventilating and air conditioning, plumbing,
network infrastructure, building and equipment controls and monitoring, sheet
metal and process piping systems of commercial and industrial facilities. The
Residential Services group provides mechanical and other contracting services
to homebuilders and repair, installation and maintenance services to
homeowners. The Cleaning Systems group offers cleaning and maintenance
management services to retail, commercial and industrial customers.

   Encompass was originally founded as Group Maintenance America Corp. On
February 22, 2000, Building One Services Corporation merged with and into Group
Maintenance America Corp. and the merged company then changed its name to
Encompass Services Corporation. The merger with Building One Services
Corporation was accounted for as a "reverse acquisition" under generally
accepted accounting principles. Accordingly, the financial statements and other
information provided herewith for periods prior to the merger reflect the
historical results of Building One Services Corporation rather than Encompass
as a stand-alone entity.

   Encompass' executive offices are currently located in leased office space at
3 Greenway Plaza, Suite 2000, Houston, Texas 77046. Encompass conducts its
business from over 200 facilities, substantially all of which are leased under
agreements with remaining terms up to 14 years from the date hereof. Encompass'
vehicle fleet consists of approximately 9,000 owned or leased service trucks,
vans and support vehicles.

   Additional information concerning the Debtors and their financial condition
and results of operations, on a consolidated basis, is set forth in the
Debtors' recent periodic Securities and Exchange Commission filings attached
hereto as Exhibits B-1, B-2, B-3 and B-4.

B.  Events Leading to Chapter 11 Cases

   As of September 30, 2002, Encompass had $1,261.3 million of debt and
mandatorily redeemable convertible preferred stock obligations (including
accrued interest and dividends). During the 1999-2000 period, Encompass paid in
excess of $700 million to repurchase shares of its common stock. The funds used
to make such repurchases were obtained through the issuance of debt and
mandatorily redeemable convertible preferred stock. Beginning in 2001 and
continuing through 2002, the Debtors have experienced, and continue to
experience, financial difficulties due to a number of factors which have made
it increasingly difficult for Encompass to comply with the financial covenants
in its financing arrangements relating to its debt. Encompass experienced cost
overruns in various projects resulting in losses in certain regional
operations. Most notably, Encompass' electrical operations in California and
its mechanical operations in Texas had significant

                                      12

<PAGE>

losses in the 2000-2002 period caused by poor project performance, thereby
adversely impacting earnings during this period. According to the U.S.
Department of Commerce construction reports, private non-residential
construction has declined approximately 20% (seasonally adjusted annual rate)
from June 2001 to June 2002, with the largest declines in the industrial,
office building and hotel sectors. Overcapacity in the industry has resulted in
a very competitive pricing environment in many markets, resulting in downward
pressure on profit margins. Such depressed conditions have resulted in a
substantial decline in non-residential construction services for 2002, which,
in turn, have resulted in slower sales, lower margins and weaker cash flows
than the Debtors expected. In addition, revenue from higher margin
telecommunications and technology customers (which represented 12% of 2000
consolidated revenues) were dramatically reduced as funding for such projects
largely evaporated. Encompass provided allowances totaling approximately $45.5
million in 2001 for uncollectable receivables from telecommunications and
technology customers.

   As a result of the financial challenges posed by these factors, during the
second half of 2001, the Debtors began evaluating their options for solving
their liquidity problems. Beginning in the second quarter of 2002, Encompass
management began new initiatives to reduce operating costs and capital
expenditures and manage its working capital, including by making numerous
management changes. In the third quarter of 2001, Encompass announced its
decision to cease operations of its Global Technologies segment effective
September 30, 2001 due to significant reduction in capital spending in the
telecommunications and technology industries. Encompass also began to consider
financing alternatives with a view to resolving its tight financial situation
under its outstanding indebtedness for borrowed money. Effective November 9,
2001, the Existing Credit Agreement was amended to grant Encompass certain
temporary covenant modification.

   In the first quarter of 2002, Encompass additionally engaged a financial
advisor to solicit indications of interest from third parties with respect to
an investment in Encompass, or a possible sale or merger of Encompass.
Encompass' advisor sought indications of interest for such transactions, but
was unsuccessful at finding third parties willing to engage in discussions
regarding any of these transactions. Separate from the activities of such
advisor, in the first quarter of 2002 Encompass' management met with a third
party concerning the possible acquisition of Encompass. However, this meeting
did not progress beyond preliminary discussions due to the lack of interest
expressed by the potential acquiror.

   On March 12, 2002, Apollo, certain funds of which are holders of the
Mandatorily Convertible Preferred Stock, proposed that Encompass attempt to
raise equity capital through a common stock rights offering to all of its
shareholders, and to use the proceeds from the rights offering to reduce long
term debt and obtain long term covenant relief under Encompass' Existing Credit
Agreement. In order to support the success of the rights offering, Apollo
offered to purchase up to $35 million of Existing Common Stock in the rights
offering. Because of Apollo's ownership position in Encompass and its
representation on Encompass' Board, the Board of Directors of Encompass formed
the Special Committee to evaluate the merits of any transaction between
Encompass and Apollo.

   Between March 12 and June 27, 2002, the Special Committee evaluated
proposals made by Apollo, negotiated improved terms and considered the
availability of alternative transactions.

   At a meeting held on June 25, 2002, the Board of Directors of Encompass,
following the recommendation of the Special Committee, approved a rights
offering and authorized Encompass to enter into an agreement with Apollo or its
affiliates, pursuant to which Apollo would agree, subject to certain closing
conditions, to purchase $35 million of equity securities of Encompass, and
recommended that the action be adopted by Encompass' Board of Directors.

   On June 26, 2002, Encompass entered into an amendment to its Existing Credit
Agreement which provided financial covenant modifications through February
2005. Pursuant to the amended Existing Credit Agreement, Encompass was required
to sell $35 million of its voting stock to Apollo and to apply $31 million of
proceeds of such investment to the permanent reduction of the amounts
outstanding under the Existing Credit Facility by October 15, 2002. The primary
reason for authorizing the rights offering and Apollo's investment was to induce

                                      13

<PAGE>

Encompass' lenders to grant covenant relief without which Encompass would
likely have breached its second quarter covenants. Effective as of June 27,
2002, Encompass and Apollo entered into the Securities Purchase Agreement.

   In July of 2002, Encompass identified cost overruns and other issues related
to two large construction projects located in California and Colorado which
caused Encompass to book losses on these projects, resulting in lower than
projected revenue and EBITDA for the second quarter of 2002. Encompass also
continued to suffer financial difficulties arising from the continued
depression of the construction industry, including the financial problems
experienced by sectors of the economy in which several significant customers of
Encompass and its Subsidiaries operate, such as the telecommunications and
technology sectors.

   On July 17, 2002 Standard & Poor's announced it was downgrading Encompass.
On August 13, 2002, Encompass made public its second quarter results, reporting
revenue and EBITDA lower than previously projected, and reduced its forecast
for revenue and EBITDA for the 2002 fiscal year.

   The share price for Existing Common Stock continuously declined from a
closing per share price of $0.61 on June 21, 2002 to a closing per share price
of $0.14 on September 30, 2002. On July 22, 2002, the New York Stock Exchange
notified Encompass that unless the Existing Common Stock achieved a $1.00 sales
price and an average share price of $1.00 over the 30-trading-day period
preceding January 22, 2003, it would commence suspension and delisting
procedures for the Existing Common Stock on such exchange.

   Following the public announcement of Encompass' second quarter 2002 results,
Encompass' and its Subsidiaries' customers, vendors and surety providers began
questioning whether the conditions to Apollo's obligations under the Securities
Purchase Agreement would be satisfied, in particular, whether a material
adverse change had occurred under the Securities Purchase Agreement, which, if
such claim were true, would permit Apollo to terminate the Securities Purchase
Agreement. During this period, Apollo stated that it had not declared or
decided that a material adverse change under the Securities Purchase Agreement
had occurred but was reserving its right to do so.

   During the period following the announcement of Encompass' second quarter
results, Encompass' customers increasingly began to demand bid and performance
bonds for new and existing construction contracts. In early October, Encompass
began experiencing increased difficulty securing new construction contracts and
bid and performance bonds for its commercial activity. In addition, Encompass'
surety providers recently began notifying Encompass of new and increased
collateral requirements, based upon their concern for Encompass'
creditworthiness, demanding that Encompass and its Subsidiaries post letters of
credit in order to obtain the necessary bonding, which has further exacerbated
Encompass' liquidity problems.

   In late September, Encompass received revenue and EBITDA results for the
month of August 2002 from its regional operations. Because its internal
forecasts showed that Encompass would only be in compliance with its third
quarter financial covenants under the Existing Credit Agreement if Encompass
closed the sale of several operating entities prior to October 1, 2002 (which
were scheduled to close prior to that time) and used all its cash reserves to
reduce the amount of its revolving loan under the Existing Credit Agreement,
Encompass became increasingly concerned that it would not be able to continue
to access its revolver.

   On September 24, 2002, Encompass met with a steering committee representing
the Senior Lenders in order to discuss obtaining a waiver of financial
covenants under its Existing Credit Agreement. Encompass was increasingly
concerned that the closing of the rights offering would not give sufficient
liquidity to satisfy Encompass' needs. Encompass informed the steering
committee that it had engaged advisors to assist in evaluating alternate
transactions to the rights offering, which alternate transactions could include
a prepackaged reorganization of Encompass under Chapter 11 of the Bankruptcy
Code.

   On September 30, 2002, Encompass obtained a waiver through October 15, 2002
of certain financial covenants under its Existing Credit Agreement. Encompass
has not obtained a waiver of financial covenants

                                      14

<PAGE>

defaults under its Existing Credit Agreement for any period after October 15,
2002. As of the date hereof, Encompass is in default under the terms of the
Existing Credit Agreement and therefore, as long as such default is continuing,
is prohibited from paying any amounts on its Senior Subordinated Notes or any
other subordinated indebtedness.

   On October 1, 2002, the New York Stock Exchange notified Encompass that it
had permanently halted trading in the Existing Common Stock and was immediately
delisting the Existing Common Stock. The Existing Common Stock currently trades
on the over-the-counter market and is quoted on the "pink sheets". The closing
price for the Existing Common Stock on October 15, 2002 was $.006.

   Encompass has continued to experience further operational issues. In light
of Encompass' announced financial difficulties, customers for existing projects
are increasingly requesting bonds, or requesting increased coverage amounts of
bonds, on continuing projects, and threatening to terminate Encompass from such
projects if such requests are not satisfied. Bonding requirements for new
projects have significantly increased in frequency, and Encompass has been
entirely excluded from bidding on a number of projects. Encompass' surety
providers have imposed increasingly stringent requirements to the issuance of
bonds, including requiring full cash collateral for the face amount of new
bonds issued.

   On October 7, 2002, Encompass retained CDG in contemplation of a potential
restructuring of Encompass. Michael F. Gries of CDG was designated to act as
CRO.

   At a meeting held on October 13, 2002, the Board of Directors approved the
principal terms of the Plan and voted to terminate the rights offering and
cancel the stockholders' meeting scheduled to be held on October 15, 2002.

   On October 16, 2002, Apollo notified Encompass that it was terminating the
Securities Purchase Agreement.



C.  Restructuring Professionals

   Encompass has engaged CDG as restructuring manager and has designated
Michael F. Gries of such firm to act as CRO. The CRO and CDG will oversee the
development of financial projections, disseminate appropriate information to
stakeholders, oversee the asset disposition process, manage the chapter 11
process and filings and assist in corporate communications, all on behalf of
Encompass and its Subsidiaries. Encompass has agreed to pay CDG a monthly fee
of $250,000 and to reimburse CDG for all reasonable out-of-pocket expenses
incurred by it as part of such engagement.

   Encompass has retained Houlihan Lokey to act as Debtors' financial advisor
in connection with the Restructuring and have agreed to pay Houlihan Lokey a
monthly fee of $200,000 and a transaction fee of $5 million payable upon the
earliest to occur of (i) termination of Houlihan Lokey's engagement by Debtors,
(ii) the closing or consummation of the Restructuring and (iii) the expiration
of the engagement as of February 29, 2004. Fifty percent (50%) of the monthly
fees paid to Houlihan Lokey after the first two months of Houlihan Lokey's
engagement, and one hundred percent (100%) of the monthly fees paid to Houlihan
Lokey after the first eight months of Houlihan Lokey's engagement shall be
credited against this transaction fee. Encompass has also agreed to pay all
reasonable out-of-pocket expenses incurred by Houlihan Lokey (including the
reasonable fees and expenses of its counsel).

   Encompass has retained Weil, Gotshal as its Restructuring counsel. Encompass
will pay Weil, Gotshal in accordance with its standard billing rates and will
reimburse Weil, Gotshal for all reasonable out-of-pocket expenses incurred by
it as part of such representation.

   Encompass has also retained Deloitte & Touche LLP to provide tax advice on
elections available to companies in a reorganization under chapter 11 of the
Bankruptcy Code.

   Encompass has retained Innisfree M&A Incorporated to serve as the
Solicitation Agent in connection with the Solicitation. Encompass will pay the
Solicitation Agent reasonable and customary compensation for its services in
connection with the Solicitation, plus reimbursement for reasonable
out-of-pocket expenses. Brokers, dealers, commercial banks, trust companies and
other Nominees will be reimbursed by Encompass for customary mailing and
handling expenses incurred by them in forwarding materials to their customers,
but will not

                                      15

<PAGE>

otherwise be compensated for their services. Encompass also will pay any other
customary fees and expenses attributable to the Solicitation.

   Encompass believes that it will retain additional Professionals to assist in
the Restructuring process, including, but not limited to, additional
Professionals to provide investment banking services and counsel to assist with
respect to asset dispositions and to pursue litigation claims.

D.  Estimated Pre-Restructuring Indebtedness and Preferred Stock

<TABLE>
<CAPTION>
                                                               As of
                                                           September 30,
                                                               2002
                                                           -------------
                                                            (Millions)
        <S>                                                <C>
        Revolver..........................................   $  203.2*
        Tranche A Term Loan...............................      125.2
        Tranche B Term Loan...............................      163.7
        Tranche C Term Loan...............................       96.5
                                                             --------
           Total Existing Bank Debt.......................   $  588.6**
        Other Secured Debt................................        0.6
                                                             --------
           Total Secured Debt.............................   $  589.2
        Senior Subordinated Notes.........................      335.0***
        Junior Subordinated Notes.........................        4.1
                                                             --------
           Total Debt.....................................   $  928.3
        Mandatorily Redeemable Convertible Preferred Stock      309.0
                                                             --------
           Total Debt and Preferred Stock.................   $1,237.3
</TABLE>
--------
*  Excludes $25.4 million of issued and undrawn letters of credit.
** Excludes approximately $3.1 million of accrued and unpaid interest as of
   September 30, 2002. Also excludes approximately $6.2 million of swap
   obligations.
*** Excludes $14.7 million of accrued interest as of September 30, 2002.

   Encompass is the borrower, and its Subsidiaries are guarantors, under the
Existing Credit Agreement. The Existing Bank Debt outstanding under the
Existing Credit Agreement is comprised of revolving loans in an aggregate
principal amount of $203.2 million, term loans in the aggregate principal
amount of $385.4 million, accrued interest as of September 30, 2002 of
approximately $2.2 million and estimated swap obligations as of September 30,
2002 of approximately $7.1 million (including approximately $0.9 million of net
accrued interest payable).

   In connection with the Debtors' agreement to the Fifth Amendment of the
Existing Credit Agreement, dated as of June 26, 2002, the Debtors' granted
their Senior Lenders security interests in substantially all of their property.
Prior to such amendment, the indebtedness under the Existing Credit Agreement
was primarily secured by the Senior Lenders' security interests in the Debtors'
inventory, accounts receivable and investment property. Based upon the Debtors'
preliminary review of financing statements on file in certain states in which
the Debtors transact business, the Senior Lenders began perfecting their
security interests in the additional collateral interests taken under the Fifth
Amendment on July 31, 2002. If the Debtors were to commence chapter 11 cases
prior to the expiration of the ninety (90) day period set forth in section 547
of the Bankruptcy Code, certain of the Senior Lenders' security interests in
collateral other than inventory, accounts receivable and investment property
may be subject to challenge as avoidable transfers. The Debtors nonetheless
believe that any effort to avoid such security interests will not benefit the
Estates and will, in fact, needlessly incur Administrative Expense Claims
because the holders of the Senior Subordinated Note Claims and the Junior
Subordinated Note Claims are subordinated under the terms of their respective
agreements to the full payment of the Existing Credit Agreement Claims. As
such, the Debtors believe that no payments may be made to the holders of Senior
Subordinated Note Claims and Junior Subordinated Note Claims prior to the full
satisfaction of the Existing Credit Agreement Claims, irrespective of the
perfected and/or unperfected status of the Senior Lenders' security interests
in collateral other than the Debtors' inventory, accounts receivable and
investment property.

   Encompass is the obligor, and its Subsidiaries are guarantors, under the
Senior Subordinated Notes in the aggregate principal amount of $335 million and
accrued interest as of September 30, 2002 of approximately $14.7 million.

                                      16

<PAGE>

   Encompass is the obligor under the Junior Subordinated Notes in the
aggregate principal amount of $4.1 million. These Junior Subordinated Notes
were issued in connection with the purchase of several of the Debtors'
businesses and as a result are subordinated under section 510(b) of the
Bankruptcy Code.

   Certain Apollo funds own all of the 256,191 shares of the Mandatorily
Redeemable Convertible Preferred Stock outstanding. The Mandatorily Redeemable
Convertible Preferred Stock accrues cumulative dividends at a rate of 7.25% per
annum, payable quarterly or accumulated at Encompass' option until February 22,
2003. Upon any liquidation, dissolution or winding up, holders of Mandatorily
Redeemable Convertible Preferred Stock are entitled to a cash liquidation
payment equal to $1,000 per share plus accrued and unpaid dividends. Accrued
and unpaid dividends on the Mandatorily Redeemable Convertible Preferred Stock
were $52.8 million at September 30, 2002.

E.  Litigation

   Encompass and/or its Subsidiaries are or may become plaintiffs in certain
actions which they intend to continue pursuing and/or to initiate after the
Petition Date. Those actions include: (i) a lawsuit filed by one or more of the
Debtors against National Union Fire Insurance Co. of Pittsburgh, PA wherein
such Debtors have asserted in excess of $5 million in damages resulting from
the defendant's bad faith breach of its insurance contract with such Debtors;
(ii) a lawsuit filed by one or more of the Debtors against the General Services
Administration of the United States of America wherein Debtors have asserted in
excess of $7 million in damages resulting from the defendant's failure to pay
amounts owed under a contract with such Debtors; (iii) a lawsuit filed by one
or more of the Debtors against GTEC SA, Giovanola Freres, SA and other
defendants wherein the Debtors have asserted in excess of $6 million in damages
resulting from the defendants' failure to pay amounts owed under a contract
with such Debtors; and (iv) a lawsuit to be filed by one or more of the Debtors
against a customer wherein Debtors will assert in excess of $10 million in
damages resulting from the defendant's failure to pay amounts owed under a
contract with such Debtors. Encompass and/or its Subsidiaries intend to retain
special counsel pursuant to section 327(e) of the Bankruptcy Code in order to
pursue the claims asserted in each of the preceding actions.

   Encompass and/or its Subsidiaries have also been named as defendants in a
number of actions which assert claims for, inter alia, personal injury,
property damage, unfair labor and/or hiring practices, civil rights violations,
employment discrimination, breach of contract, preferential transfers,
indemnity, contribution, fraud, environmental damage and/or release, and claims
related to toxic mold. All of the preceding Litigation Claims are Disputed
Claims.

      III. MANAGEMENT AND CORPORATE STRUCTURE OF THE REORGANIZED DEBTORS

A.  The Board of Directors and Executive Officers of the Reorganized Debtors

1.  Reorganized Encompass

   On the Effective Date, the term of each member of Encompass' and its
Subsidiaries' current Board of Directors will automatically expire. The initial
Board of Directors of Reorganized Encompass on and after the Effective Date
will consist of seven members. As required by section 1129(a)(5) of the
Bankruptcy Code, the names of such Board members will be set forth in the Plan
Supplement. The Board of Directors of Reorganized Encompass will have the
responsibility for the management, control, and operation of Reorganized
Encompass and its Reorganized Subsidiaries on and after the Effective Date.

   The Board of Directors of Reorganized Encompass as of the Effective Date
shall consist of the Chief Executive Officer of Reorganized Encompass, four
directors designated by the holders of Allowed Existing Credit Agreement Claims
and two directors designated by the holders of Allowed Subordinated Note Claims.

                                      17

<PAGE>

The Debtors will consult with representatives of the holders of Existing Credit
Agreement Claims to determine their four appointees to the Board of Directors
and will consult with the indenture trustee for the Senior Subordinated Notes
to provide the two designees to the Board of Directors of the Allowed
Subordinated Note Claims.

   Encompass anticipates that the members of the Management Group will maintain
their current positions as executive officers of Reorganized Encompass on and
after the Effective Date. The Management Group is as follows:

<TABLE>
<CAPTION>
        Name                                 Position
        ----                                 --------
 <C>                <S>
 Joseph M. Ivey.... President and Chief Executive Officer; Director
 Henry P. Holland.. Executive Vice President and Chief Operating Officer
 Darren B. Miller.. Senior Vice President, Chief Financial Officer
 Daniel W. Kipp.... Senior Vice President, Chief Information and Administrative
                      Officer
 Gray H. Muzzy..... Senior Vice President, General Counsel and Secretary
 L. Scott Biar..... Vice President, Chief Accounting Officer
 Todd Matherne..... Vice President, Treasurer
 James L. Cocca.... Senior Vice President--Operations
 Patrick L. McMahon Senior Vice President--Operations
 James L. Phillips. Senior Vice President--Operations
 Steven A. Bate.... Vice President--Operations
 William Hill...... Vice President--Operations
</TABLE>

   Joseph M. Ivey became President and Chief Executive Officer and a director
of Encompass in February 2000. Prior to the merger of Building One Services
Corporation with and into Encompass (under its former name, Group Maintenance
America Corp., he served as President and Chief Executive Officer of Building
One Services Corporation from February 1999 to February 2000. He also served as
a Director of Building One Services Corporation from October 1998 to February
2000. From September 1998 to February 1999, Mr. Ivey served as the President of
the Building One Services Corporation mechanical group. Prior to joining
Building One Services Corporation, Mr. Ivey served as the Chairman and Chief
Executive Officer of Encompass Mechanical Services Southeast, Inc. (formerly
known as Ivey Mechanical Company, Inc.), a mechanical services company and
wholly owned subsidiary of Encompass acquired by Building One Services
Corporation in 1998. Mr. Ivey also serves as a Trustee of Freed-Hardeman
University.

   Henry P. Holland became Executive Vice President and Chief Operating Officer
of Encompass in October 2000. Previously, he served as President and Chief
Operating Officer of Metamor Worldwide (now PSINet Consulting Solutions) from
June 1999 to June 2000 when the company was sold to PSI Net. Prior to joining
Metamor, Mr. Holland served as Executive Vice President of Landmark Graphics, a
leading supplier of decision-making software and services for the oil and gas
industry, from 1994 to 1999.

   Darren B. Miller became Senior Vice President of Encompass in February 2000.
From July 1998 to February 2000, he served as Executive Vice President of
Encompass and from October 1996 until July 1998 as Senior Vice President. He
has also served as Chief Financial Officer of Encompass since October 1996.
From 1989 to 1996, Mr. Miller served in several capacities at Allwaste, Inc.,
an industrial service company, including Vice President, Treasurer and
Controller from 1995 to 1996.

   Daniel W. Kipp became Senior Vice President, Chief Information and
Administrative Officer of Encompass in January 2001. From February 2000 to
January 2001, he served as Senior Vice President, Treasurer and Chief
Information Officer of Encompass. From July 1998 to February 2000, he served as
Senior Vice President and Chief Accounting Officer of Encompass and as Vice
President and Corporate Controller from February 1997 to July 1998. From
February 1994 until February 1997, Mr. Kipp was a sales executive with American
Sterling, a provider of hazard insurance outsourcing services to the mortgage
banking industry.

                                      18

<PAGE>

   Gray H. Muzzy became Senior Vice President, General Counsel and Secretary of
Encompass in April 2000. From January 1989 to April 2000, Mr. Muzzy was a
partner with the Houston-based law firm of Bracewell & Patterson, L.L.P. Mr.
Muzzy provided legal representation to a variety of industries, including real
estate, oil and gas, software, chemical, banking and insurance.

   L. Scott Biar became Vice President and Chief Accounting Officer of
Encompass in August 2000. From June 1998 to June 2000, Mr. Biar was Vice
President and Corporate Controller of Corporate Brand Foods America. From May
1991 through June 1998, Mr. Biar served in various senior financial roles with
Weatherford International, Inc., most recently as Corporate Controller. Mr.
Biar is a Certified Public Accountant.

   Todd Matherne became Vice President and Treasurer of Encompass in January
2001. During 2000, he was co-founder and advisor to US Farm and Ranch Supply
Company, Inc. From April 1995 to December 1999, Mr. Matherne served in senior
financial and operations roles with Service Corporation International, most
recently as Senior Vice President, Treasurer and Interim Chief Financial
Officer.

   James L. Cocca became Senior Vice President--Operations of Encompass in
October 2001. Mr. Cocca was Chief Operating Officer of Encompass' Electrical
Technologies Group from November 2000 to October 2001. He held the position of
President of Schindler Elevator Corporation (formerly Westinghouse Elevator)
from January 1996 to November 2000 with responsibility for North American
Operations.

   Patrick L. McMahon became Senior Vice President--Operations of Encompass in
October 2001. Mr. McMahon was Chief Operating Officer--Mechanical Services
Group of Encompass from August 2001 to October 2001. He served as
President--Industrial Services Group of Encompass from February 2000 to August
2001. From July 1999 to February 2000, he was Executive Vice President and
Chief Operating Officer of the Industrial Business Unit of Building One
Services Corporation's Mechanical and Electrical Group. From October 1998 to
July 1999, Mr. McMahon was a management consultant with respect to outsourcing
maintenance operations and served as President and Chief Operating Officer of
Professional Services Group, a subsidiary of Air & Water Technologies, between
May 1995 and October 1998.

   James L. Phillips became Senior Vice President--Operations of Encompass in
October 2001. Previously, Mr. Phillips served as Vice President of Operations
of NetVersant Solutions from May 2000 to October 2001. From November 1998 to
May 2000, he was Co-Founder and Executive Vice President of East Coast
Concepts, a system integration alliance partner to GE Capital Corporation. From
1996 to November 1998, he was Executive Vice President of GE Capital Leverage
Procurement Program.

   Steven A. Bate became Vice President--Operations in March 2002. Mr. Bate was
Vice President-Integration of Encompass from November 2000 to March 2002.
Previously, Mr. Bate served as an operations finance consultant to NetVersant
Solutions from July 2000 to October 2000. From October 1999 to April 2000, he
served as Vice President-Operations of Metamor Worldwide (now PSINet Consulting
Solutions). From September 1998 to October 1999, Mr. Bate served as Chief
Financial Officer of Insource Management Group, a private consulting services
firm. Previously, he served as Vice President-Independent Business Units for
Landmark Graphics.

   William Hill became Vice President--Operations in December 2001. Previously,
Mr. Hill served as Vice President-Operations of Building One Service Solutions,
Inc., a wholly-owned subsidiary of Encompass acquired by Building One Services
Corporation in 1998, from January 2000 to December 2001. From October 1998 to
January 2000, Mr. Hill served in various capacities with Building One Service
Solutions, Inc., including Regional President and Director of Operations. Mr.
Hill previously served as Director of Operations for SPC Contract Management, a
janitorial services contract management company, for more than 22 years.

                                      19

<PAGE>

2.  Reorganized Subsidiaries

   Certain officers of Reorganized Encompass on and after the Effective Date
will also serve as officers and directors of the Reorganized Subsidiaries in
accordance with past practice, unless otherwise provided in the Plan
Supplement. In accordance with section 1129(a)(5) of the Bankruptcy Code, the
Debtors will identify those individuals proposed to serve as officers and
directors of the Reorganized Subsidiaries in the Plan Supplement.

B.  Employee Incentive Programs

   In connection with the Plan, Reorganized Encompass will adopt a new Stock
Option Plan that is intended to provide incentives to employees to continue
their efforts to foster and promote the long-term growth and performance of
Reorganized Encompass and its Reorganized Subsidiaries. The Stock Option Plan
will authorize the issuance of New Options to purchase shares of New Common
Stock up to an aggregate amount of fifteen percent (15%) of New Common Stock on
a fully diluted basis as of the Effective Date. On the Effective Date,
Reorganized Encompass will issue New Options to purchase up to 7% of the
outstanding New Common Stock on a fully diluted basis. Such New Options will be
issued to employees of the Reorganized Debtors as determined by Reorganized
Encompass' Board of Directors in consultation with the Chief Executive Officer
of Reorganized Encompass regarding such allocation. The remaining New Options
will be available for future grants at the discretion of Reorganized Encompass'
Board of Directors subject to such terms and conditions as Reorganized
Encompass' Board of Directors may determine at the time of grant. The terms of
the New Options, including, without limitation, vesting provisions and exercise
price, will be established by Reorganized Encompass' Board of Directors.

   The Debtors also intend to adopt employee bonus programs pursuant to which
the Board of Directors of each of the Reorganized Debtors may authorize
employee bonus awards designed to provide incentives for employees to promote
the financial performance of the Reorganized Debtors. Encompass expects that
bonuses under the program will be in the form of cash awards and that the Board
of Directors of the Reorganized Debtors will set employee performance goals and
expectations for awards under the program at their discretion.

C.  Employment Agreements

   On or before the Confirmation Date, the Debtors intend to assume all or
substantially all employment agreements currently in effect.

                           IV.  SUMMARY OF THE PLAN

A.  Introduction

   Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself and its creditors and shareholders. In
addition to permitting rehabilitation of the debtor, chapter 11 promotes
equality of treatment of creditors and equity security holders who hold
substantially similar claims against or interests in the debtor and its assets.
In furtherance of these two goals, upon the filing of a petition for relief
under chapter 11, section 362 of the Bankruptcy Code provides for an automatic
stay of substantially all acts and proceedings against the debtor and its
property, including all attempts to collect claims or enforce liens that arose
prior to the commencement of the chapter 11 case.

   The consummation of a plan of reorganization is the principal objective of a
Chapter 11 case. A plan of reorganization sets forth the means for satisfying
Claims against and Equity Interests in a debtor. Confirmation of a plan of
reorganization by the bankruptcy court makes the plan binding upon the debtor,
any issuer of securities under the plan, any Person or entity acquiring
property under the plan, and any creditor of or equity security holder in the
debtor, whether or not such creditor or equity security holder (i) is impaired
under or has accepted the plan or (ii) receives or retains any property under
the plan. Subject to certain limited exceptions, and other

                                      20

<PAGE>

than as provided in the plan itself or the Confirmation Order, the confirmation
order discharges the debtor from any debt that arose prior to the date of
confirmation of the plan and substitutes therefor the obligations specified
under the confirmed plan, and terminates all rights and interests of equity
security holders.

   THE REMAINDER OF THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE AND MEANS
FOR IMPLEMENTATION OF THE PLAN, AND OF THE CLASSIFICATION AND TREATMENT OF
CLAIMS AND EQUITY INTERESTS UNDER THE PLAN, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN (AS WELL AS THE EXHIBITS ATTACHED THERETO AND DEFINITIONS
THEREIN), WHICH IS ATTACHED HERETO AS EXHIBIT A.

   THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES OF
THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN. THE
STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE PRECISE
OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR DOCUMENTS
REFERRED TO THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH DOCUMENTS
FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.

   THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN CONTROL THE ACTUAL
TREATMENT OF CLAIMS AGAINST AND INTERESTS IN THE DEBTORS UNDER THE PLAN AND
WILL, UPON OCCURRENCE OF THE EFFECTIVE DATE, BE BINDING UPON ALL HOLDERS OF
CLAIMS AGAINST AND EQUITY INTERESTS IN THE DEBTORS, THEIR ESTATES, THE
REORGANIZED DEBTORS, ALL PARTIES RECEIVING PROPERTY UNDER THE PLAN, AND OTHER
PARTIES IN INTEREST. IN THE EVENT OF ANY CONFLICT BETWEEN THIS DISCLOSURE
STATEMENT, ON THE ONE HAND, AND THE PLAN OR ANY OTHER OPERATIVE DOCUMENT, ON
THE OTHER HAND, THE TERMS OF THE PLAN AND/OR SUCH OTHER OPERATIVE DOCUMENT WILL
CONTROL.

B.  Schedule of Treatment of Claims and Equity Interests

<TABLE>
<CAPTION>
   Class                           Title                          Status     Entitled To Vote
   -----                           -----                          ------     ----------------
<C>          <S>                                                <C>        <C>
Unclassified Administrative Expense Claims                      Unimpaired No
Unclassified Priority Tax Claims                                Unimpaired No
Class 1..... Other Priority Claims                              Unimpaired No; deemed to accept
Class 2..... Intercompany Claims                                Unimpaired No; deemed to accept
Class 3..... Subsidiary Interests                               Unimpaired No; deemed to accept
Class 4..... Secured Tax Claims                                 Unimpaired No; deemed to accept
Class 5..... Other Secured Claims                               Unimpaired No; deemed to accept
Class 6..... Encompass Existing Credit Agreement Claims         Impaired   Yes
Class 7..... Senior Subordinated Note Claims                    Impaired   Yes
Class 8..... Junior Subordinated Notes Claims                   Impaired   No; deemed to reject
Class 9..... General Unsecured Claims                           Unimpaired No, deemed to accept
Class 10.... Litigation Claims                                  Impaired   No; deemed to reject
Class 11.... Mandatorily Redeemable Convertible Preferred Stock Impaired   No, deemed to reject
Class 12.... Existing Common Stock and Section 510(b) Claims    Impaired   No; deemed to reject
Class 13.... Existing Other Equity Interests                    Impaired   No; deemed to reject
</TABLE>

C.  Treatment of Unclassified Claims

   In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative
Expense Claims and Priority Tax Claims are not classified and are not entitled
to vote on the Plan.

                                      21

<PAGE>

1.  Administrative Expense Claims

   Each holder of an Allowed Administrative Expense Claim will receive, on the
latest of (i) the Distribution Date, (ii) the date on which its Administrative
Expense Claim becomes an Allowed Administrative Expense Claim, and (iii) the
date on which its Administrative Expense Claim becomes payable under any
agreement relating thereto, or as soon as practicable thereafter, Cash equal to
the unpaid portion of its Allowed Administrative Expense Claim. Notwithstanding
the foregoing, (a) any Allowed Administrative Expense Claim based on a
liability incurred by the Debtors in the ordinary course of business during the
Chapter 11 Cases shall be paid in the ordinary course of business, in
accordance with the terms and conditions of any agreement relating thereto and
(b) any Allowed Administrative Expense Claim may be paid on such other terms as
may be agreed on between the holder of such Claim and the Debtors.

2.  Priority Tax Claims

   On the later of (i) the Distribution Date and (ii) the date such Priority
Tax Claim becomes an Allowed Priority Tax Claim, or as soon as practicable
thereafter, each holder of an Allowed Priority Tax Claim will receive in full
satisfaction, settlement, release, and discharge of and in exchange for such
Allowed Priority Tax Claim, in the sole discretion of the Debtors, (a) Cash
equal to the unpaid portion of such Allowed Priority Tax Claim, (b) deferred
Cash payments over a period not exceeding six years after the date of
assessment of such Allowed Priority Tax Claim, of a value, as of the Effective
Date, equal to such Allowed Priority Tax Claim, or (c) such other treatment as
to which the Debtors and such holder will have agreed upon in writing;
provided, however, that the Debtors reserve the right to prepay any Allowed
Priority Tax Claim, or any remaining balance of any Allowed Priority Tax Claim,
in full at any time on or after the Distribution Date without premium or
penalty; provided further, however, that no holder of an Allowed Priority Tax
Claim will be entitled to any payments on account of any pre-Effective Date
interest accrued on or penalty arising after the Petition Date with respect to
or in connection with such Allowed Priority Tax Claim.

D.  Treatment of Classified Claims and Equity Interests

1.  Class 1-- Other Priority Claims

      a. Claims in Class: Class 1 consists of all Other Priority Claims.

      b. Treatment: On the later of (i) the Distribution Date and (ii) the date
   on which its Other Priority Claim becomes an Allowed Other Priority Claim,
   or, in each case, as soon as practicable thereafter, each holder of an
   Allowed Other Priority Claim will receive, in full satisfaction, settlement,
   release, and discharge of and in exchange for such Allowed Other Priority
   Claim, Cash equal to the full amount of its Allowed Other Priority Claim.

2.  Class 2 -- Intercompany Claims

      a. Claims in Class: Class 2 consists of all Intercompany Claims.

      b. Treatment: The legal, equitable, and contractual rights of the holders
   of Allowed Intercompany Claims are unaltered by the Plan, or such Allowed
   Intercompany Claims will otherwise be rendered unimpaired pursuant to
   section 1124 of the Bankruptcy Code.

3.  Class 3 -- Subsidiary Interests

      a. Claims in Class: Class 3 consists of all Subsidiary Interests.

      b. Treatment: The legal, equitable, and contractual rights of the holders
   of Allowed Subsidiary Interests are unaltered by the Plan, or such Allowed
   Subsidiary Interests will otherwise be rendered unimpaired pursuant to
   section 1124 of the Bankruptcy Code.

                                      22

<PAGE>

4.  Class 4 -- Secured Tax Claims

      a. Claims in Class: Class 4 consists of all Secured Tax Claims.

      b. Treatment: Except to the extent that a holder of an Allowed Secured
   Tax Claim has been paid by the Debtors prior to the Effective Date or agrees
   to a different treatment, each holder of an Allowed Secured Tax Claim will
   receive, at the sole option of the Reorganized Debtors, (i) Cash in the
   amount of such Allowed Secured Tax Claim, including any interest required by
   section 506(b) of the Bankruptcy Code, on the later of the Effective Date or
   the date on which such Allowed Secured Tax Claim becomes an Allowed Secured
   Tax Claim, or as soon thereafter as is practicable, or (ii) equal annual
   Cash payments in an aggregate amount equal to such Allowed Secured Tax
   Claim, together with interest at a fixed annual rate equal to 7.0% over a
   period through the sixth anniversary of the date of assessment of such
   Allowed Secured Tax Claim, or upon such other terms determined by the
   Bankruptcy Court to provide the holder of such Allowed Secured Tax Claim
   deferred Cash payments having a value, as of the Effective Date, equal to
   such Allowed Secured Tax Claim.

5.  Class 5 -- Other Secured Claims

      a. Claims in Class: Class 5 consists of all Other Secured Claims.

      b. Treatment: The legal, equitable and contractual rights of the holders
   of Other Secured Claims are unaltered by the Plan, or such Secured Claims
   will otherwise be rendered unimpaired pursuant to section 1124 of the
   Bankruptcy Code.

6.  Class 6 -- Existing Credit Agreement Claims

      a. Claims in Class: Class 6 consists of all Existing Credit Agreement
   Claims.

      b. Treatment: On the later of (i) Effective Date and (ii) the date on
   which its Existing Credit Agreement Claim becomes an Allowed Existing Credit
   Agreement Claim, or, in each case, as soon as practicable thereafter, each
   holder of an Allowed Existing Credit Agreement Claim will receive, in full
   satisfaction, settlement, release, and discharge of and in exchange for such
   Allowed Existing Credit Agreement Claim, (i) a Pro Rata amount of
   indebtedness under the New Term Loan and all rights related to such
   indebtedness under the New Term Loan and (ii) a Pro Rata distribution of
   34,000,000 shares of New Common Stock.

7.  Class 7 -- Senior Subordinated Note Claims

      a. Claims in Class: Class 7 consists of all Senior Subordinated Note
   Claims.

      b. Treatment: On the later of (i) the Effective Date and (ii) the date on
   which its Senior Subordinated Note Claim becomes an Allowed Senior
   Subordinated Note Claim, or, in each case, as soon as practicable
   thereafter, each holder of an Allowed Senior Subordinated Note Claim will
   transfer to Encompass such Allowed Senior Subordinated Note Claim for
   cancellation and will receive from Encompass in exchange therefor, and in
   full satisfaction, settlement, release, and discharge of such Claim, a Pro
   Rata distribution of 8,500,000 shares of New Common Stock.

8.  Class 8 -- Junior Subordinated Notes Claims

      a. Claims in Class: Class 8 consists of all Junior Subordinated Notes
   Claims.

      b. Treatment: On the Effective Date, all Junior Subordinated Note Claims
   will be cancelled, and the holders of all Junior Subordinated Note Claims
   will not receive any distribution under the Plan.

9.  Class 9 -- General Unsecured Claims

      a. Claims in Class: Class 9 consists of all General Unsecured Claims.

                                      23

<PAGE>

      b. Treatment: Except to the extent that a holder of an Allowed General
   Unsecured Claim has been paid on or before the Effective Date pursuant to
   the Critical Vendor Order or otherwise, the legal, equitable, and
   contractual rights of the holders of General Unsecured Claims will be
   unaltered by the Plan, or such General Unsecured Claims will otherwise be
   rendered unimpaired pursuant to section 1124 of the Bankruptcy Code.

10.  Class 10 -- Litigation Claims

      a. Claims in Class: Class 10 consists of all Litigation Claims.

      b. Treatment: Except to the extent that a holder of an Allowed Litigation
   Claim has been paid by the Debtors prior to the Effective Date or agrees to
   a different treatment, the holders of Litigation Claims will not receive any
   distribution under the Plan.

11.  Class 11 -- Mandatorily Redeemable Convertible Preferred Stock

      a. Equity Interests in Class: Class 11 consists of all Mandatorily
   Redeemable Convertible Preferred Stock.

      b. Treatment: On the Effective Date, all Mandatorily Redeemable
   Convertible Preferred Stock and the accrued and unpaid dividends thereon
   will be cancelled, and the holders of Mandatorily Redeemable Convertible
   Preferred Stock will not receive or retain any property on account of their
   Mandatorily Redeemable Convertible Preferred Stock.

12.  Class 12 -- Existing Common Stock and Section 510(b) Claims

      a. Claims and Equity Interests in Class: Class 12 consists of all
   Existing Common Stock and Section 510(b) Claims.

      b. Treatment: On the Effective Date, all Existing Common Stock shall be
   cancelled, and the holders of Existing Common Stock and Section 510(b)
   Claims shall not receive or retain any property on account of their Existing
   Common Stock and/or Section 510(b) Claims.

13.  Class 13 -- Existing Other Equity Interests

      a. Equity Interests in Class: Class 13 consists of all Existing Other
   Equity Interests.

      b. Treatment: On the Effective Date, all Existing Other Equity Interests
   will be cancelled, and the holders of Existing Other Equity Interests will
   not receive or retain any property on account of their Existing Other Equity
   Interests.

E.  Allowed Claims

   Notwithstanding any provision in the Plan to the contrary, the Debtors or
Reorganized Debtors will only make distributions to holders of Allowed Claims.
No holder of a Disputed Claim will receive any distribution on account thereof
until and to the extent that its Disputed Claim becomes an Allowed Claim or
Allowed Equity Interest.

F.  Postpetition Interest

   In accordance with section 502(b)(2) of the Bankruptcy Code, the amount of
all unsecured Claims against the Debtors will be calculated as of the Petition
Date. Except as otherwise explicitly provided in the Plan, in section 506(b) of
the Bankruptcy Code or by order of the Bankruptcy Court, no holder of a Claim
will be entitled to or will receive Postpetition Interest.

                                      24

<PAGE>

G.  Alternative Treatment

   Notwithstanding any provision in the Plan to the contrary, any holder of an
Allowed Claim may receive, instead of the distribution or treatment to which it
is entitled under the Plan, any other distribution or treatment to which it and
the Debtors may agree to in writing.

H.  Tax Allocation

   For tax purposes, the value of any New Securities received by holders of
Claims in satisfaction of interest bearing obligations will be allocated first
to the full satisfaction of principal of such interest bearing obligations and
second in satisfaction of any accrued unpaid interest. See Section
VII.B.8--"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN--CONSEQUENCES TO
HOLDERS OF CLAIMS OR INTERESTS--ALLOCATION OF CONSIDERATION TO INTEREST."

I.  Means for Implementation of the Plan

1.  Continued Corporate Existence; Authorized Capital Stock

   Except for any Subsidiaries that may be sold as part of the expected asset
disposition program, each of the Reorganized Debtors will continue to exist
after the Effective Date as separate entities in accordance with the applicable
law in the applicable jurisdiction in which they are incorporated, formed or
organized under their respective certificates of incorporation and bylaws,
partnership agreement, membership agreement or other organizational documents
in effect before the Effective Date except as their organizational documents
may be amended pursuant to the Plan. On the Effective Date, the organizational
documents of each Reorganized Debtor will be amended as necessary to satisfy
the provisions of the Plan and the Bankruptcy Code and will include pursuant to
section 1123(a)(6) of the Bankruptcy Code, a provision prohibiting the issuance
of non-voting equity securities. In addition, the Reorganized Encompass
Certificate of Incorporation will include a provision (i) authorizing 50
million shares of New Preferred Stock, and (ii) authorizing 150 million shares
of New Common Stock. See Section VI.B--"CAPITAL STRUCTURE OF THE REORGANIZED
DEBTORS--NEW SECURITIES."

2.  Restructuring Transactions

   Notwithstanding the foregoing, and in accordance with the provisions of
section 1123 of the Bankruptcy Code, the Debtors may enter into any
transactions or take any actions appropriate or necessary to effect a corporate
restructuring of their respective businesses, including, without limitation,
any action necessary to effect a change in the organizational form of a Debtor.
Any such proposed corporate restructuring will be described in the documents
and papers contained in the Plan Supplement. In addition to such
pre-Confirmation Date transactions, the applicable Reorganized Debtors may
enter into such transactions, on and after the Confirmation Date, which are
necessary or appropriate to effect a corporate restructuring of their
respective businesses, including, without limitation, simplifying the overall
corporate structure of the Reorganized Debtors, reincorporating certain of the
Debtors under the laws of jurisdictions other than the laws under which the
applicable Debtor is presently incorporated or reforming some or all of the
Subsidiary Debtors as limited liability companies or limited partnerships in
such jurisdictions. Such restructuring may include one or more mergers,
consolidations, dispositions, liquidations, or dissolutions, as may be
determined by the Reorganized Debtors to be necessary or appropriate. In each
case in which the surviving, resulting, or acquiring corporation in any such
transaction is a successor to a Reorganized Debtor, such surviving, resulting,
or acquiring corporation will perform the obligations of the applicable
Reorganized Debtor pursuant to the Plan to pay or otherwise satisfy the Allowed
Claims against such Reorganized Debtor, except as provided in any contract,
instrument or other agreement or document effecting a disposition to such
surviving, resulting, or acquiring corporation, which may provide that another
Reorganized Debtor will perform such obligations.

                                      25

<PAGE>

3.  Substantive Consolidation for Purposes of Treating Impaired Claims

   For voting and confirmation purposes, the Plan is premised upon the
administrative and procedural consolidation of all of the Debtors. For
distribution purposes, the Plan is premised on the substantive consolidation of
the holders of Impaired Claims to whom distributions are proposed to be made.
The Plan does not contemplate substantive consolidation of the Debtors with
respect to any Class of Claims or Equity Interests to whom no distribution is
proposed to be made, nor does it contemplate the merger of any Debtor entity
into another nor the transfer or commingling of any assets of any Debtor,
except as such assets are to be pooled for purposes of distributions to holders
of Impaired Claims to whom distributions are proposed to be made. On the
Effective Date, (a) Impaired Claims against any Debtor and all guaranties by
any Debtor of such Impaired Claims will be treated as a single Claim against
all of the Debtors and any holders of Impaired Claims against two or more
Debtors, and any Impaired Claims for joint and several liability against two or
more Debtors will be treated and Allowed as a single Impaired Claim against the
consolidated Debtors, and (b) each holder of a Claim in an Impaired Class of
Claims that files a Claim in the Chapter 11 Case of any Debtor will be treated
as one such Claim for distribution purposes; provided, however, that the
holders of the Impaired Claims specified in subsections (a) and (b) of this
paragraph are the holders of Impaired Claims to whom distributions are proposed
to be made under the Plan. Substantive consolidation will not (other than for
purposes related to the Plan as set forth in this paragraph): (w) affect the
legal and corporate structures of the Reorganized Debtors or affect or modify
ownership of any asset of any Debtor, (x) cause any Debtor to be liable for any
Claim or unimpaired Claim in any way under the Plan for which it is otherwise
not liable and the liability of any Debtor for any such Claim shall not be
affected by such substantive consolidation, (y) affect Intercompany Claims,
and/or (z) affect Subsidiary Interests.

4.  Corporate Action; Cancellation of Securities

   As of the Effective Date, the Certificates evidencing the Extinguished
Securities will evidence solely the right to receive from the Debtors the
distribution of the consideration, if any, under the Plan as described in
Section IV.D--"SUMMARY OF THE PLAN--TREATMENT OF CLASSIFIED CLAIMS AND EQUITY
INTERESTS." On the Effective Date, except as otherwise provided for in the
Plan, (i) the Extinguished Securities, to the extent not already cancelled,
will be deemed cancelled and of no further force or effect without any further
action on the part of the Bankruptcy Court or any other Person and (ii) the
obligations of the Debtors under the Extinguished Securities and under the
Debtors' certificate of incorporation, any agreements, indentures, or
certificates of designations or other organizational documents governing the
Extinguished Securities will be terminated and discharged; provided, however,
that each indenture or other agreement that governs the rights of the holder of
a Claim based on the Extinguished Securities and that is administered by an
indenture trustee, agent, or servicer will continue in effect solely for the
purposes of (a) allowing such indenture trustee, agent, or servicer to make the
distributions to be made on account of such Claims under the Plan and (b)
permitting such indenture trustee, agent, or servicer to maintain any rights it
may have for fees, costs, and expenses under such indenture or other agreement.
Additionally, the cancellation of any indenture will not impair the rights and
duties under such indenture as between the indenture trustee thereunder and the
beneficiaries of the trust created thereby. Additionally, as of the Effective
Date, all Equity Interests, to the extent not already cancelled, will be
cancelled; provided, however, that the Subsidiary Interests shall be treated in
accordance with the terms of the Plan.

   Any actions taken by an indenture trustee, agent or servicer that are not
for the purposes authorized under the Plan will not be binding upon the
Debtors. Except with respect to the making of distributions as provided in the
preceding paragraph, the Reorganized Debtors may, with or without cause,
terminate any indenture or other governing agreement and the authority of any
indenture trustee, agent or servicer to act thereunder at any time by giving
five Business Days' written notice of termination to the indenture trustee,
agent, or servicer. If distributions under the Plan on account of Senior
Subordinated Note Claims have not been completed at the time of termination of
the indenture or other governing agreement, the Reorganized Debtors will
designate a distribution agent to act in place of the indenture trustee, agent,
or servicer, and the provisions of the Plan will be deemed to apply to the new
distribution agent.

                                      26

<PAGE>

5.  Directors and Executive Officers

   On the Effective Date, the term of each member of the current Board of
Directors of Encompass will automatically expire. The initial Board of
Directors of Reorganized Encompass on and after the Effective Date will consist
of seven members, one of which will be the Chief Executive Officer of
Reorganized Encompass, four of which will be designated by the holders of
Allowed Existing Credit Agreement Claims and two of which will be designated by
the holders of Allowed Senior Subordinated Note Claims. The Debtors will
consult with representatives of the holders of Existing Credit Agreement Claims
to determine the four appointees to be designated by the holders of Allowed
Existing Credit Agreement Claims to the Reorganized Encompass' Board of
Directors and will consult with the indenture trustee for the Senior
Subordinated Notes to determine the two appointees to be designated by the
holders of the Allowed Senior Subordinated Notes to the Reorganized Encompass'
Board of Directors. The Reorganized Encompass' Board of Directors will have the
responsibility for the management, control, and operation of Reorganized
Encompass on and after the Effective Date. The members of the Management Group
will maintain their current positions as executive officers of Reorganized
Encompass on and after the Effective Date. Certain officers of Reorganized
Encompass on and after the Effective Date will also serve as the officers and
directors of its Reorganized Subsidiaries in accordance with past practice,
unless otherwise provided in the Plan Supplement.

   Certain officers of Reorganized Encompass on and after the Effective Date
will also serve as officers and directors of the Reorganized Subsidiaries in
accordance with past practice, unless otherwise provided in the Plan
Supplement. In accordance with section 1129(a)(5) of the Bankruptcy Code, the
Debtors will identify those individuals proposed to serve as officers and
directors of the Reorganized Subsidiaries in the Plan Supplement.

6.  New Securities

   As of the Effective Date, the issuance by Reorganized Encompass of an
aggregate of 42,500,000 shares of New Common Stock to holders of Existing
Credit Agreement Claims and Senior Subordinated Notes Claims will be authorized.

   As of the Effective Date, the grant by Reorganized Encompass of the New
Options to purchase an aggregate of up to 3,500,000 shares of New Common Stock
in accordance with the Stock Option Plan will be authorized.

   As of the Effective Date, the reservation by Reorganized Encompass of
7,500,000 shares of New Common Stock for issuance pursuant to any exercise of
New Options will be authorized.

   The issuance, grant, and reservation of New Securities described in this
Section IV.I.6 and authorized pursuant to the Plan will not require any further
act or action by, among other Persons, any shareholders or creditors of the
Debtors, under applicable law, regulation, order or rule.

   All New Common Stock to be issued or granted will be deemed issued or
granted, as applicable, as of the Effective Date regardless of the date on
which they are actually distributed. The New Securities are described in
Section VI.B--"CAPITAL STRUCTURE OF THE REORGANIZED DEBTORS--NEW SECURITIES."

7.  New Senior Credit Agreement

   The Debtors expect that the indebtedness under the Existing Credit Agreement
will be restructured in the New Senior Credit Agreement to provide for a New
Term Loan in the amount of $200 million, subject to increase as a result of any
drawing upon letters of credit issued and outstanding under the Existing Credit
Agreement as of the Petition Date, in which case such drawings will increase
the principal amount of the New Term Loan in an amount equal to such drawing
and will be allocated to the reimbursing Senior Lenders. In addition, the
Debtors anticipate that the New Senior Credit Agreement will include the Exit
Facility, which the Debtors anticipate will provide for revolving loans of up
to $100 million, the full amount of which will be

                                      27

<PAGE>

available for the issuance of letters of credit. All letters of credit issued
and outstanding under the DIP Facility will be deemed to be issued and
outstanding under the Exit Facility as of the Effective Date. Indebtedness
under the New Term Loan will be junior to indebtedness under the Exit Facility.
The Exit Facility will provide liquidity for working capital and other general
corporate purposes to the Reorganized Debtors following the conclusion of the
Chapter 11 Cases. On the Effective Date, the Reorganized Debtors will enter
into the New Senior Credit Agreement. See Section VI.C--"CAPITAL STRUCTURE OF
THE REORGANIZED DEBTORS--NEW SENIOR CREDIT AGREEMENT."

8.  Stock Option Plan

   In connection with the Plan, Reorganized Encompass will adopt a new Stock
Option Plan that is intended to provide incentives to employees to continue
their efforts to foster and promote the long-term growth and performance of the
Reorganized Debtors. The Stock Option Plan will authorize the issuance of New
Options to purchase shares of New Common Stock up to an aggregate amount of
fifteen percent (15%) of the New Common Stock on a fully diluted basis as of
the Effective Date. On the Effective Date, Reorganized Encompass will issue New
Options to purchase up to 7% of the outstanding New Common Stock on a fully
diluted basis. Such New Options will be issued to employees of the Reorganized
Debtors as determined by Reorganized Encompass' Board of Directors, in
consultation with the Chief Executive Officer of Reorganized Encompass
regarding such allocation. The remaining New Options will be available for
future grants at the discretion of Reorganized Encompass' Board of Directors
subject to such terms and conditions as Reorganized Encompass' Board of
Directors may determine at the time of grant. The terms of the New Options,
including, without limitation, vesting provisions and exercise price, will be
established by Reorganized Encompass' Board of Directors. See Section
III.B--"MANAGEMENT AND CORPORATE STRUCTURE OF THE REORGANIZED DEBTORS--EMPLOYEE
INCENTIVE PROGRAMS."

9.  Revesting of Assets

   The property of each Debtor's Estate, together with any property of each
Debtor that is not property of its Estate and that is not specifically disposed
of pursuant to the Plan, will revest in the applicable Reorganized Debtor on
the Effective Date. Thereafter, the Reorganized Debtors may operate their
businesses and may use, acquire, and dispose of property free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules, and the Bankruptcy
Court. As of the Effective Date, all property of the Reorganized Debtors will
be free and clear of all Claims, encumbrances, Equity Interests, charges and
liens except as specifically provided or contemplated in the Plan or the
Confirmation Order. Without limiting the generality of the foregoing, the
Reorganized Debtors may, without application to or approval by the Bankruptcy
Court, pay professional fees and expenses incurred after the Effective Date.

10.  Preservation of Rights of Action; Settlement of Litigation Claims

   Except as otherwise provided in the Plan or in the Confirmation Order, or in
any contract, instrument, release, indenture or other agreement entered into in
connection with the Plan, in accordance with section 1123(b) of the Bankruptcy
Code, the Reorganized Debtors will retain and may enforce, sue on, settle, or
compromise (or decline to do any of the foregoing) all claims, rights or causes
of action, suits, and proceedings, whether in law or in equity, whether known
or unknown, that the Debtors or their Estates may hold against any Person or
entity without the approval of the Bankruptcy Court. The Reorganized Debtors or
their successor(s) may pursue such retained claims, rights or causes of action,
suits, or proceedings as appropriate, in accordance with the best interests of
the Reorganized Debtors or their successor(s) who hold such rights.

11.  Effectuating Documents; Further Transactions

   The chairman of the board of directors, president, chief financial officer,
any executive vice-president or senior vice-president, or any other appropriate
officer of each Debtor will be authorized to execute, deliver, file, or record
such contracts, instruments, releases, indentures, and other agreements or
documents, and take such

                                      28

<PAGE>

other actions, as may be necessary or appropriate, to effectuate and further
evidence the terms and conditions of the Plan. The secretary or assistant
secretary of the appropriate Debtor will be authorized to certify or attest to
any of the foregoing actions.

12.  Exemption from Certain Transfer Taxes

   Pursuant to section 1146(c) of the Bankruptcy Code, any transfers from a
Debtor to a Reorganized Debtor or any other Person or entity pursuant to the
Plan will not be subject to any document recording tax, stamp tax, conveyance
fee, intangibles or similar tax, mortgage tax, real estate transfer tax,
mortgage recording tax, or other similar tax or governmental assessment, and
the Confirmation Order will direct the appropriate state or local governmental
officials or agents to forego the collection of any such tax or governmental
assessment and to accept for filing and recordation any of the foregoing
instruments or other documents without the payment of any such tax or
governmental assessment.

J.  Provisions Governing Distributions

1.  Distributions for Claims Allowed as of the Effective Date

   Except as otherwise provided in the Plan or as ordered by the Bankruptcy
Court, distributions and issuances of New Securities to be made in exchange for
or on account of Claims that are Allowed Claims as of the Effective Date will
be made on the Distribution Date, or as soon thereafter as reasonably
practicable. All Cash distributions will be made by the Disbursing Agent from
available Cash of the Reorganized Debtors. Any distribution under the Plan of
property other than Cash (including any issuance of New Securities and the
distribution of such New Securities in exchange for Allowed Claims as of the
Effective Date) will be made by the Disbursing Agent, the indenture trustee or
the transfer agent in accordance with the terms of the Plan.

2.  Disbursing Agent

   The Disbursing Agent will make all distributions required under the Plan,
except with respect to a holder of a Claim whose distribution is governed by an
indenture or other agreement and is administered by an indenture trustee,
agent, or servicer, which distributions will be deposited with the appropriate
indenture trustee, agent, or servicer, who will deliver such distributions to
the holders of Claims in accordance with the provisions of the Plan and the
terms of the relevant indenture or other governing agreement.

   If the Disbursing Agent is an independent third party designated by the
Reorganized Debtors to serve in such capacity (or, in the case of an indenture
or other agreement that governs distributions and is administered by an
indenture trustee, agent, or servicer), such Disbursing Agent, indenture
trustee, agent, or servicer will receive, without further Bankruptcy Court
approval, reasonable compensation for distribution services rendered pursuant
to the Plan and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services from the Reorganized Debtors on terms acceptable
to the Reorganized Debtors. No Disbursing Agent will be required to give any
bond or surety or other security for the performance of its duties unless
otherwise ordered by the Bankruptcy Court. If otherwise so ordered, all costs
and expenses of procuring any such bond will be paid by the Reorganized Debtors.

3.  Surrender of Securities or Instruments

   On or before the Distribution Date, or as soon as reasonably practicable
thereafter, each holder of a Certificate will surrender such Certificate to the
Disbursing Agent, or, with respect to the Senior Subordinated Notes, the
indenture trustee, and such Certificate will be cancelled. No distribution of
property under the Plan will be made to or on behalf of any such holder unless
and until such Certificate is received by the Disbursing Agent or the indenture
trustee, as the case may be, or the unavailability of such Certificate is
reasonably established to the satisfaction of the Disbursing Agent or indenture
trustee, as the case may be. Any such holder

                                      29

<PAGE>

who fails to surrender or cause to be surrendered such Certificate or fails to
execute and deliver an affidavit of loss and indemnity reasonably satisfactory
to the Disbursing Agent or indenture trustee, as the case may be, prior to the
second anniversary of the Effective Date will be deemed to have forfeited all
rights and Claims or Equity Interests in respect of such Certificate, will not
participate in any distribution under the Plan and (i) all Cash in respect of
such forfeited distribution, including interest accrued thereon, will revert to
the Reorganized Debtors and (ii) all New Securities in respect of such
forfeited distribution will be cancelled notwithstanding any federal or escheat
laws to the contrary.

4.  Instructions to Disbursing Agent

   Prior to any distribution on account of a Senior Subordinated Note Claim,
the indenture trustee will (i) inform the Disbursing Agent as to the amount of
properly surrendered Senior Subordinated Notes and (ii) inform the Disbursing
Agent in a properly completed letter of transmittal, accompanied by properly
remitted securities, of the names of holders of Allowed Senior Subordinated
Note Claims, and the number of shares of New Common Stock to be issued and
distributed to or on behalf of such holders of Allowed Senior Subordinated Note
Claims in exchange for properly surrendered Senior Subordinated Notes.

5.  Services of Indenture Trustee

   The indenture trustee's services with respect to consummation of the Plan
will be as set forth in the Plan and as authorized by the indenture.

6.  Notification Date for Distributions

   At the close of business on the Distribution Notification Date, the transfer
ledgers for the Existing Bank Debt (maintained by Bank of America, N.A., as
Administrative Agent under the Existing Credit Agreement) and Senior
Subordinated Notes will be closed, and there will be no further changes in the
record holders of such debt. The Reorganized Debtors and the Disbursing Agent,
if any, will have no obligation to recognize any transfer of any such debt
occurring after the Distribution Notification Date and will be entitled instead
to recognize and deal for all purposes under the Plan with only those record
holders listed on the transfer ledgers as of the close of business on the
Distribution Notification Date.

7.  Means of Cash Payment

   Cash payments under the Plan will be in U.S. funds by check, wire transfer,
or such other commercially reasonable manner as the payor will determine in its
sole discretion.

8.  Calculation of Distribution Amounts of New Common Stock

   No fractional shares of New Common Stock will be issued or distributed under
the Plan or by Reorganized Encompass or any Disbursing Agent, indenture
trustee, agent, or servicer. Each Person entitled to receive New Common Stock
will receive the total number of whole shares of New Common Stock to which such
Person is entitled. Whenever any distribution to a particular Person would
otherwise call for distribution of a fraction of a share of New Common Stock,
such number of shares to be distributed will be rounded down to the nearest
whole number.

9.  Delivery of Distributions; Undeliverable or Unclaimed Distributions

   Distributions to holders of Allowed Claims will be made by the Disbursing
Agent or the indenture trustee, as the case may be, (i) at the holder's last
known address, (ii) at the address in any written notice of address change
delivered to the Disbursing Agent, (iii) in the case of the holder of a Senior
Subordinated Note Claim, at

                                      30

<PAGE>

the address in the indenture trustee's official records, or (iv) at the address
set forth in a properly completed letter of transmittal accompanying a
Certificate properly remitted in accordance with the terms hereof. If any
holder's distribution is returned as undeliverable, no further distributions to
such holder will be made, unless and until the Disbursing Agent or indenture
trustee is notified of such holder's then current address, at which time all
missed distributions will be made to such holder without interest. Amounts in
respect of undeliverable distributions made through the Disbursing Agent or the
indenture trustee will be returned to the Reorganized Debtors or the indenture
trustee, as the case may be, until such distributions are claimed. All claims
for undeliverable distributions must be made on or before the second
anniversary of the Effective Date, after which date (a) all Cash in respect of
such forfeited distribution including interest accrued thereon will revert to
the Reorganized Debtors and (b) all New Securities in respect of such forfeited
distribution will be cancelled, in each case, notwithstanding any federal or
escheat laws to the contrary.

10.  Withholding and Reporting Requirements

   In connection with the Plan and all distributions thereunder, the Disbursing
Agent will, to the extent applicable as determined in its sole discretion,
comply with all tax withholding and reporting requirements imposed by any
federal, state, local, or foreign taxing authority, and all distributions under
the Plan will be subject to any such withholding and reporting requirements.
The Disbursing Agent will be authorized to take all actions necessary or
appropriate to comply with such withholding and reporting requirements.

11.  Setoffs

   Other than in respect of any Existing Credit Agreement Claim, a Reorganized
Debtor may, but will not be required to, setoff against any Claim, and the
payments or other distributions to be made pursuant to the Plan in respect of
such Claim, claims of any nature whatsoever that the Debtor or Reorganized
Debtor may have against the Claim's holder; provided, however, that neither the
failure to do so nor the allowance of any Claim under the Plan will constitute
a waiver or release by the Reorganized Debtor of any claim that the Debtor or
Reorganized Debtor may have against such holder. Nothing in the Plan will be
deemed to expand rights to setoff under applicable non-bankruptcy law.
Notwithstanding the foregoing, the Reorganized Debtors will be deemed to waive
and will have no right of setoff or recoupment against any Existing Credit
Agreement Claim or against any amounts at any time due or outstanding under the
DIP Facility.

K.  Procedures for Resolving Disputed, Contingent, and Unliquidated Claims

1.  Objections to Claims and Equity Interests; Disputed Claims and Equity
Interests

   The Debtors intend to make distributions, as required by the Plan, in
accordance with the books and records of the Debtors (or in the case of the
Existing Bank Debt, in accordance with the books and records of Bank of
America, N.A., as Administrative Agent under the Existing Credit Agreement).
Unless disputed by the holder of a Claim, the amount set forth in the books and
records of the Debtors will constitute the amount of the Allowed Claim of such
holder. If any holder of a Claim disagrees with the Debtors, such holder must
so advise the Debtors in writing, in which event, the Claim will be a Disputed
Claim. The Debtors intend to attempt to resolve any such disputes consensually.

   Notwithstanding the foregoing, the Debtors may, in their discretion, file
with the Bankruptcy Court (or any other court of competent jurisdiction) an
objection to the allowance of any Claim, or any other appropriate motion or
adversary proceeding with respect thereto. All such objections will be
litigated to Final Order; provided, however, that the Debtors may compromise
and settle, withdraw or resolve by any other method any objections to Claims or
Equity Interests. In addition, any Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code or other applicable law regardless of
whether such Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court will
retain jurisdiction to estimate

                                      31

<PAGE>

any Claim at any time during litigation concerning any objection to any Claim,
including during the pendency of any appeal relating to any such objection. In
the event the Bankruptcy Court estimates any contingent or unliquidated Claim,
that estimated amount will constitute either the Allowed amount of such Claim
or a maximum limitation on such Claim, as determined by the Bankruptcy Court.
If the estimated amount constitutes a maximum limitation on such Claim, the
Debtors may elect to pursue any supplemental proceedings to object to any
ultimate distribution on such Claim. All of the aforementioned Claims
objection, estimation, and resolution procedures are cumulative and are not
necessarily exclusive of one another. Claims may be estimated and thereafter
resolved by any permitted mechanism.

2.  No Distribution Pending Allowance

   Notwithstanding any other provision in the Plan, if any portion of a Claim
is a Disputed Claim, no payment or distribution provided under the Plan will be
made on account of or in exchange for such Claim unless and until such Disputed
Claim becomes an Allowed Claim.

3.  Distributions After Allowance

   To the extent that a Disputed Claim ultimately becomes an Allowed Claim, a
distribution will be made to the holder of such Allowed Claim in accordance
with the provisions of the Plan. As soon as reasonably practicable after the
date that the order or judgment of the Bankruptcy Court or other applicable
court of competent jurisdiction allowing any Disputed Claim becomes a Final
Order, the Disbursing Agent will provide to the holder of such Claim the
distribution to which such holder is entitled under the Plan on account of or
in exchange for such Allowed Claim.

L.  Treatment of Executory Contracts and Unexpired Leases

1.  Assumed Contracts and Leases

   Except as otherwise provided in the Plan, or in any contract, instrument,
release, indenture, or other agreement or document entered into in connection
with the Plan, as of the Effective Date each Reorganized Debtor will be deemed
to have assumed each executory contract and unexpired lease to which it is a
party, unless such contract or lease (i) was previously assumed or rejected by
the Debtors, (ii) previously expired or terminated pursuant to its own terms,
(iii) is the subject of a motion to reject filed on or before the Confirmation
Date or (iv) is set forth in a schedule, as an executory contract or unexpired
lease to be rejected, filed as part of the Plan Supplement. The Confirmation
Order will constitute an order of the Bankruptcy Court under section 365 of the
Bankruptcy Code approving the contract and lease assumptions or rejections
described above, as of the Effective Date.

   Each executory contract and unexpired lease that is assumed and relates to
the use, ability to acquire, or occupancy of real property will include (a) all
modifications, amendments, supplements, restatements, or other agreements made
directly or indirectly by any agreement, instrument, or other document that in
any manner affect such executory contract or unexpired lease and (b) all
executory contracts or unexpired leases appurtenant to the premises, including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vaults, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights in rem related to such premises, unless any
of the foregoing agreements has been rejected pursuant to an order of the
Bankruptcy Court.

2.  Payments Related to Assumption of Contracts and Leases

   Any monetary amounts by which any executory contract and unexpired lease to
be assumed under the Plan is in default will be satisfied, under section
365(b)(1) of the Bankruptcy Code, by the applicable Debtor. If there is a
dispute regarding (i) the nature or amount of any Cure, (ii) the ability of a
Reorganized Debtor or any

                                      32

<PAGE>

assignee to provide "adequate assurance of future performance" (within the
meaning of section 365 of the Bankruptcy Code) under the contract or lease to
be assumed, or (iii) any other matter pertaining to assumption, Cure will occur
following the entry of a Final Order of the Bankruptcy Court resolving the
dispute and approving the assumption or assumption and assignment, as the case
may be.

3.  Rejected Contracts and Leases

   Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, none of the executory contracts and unexpired leases to which a
Debtor is a party will be rejected under the Plan; provided, however, that the
Debtors reserve the right, at any time prior to the Confirmation Date, to seek
to reject any executory contract or unexpired lease to which any Debtor is a
party.

4.  Claims Based on Rejection of Executory Contracts or Unexpired Leases

   All Claims arising out of the rejection of executory contracts and unexpired
leases must be served upon the appropriate Debtor and its counsel within 60
days after the earlier of (i) the date of entry of an order of the Bankruptcy
Court approving such rejection or (ii) the Confirmation Date. Any Claims not
filed within such times will be forever barred from assertion against the
respective Debtor, its Estate, and its property.

5.  Compensation and Benefit Plans and Treatment of Retirement Plans

   Except and to the extent previously assumed by an order of the Bankruptcy
Court, on or before the Confirmation Date, all employee compensation and
benefit plans of the Debtors, including benefit plans and programs subject to
sections 1114 and 1129(a)(13) of the Bankruptcy Code, entered into before or
after the Petition Date and not since terminated, will be deemed to be, and
will be treated as if they were, executory contracts that are to be assumed
under the Plan. The Debtors' obligations under such plans and programs will
survive Confirmation of the Plan, except for (i) executory contracts or
employee benefit plans specifically rejected pursuant to the Plan (to the
extent such rejection does not violate sections 1114 and 1129(a)(13) of the
Bankruptcy Code) and (ii) such executory contracts or employee benefit plans as
have previously been rejected, are the subject of a motion to reject as of the
Confirmation Date, or have been specifically waived by the beneficiaries of any
employee benefit plan or contract; provided, however, that the Debtors'
obligations, if any, to pay all "retiree benefits," as defined in section
1114(a) of the Bankruptcy Code, will continue unimpaired and in full force and
effect.

M.  Acceptance or Rejection of the Plan

1.  Classes Entitled To Vote

   Each Impaired Class of Claims or Equity Interests that will (or may) receive
or retain property or any interest in property under the Plan is entitled to
vote to accept or reject the Plan. By operation of law, each unimpaired Class
of Claims or Equity Interests is deemed to have accepted the Plan and,
therefore, is not entitled to vote. Because holders of Claims and Equity
Interests in Classes that are not entitled to receive or retain any property
under the Plan are presumed to have rejected the Plan, they are not entitled to
vote.

2.  Acceptance by Impaired Classes

   An Impaired Class of Claims will have accepted the Plan if the holders of at
least two-thirds in amount and more than one-half in number of the Allowed
Claims in the Class actually voting have voted to accept the Plan, in each case
not counting the vote of any holder designated under section 1126(e) of the
Bankruptcy Code.

3.  Elimination of Classes

   Any Class that does not contain any Allowed Claims or Equity Interests or
any Claims or Equity Interests temporarily allowed for voting purposes under
Federal Rule of Bankruptcy Procedure 3018, as of the date of the

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commencement of the Confirmation Hearing, will be deemed not included in the
Plan for purposes of (i) voting to accept or reject the Plan and (ii)
determining whether such Class has accepted or rejected the Plan under section
1129(a)(8) of the Bankruptcy Code.

4.  Nonconsensual Confirmation

   The Bankruptcy Court may confirm the Plan over the dissent of any Impaired
Class if all of the requirements for consensual confirmation under subsection
1129(a), other than subsection 1129(a)(8), of the Bankruptcy Code and for
nonconsensual confirmation under of subsection 1129(b) of the Bankruptcy Code
have been satisfied.

   To obtain confirmation notwithstanding the nonacceptance of a Class, the
Debtors must demonstrate to the Court that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to any dissenting Impaired
Classes. A plan does not discriminate unfairly if the legal rights of a
dissenting Class are treated in a manner consistent with the treatment of other
Classes whose legal rights are substantially similar to those of the dissenting
Class and if no Class receives more than it is entitled to for its Claims or
Equity Interests. If required, the Debtors will show at the Confirmation
Hearing that the Plan does not discriminate unfairly.

   To the extent necessary, the Debtors will request confirmation of the Plan,
as the Plan may be modified from time to time, under section 1129(b) of the
Bankruptcy Code.

N.  Conditions Precedent; Waiver

1.  Conditions to Confirmation

   The Confirmation of the Plan is subject to the satisfaction or due waiver of
the following conditions precedent:

      a. The proposed Confirmation Order shall be in form and substance
   reasonably acceptable to the Debtors.

      b. The DIP Facility shall have been obtained.

      c. The Exit Facility shall have been obtained and shall be in full force
   and effect and shall not have expired or otherwise terminated.

2.  Conditions to Effective Date

   The following are conditions precedent to the occurrence of the Effective
Date, each of which must be satisfied or waived in accordance with the Plan.

      a. The Confirmation Order shall have been entered by the Bankruptcy Court
   and that order must provide, among other things, that:

  .   the Debtors and Reorganized Debtors are authorized and directed to take
      all actions necessary or appropriate to enter into, implement and
      consummate the contracts, instruments, releases, leases, indentures and
      other agreements or documents created in connection with the Plan;

  .   the provisions of the Confirmation Order are non-severable and mutually
      dependent;

  .   all executory contracts or unexpired leases assumed or assumed and
      assigned by the Debtors during the Chapter 11 Cases or under the Plan
      shall remain in full force and effect for the benefit of the Reorganized
      Debtors or their assignees notwithstanding any provision in such contract
      or lease (including those described in sections 365(b)(2) and (f) of the
      Bankruptcy Code) that prohibits such assignment or transfer or that
      enables, permits, or requires termination of such contract or lease;

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<PAGE>

  .   the transfers of property by the Debtors (i) to the Reorganized Debtors
      (A) are or will be legal, valid and effective transfers of property, (B)
      vest or will vest the Reorganized Debtors with good title to such
      property free and clear of all liens, charges, Claims, encumbrances, or
      Equity Interests, except as expressly provided in the Plan or
      Confirmation Order, (C) do not and will not constitute avoidable
      transfers under the Bankruptcy Code or under applicable bankruptcy or non
      bankruptcy law, and (D) do not and will not subject the Reorganized
      Debtors to any liability by reason of such transfer under the Bankruptcy
      Code or under applicable non bankruptcy law, including any laws affecting
      successor, transferee or stamp or recording tax liability and (ii) to
      holders of Claims or Equity Interests under the Plan are for good
      consideration and value;

  .   except as expressly provided in the Plan (or any order of the Bankruptcy
      Court), upon the effectiveness of all transactions incident to and part
      of the Plan, the Debtors are discharged effective upon the Confirmation
      Date from any "debt" (as that term is defined in section 101(12) of the
      Bankruptcy Code), and the Debtors' liability in respect thereof is
      extinguished completely, whether reduced to judgment or not, liquidated
      or unliquidated, contingent or noncontingent, asserted or unasserted,
      fixed or unfixed, matured or unmatured, disputed or undisputed, legal or
      equitable, or known or unknown, or that arose from any agreement of the
      Debtors that has either been assumed or rejected in the Chapter 11 Cases
      or pursuant to the Plan, or obligation of the Debtors incurred before the
      Confirmation Date, or from any conduct of the Debtors prior to the
      Confirmation Date, or that otherwise arose before the Confirmation Date,
      including all interest, if any, on any such debts, whether such interest
      accrued before or after the Petition Date;

  .   all Mandatorily Redeemable Convertible Preferred Stock, Existing
      Encompass Common Stock and Existing Other Equity Interests in Encompass
      shall be cancelled effective upon the Effective Date;

  .   the New Securities issued under the Plan are exempt from registration
      under the Securities Act pursuant to section 1145 of the Bankruptcy Code,
      except to the extent that any holders of New Securities are
      "underwriters," as that term is defined in section 1145 of the Bankruptcy
      Code; and

  .   the Debtors have acted in good faith with respect to the formulation,
      solicitation and Confirmation of the Plan, pursuant to section 1125(e) of
      the Bankruptcy Code.

      b. All authorizations, consents, and regulatory approvals required, if
   any, in connection with the consummation of the Plan shall have been
   obtained.

      c. The New Senior Credit Agreement shall have been executed by all
   necessary parties thereto and prior to, or simultaneously with, the
   effectiveness of the Plan, all conditions precedent thereto shall have been
   satisfied or waived such that it shall have become effective.

      d. The Debtors shall have executed and delivered all documents necessary
   to effectuate the issuance of the New Securities.

      e. All other actions, documents, and agreements necessary to implement
   the Plan shall have been effected or executed.

      f. No stay of the Confirmation Order and/or consummation of the Plan is
   in effect.

      g. All definitive documentation relating to the Plan and the transactions
   contemplated by the Plan shall be consistent in all material respects with
   the terms of the Plan and the definitive documentation relating to the New
   Common Stock, the Stock Option Plan, the New Senior Credit Agreement, the
   DIP Facility, the Reorganized Encompass Certificate of Incorporation and all
   other documents material to the consummation of the transactions
   contemplated under the Plan shall be in form and substance reasonably
   acceptable to each of the Senior Lenders.

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<PAGE>

3.  Waiver of Conditions

   Each of the conditions set forth in Section IV.N.2, other than as set forth
in subsection (c) and (f) thereof, may be waived in whole or in part by the
Debtors, without any notice to other parties in interest or the Bankruptcy
Court and without a hearing. The failure to satisfy or waive any condition to
Confirmation or the Effective Date may be asserted by the Debtors regardless of
the circumstances giving rise to the failure of such condition to be satisfied
(including any action or inaction by the Debtors). The failure of the Debtors
to exercise any of the foregoing rights will not be deemed a waiver of any
other rights, and each such right will be deemed an ongoing right that may be
asserted at any time.

O.  Modifications and Amendments; Withdrawal

   The Debtors may alter, amend, or modify the Plan or any exhibits thereto
under section 1127(a) of the Bankruptcy Code at any time prior to the
Confirmation Date. The Debtors reserve the right to include any amended
exhibits in the Plan Supplement, whereupon each such amended exhibit will be
deemed substituted for the original of such exhibit. After the Confirmation
Date the Debtors or Reorganized Debtors may, under section 1127(b) of the
Bankruptcy Code, institute proceedings in the Bankruptcy Court to remedy any
defect or omission or reconcile any inconsistencies in the Plan, the Disclosure
Statement and the Confirmation Order, and to accomplish such matters as may be
necessary to carry out the purposes and extent of the Plan so long as such
proceedings do not materially and adversely affect the treatment of holders of
Claims or Equity Interests under the Plan.

P.  Retention of Jurisdiction

   Under sections 105(a) and 1142 of the Bankruptcy Code, and notwithstanding
the Plan's Confirmation and the occurrence of the Effective Date, the
Bankruptcy Court will retain exclusive jurisdiction (except with respect to the
purposes described under clauses (i) and (xiv) below, with respect to which
jurisdiction will not be exclusive) over all matters arising out of or related
to the Chapter 11 Cases and the Plan, to the fullest extent permitted by law,
including jurisdiction to:

      (i) determine any and all objections to the allowance of Claims or Equity
   Interests;

      (ii) determine any and all motions to estimate Claims at any time,
   regardless of whether the Claim to be estimated is the subject of a pending
   objection, a pending appeal or otherwise;

      (iii) determine any and all motions to subordinate Claims or Equity
   Interests at any time and on any basis permitted by applicable law;

      (iv) hear and determine all Professional Fee Claims and other
   Administrative Claims;

      (v) hear and determine all matters with respect to the assumption or
   rejection of any executory contract or unexpired lease to which a Debtor is
   a party or with respect to which a Debtor may be liable, including, if
   necessary, the nature or amount of any required Cure or the liquidation of
   any Claims arising therefrom;

      (vi) hear and determine any and all adversary proceedings, motions,
   applications and contested or litigated matters arising out of, under, or
   related to, the Chapter 11 Cases;

      (vii) enter such orders as may be necessary or appropriate in aid of the
   consummation of the Plan and to execute, implement or consummate the
   provisions of the Plan and all contracts, instruments, releases, and other
   agreements or documents created in connection with the Plan, the Disclosure
   Statement and/or the Confirmation Order;

      (viii) hear and determine disputes arising in connection with the
   interpretation, implementation, consummation or enforcement of the Plan and
   all contracts, instruments and other agreements executed in connection with
   the Plan;

      (ix) hear and determine any request to modify the Plan or to cure any
   defect or omission or reconcile any inconsistency in the Plan or any order
   of the Bankruptcy Court;

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<PAGE>

      (x) issue and enforce injunctions or other orders, or take any other
   action that may be necessary or appropriate to restrain any interference
   with or compel action for the implementation, consummation or enforcement of
   the Plan or the Confirmation Order;

      (xi) enter and implement such orders as may be necessary or appropriate
   if the Confirmation Order is for any reason reversed, stayed, revoked,
   modified or vacated;

      (xii) hear and determine any matters arising in connection with or
   relating to the Plan, the Confirmation Order or any contract, instrument,
   release or other agreement or document created in connection with the Plan,
   the Disclosure Statement or the Confirmation Order;

      (xiii) enforce all orders, judgments, injunctions, releases,
   exculpations, indemnifications and rulings entered in connection with the
   Chapter 11 Cases;

      (xiv) recover all assets of the Debtors and property of the Debtors'
   Estates, wherever located;

      (xv) hear and determine matters concerning state, local and federal taxes
   in accordance with sections 346, 505 and 1146 of the Bankruptcy Code;

      (xvi) hear and determine all disputes involving the existence, nature or
   scope of the Debtors' discharge;

      (xvii) hear and determine such other matters as may be provided in the
   Confirmation Order or as may be authorized under, or not inconsistent with,
   provisions of the Bankruptcy Code; and

      (xviii) enter a final decree closing the Chapter 11 Cases.

Q.  Compromises and Settlements

   Pursuant to Federal Rule of Bankruptcy Procedure 9019(a), the Debtors may
compromise and settle various Claims against them and/or claims they may have
against other Persons. Each of the Debtors expressly reserves the right (with
Bankruptcy Court approval, following appropriate notice and opportunity for a
hearing) to compromise and settle Claims against it and claims that it may have
against other Persons up to and including the Effective Date. After the
Effective Date, such right will transfer to the Reorganized Debtors pursuant to
the Plan and Bankruptcy Court approval of such action will not be required.

R.  Miscellaneous Provisions

1.  Bar Dates for Certain Claims

a.  Administrative Expense Claims

   The Confirmation Order will establish an Administrative Expense Claims Bar
Date for the filing of all Administrative Expense Claims (other than
Professional Fee Claims or Claims for the expenses of the members of any
Committee (if appointed)), which date will be 60 days after the Confirmation
Date. Holders of asserted Administrative Expense Claims, other than
Professional Fee Claims or Claims for United States Trustee fees or the
expenses of the members of any Committee (if appointed), not paid and not
arising out of transactions in the ordinary course of business prior to the
Confirmation Date must submit proofs of Administrative Expense Claim on or
before such Administrative Expense Claims Bar Date or forever be barred from
doing so. The notice of Confirmation to be delivered pursuant to Federal Rules
of Bankruptcy Procedure 3020(c) and 2002(f) will set forth such date and
constitute notice of this Administrative Expense Claims Bar Date. The Debtors
or Reorganized Debtors, as the case may be, will have 60 days (or such longer
period as may be allowed by order of the Bankruptcy Court) following the
Administrative Expense Claims Bar Date to review and object to such
Administrative Expense Claims before a hearing for determination of allowance
of such Administrative Expense Claim.

b.  Professional Fee Claims

   All final requests for compensation or reimbursement of Professional Fee
Claims pursuant to sections 327, 328, 330, 331, 503(b) or 1103 of the
Bankruptcy Code for services rendered to the Debtors or any Committee (if

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<PAGE>

appointed) prior to the Effective Date must be filed and served on the
Reorganized Debtors and their counsel no later than 60 days after the Effective
Date, unless otherwise ordered by the Bankruptcy Court. Objections to
applications of such Professionals or other entities for compensation or
reimbursement of expenses must be filed and served on the Reorganized Debtors
and their counsel and the requesting Professional or other entity no later than
60 days (or such longer period as may be allowed by order of the Bankruptcy
Court) after the date on which the applicable application for compensation or
reimbursement was served. If the Debtors or the Reorganized Debtors and any
such professional cannot agree on the amount of fees and expenses to be paid to
such party, the amount of fees and expenses shall be determined by the
Bankruptcy Court.

2.  Payment of Statutory Fees

   All fees payable under section 1930 of title 28 of the United States Code,
as determined by the Bankruptcy Court at the Confirmation Hearing, will be paid
on or before the Effective Date. All such fees that arise after the Effective
Date but before the closing of the Chapter 11 Cases will be paid by the
Reorganized Debtors.

3.  Severability of Plan Provisions

   If, prior to Confirmation, any term or provision of the Plan is held by the
Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court, at
the request of the Debtors, will have the power to alter and interpret such
term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void or unenforceable, and such term or provision will then be
applicable as altered or interpreted. If, in particular, any term or provision
of the Plan is found to be violative of the requirements of section 1129(b)(2)
of the Bankruptcy Code based on the proposed receipt and/or retention of
property by the holders of Claims in any Class, the consideration to be
distributed to the holders of such Claims will be reallocated, eliminated or
otherwise adjusted to conform the Plan to the requirements of the Bankruptcy
Code. Notwithstanding any such adjustment, elimination, alteration,
interpretation or holding with to the terms and provisions of the Plan, the
terms of the Plan will remain in full force and effect and will in no way be
affected, impaired or invalidated by such holding, alteration or
interpretation. The Confirmation Order will constitute a judicial determination
and will provide that each term and provision of the Plan, as it may have been
altered, interpreted or adjusted in accordance with the foregoing, is valid and
enforceable pursuant to its terms.

4.  Successors and Assigns

   The rights, benefits and obligations of all Persons named or referred to in
the Plan will be binding on, and will inure to the benefit of, their respective
heirs, executors, administrators, personal representatives, successors or
assigns.

5.  Discharge of the Debtors and Injunction

   All consideration distributed under the Plan will be in exchange for, and in
complete satisfaction, settlement, discharge, and release of, all Claims
against and Equity Interests in the Debtors of any nature whatsoever or against
any of the Debtors' assets or properties. Except as otherwise expressly
provided in the Plan, entry of the Confirmation Order (subject to the
occurrence of the Effective Date) will act as a discharge of all Claims against
and debts of, liens on, and Equity Interests in each of the Debtors (save and
except for the Subsidiary Interests), the Debtors' assets, and their
properties, arising at any time prior to the entry of the Confirmation Order,
regardless of whether a proof of Claim or proof of Equity Interest therefor was
filed, whether the Claim or Equity Interest is Allowed, or whether the holder
thereof votes to accept the Plan or is entitled to receive a distribution
thereunder, subject to the occurrence of the Effective Date. Upon entry of the
Confirmation Order, and subject to the occurrence of the Effective Date, any
holder of such discharged Claim or Equity Interest will be precluded from
asserting against the Debtors or any of their assets or properties any other or
further Claim or Equity Interest based upon any document, instrument, act,
omission, transaction, or other activity of any kind or nature

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<PAGE>

whatsoever that occurred before the date of entry of the Confirmation Order,
except as otherwise expressly provided by the Plan. The Confirmation Order will
be a judicial determination of discharge of all liabilities of the Debtors,
subject to the occurrence of the Effective Date.

   In accordance with section 524 of the Bankruptcy Code, the discharge
described in this section and section 1141 of the Bankruptcy Code will act as
an injunction against the commencement or continuation of any action,
employment of process, or act to collect, offset, or recover the Claims and
Equity Interests discharged under the Plan. Except as otherwise expressly
provided in the Plan and/or the Confirmation Order, all Persons who have held,
hold, or may hold Claims against, or Equity Interests in, the Debtors will be
permanently enjoined, on and after the Effective Date, from (i) commencing or
continuing in any manner any action or other proceeding of any kind with
respect to any such Claim or Equity Interest, (ii) the enforcement, attachment,
collection, or recovery by any manner or means of any judgment, award, decree
or order against the Debtors on account of any such Claim or Equity Interest,
(iii) creating, perfecting or enforcing any encumbrance of any kind against the
Debtors or against the property or interests in property of the Debtors on
account of any such Claim or Equity Interest, and (iv) asserting any right of
setoff, subrogation, or recoupment of any kind against any obligation due from
the Debtors or against the property or interests in property of the Debtors on
account of any such Claim or Equity Interest. The foregoing injunction will
extend to successors of the Debtors (including, without limitation, the
Reorganized Debtors) and their respective properties and interests in property.

6.  Releases by the Debtors

   On the Effective Date, effective as of the Confirmation Date, the Debtors
and the Reorganized Debtors will waive and release and be permanently enjoined
from any prosecution or attempted prosecution of any and all claims,
obligations, rights, causes of action or liabilities, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, which the Debtors or the
Reorganized Debtors have or may have against any present or former director,
officer or employee of the Debtors and their respective attorneys, agents and
property; provided, however, that the foregoing will not operate as a waiver
of, or release from, any causes of action arising out of (i) any express
contractual obligation owing by any such director, officer or employee to the
Debtors or (ii) the willful misconduct of such director, officer or employee in
connection with, related to, or arising out of administration of the Chapter 11
Cases, the pursuit of Confirmation of the Plan, the consummation of the Plan,
the administration of the Plan or the property to be distributed under the Plan.

   On the Effective Date, effective as of the Confirmation Date, the Debtors
will release and be permanently enjoined from any prosecution or attempted
prosecution of any and all claims and causes of action, including any claims or
causes of action under chapter 5 of the Bankruptcy Code, which they have or may
have against any Senior Lender and its members, officers, directors, agents,
financial advisors, attorneys, employees, equity holders, partners, affiliates
and representatives and their respective property in connection with (i)
actions taken as or in its capacity of being a Senior Lender and (ii) the
Chapter 11 Cases.

7.  Other Releases

   On the Effective Date, effective as of the Confirmation Date, and except as
otherwise provided in the Plan or in the Confirmation Order, the Debtors, the
Reorganized Debtors, each Senior Lender and the indenture trustee, and each of
their respective present or former members, officers, directors, agents,
financial advisors, attorneys, employees, partners, and representatives and
their respective property will be released from any and all claims,
obligations, rights, causes of action and liabilities which the Debtors, the
Reorganized Debtors or any holder of a Claim against any Debtor may be entitled
to assert, whether for tort, fraud, contract, violations of federal or state
securities laws, or otherwise, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, based in whole or in part upon any
act or omission, transaction or other occurrence taking place on or before the
Confirmation Date, in any way relating to the Chapter 11 Cases or the Plan, or
otherwise; provided, however, that nothing will release any Person from any
claims, obligations, rights, causes of action or liabilities based upon any act
or omission in connection with, relating to, or arising out of, the

                                      39

<PAGE>

Chapter 11 Cases, the Solicitation of acceptances of the Plan, the pursuit of
Confirmation of the Plan, the consummation of the Plan, the administration of
the Plan, or the property to be distributed under the Plan arising out of such
Person's willful misconduct.

8.  Exculpation and Limitation of Liability

   The Reorganized Debtors, the Senior Lenders and any and all of their
respective present or former members, officers, directors, employees, Equity
Interest holders, partners, advisors, affiliates, attorneys, or agents, or any
of their successors or assigns, will not have or incur any liability to any
holder of a Claim or an Equity Interest, or any other party-in-interest, or any
of their respective agents, employees, equity holders, partners, members,
representatives, financial advisors, attorneys or affiliates, or any of their
successors or assigns, for any act or omission in connection with, relating to,
or arising out of the administration of the Chapter 11 Cases, the Solicitation
of acceptances of the Plan, the pursuit of Confirmation of the Plan, the
consummation of the Plan, or the administration of the Plan or the property to
be distributed under the Plan, except for their willful misconduct, and in all
respects will be entitled to reasonably rely upon the advice of counsel with
respect to their duties and responsibilities under the Plan.

   Notwithstanding any other provision of the Plan, no holder of a Claim or
Equity Interest, no other party-in-interest, none of their respective agents,
employees, equity holders, partners, members, representatives, financial
advisors, attorneys, or affiliates, and no successors or assigns of the
foregoing, will have any right of action against the Debtors, the Reorganized
Debtors, the Estates, any Committee, the Senior Lenders or any of their
respective present or former members, officers, directors, employees, Equity
Interest holders, partners, or affiliates or any of their successors or
assigns, for any act or omission in connection with, relating to, or arising
out of, the administration of the Chapter 11 Cases, the Solicitation of
acceptances of the Plan, the pursuit of Confirmation of the Plan, the
consummation of the Plan, or the administration of the Plan or the property to
be distributed under the Plan, except for their willful misconduct.

9.  Term of Injunctions or Stays

   Unless otherwise provided in the Plan or in the Confirmation Order, all
injunctions or stays in effect in the Chapter 11 Cases under sections 105 or
362 of the Bankruptcy Code or any order of the Bankruptcy Court, and extant on
the Confirmation Date (excluding any injunctions or stays contained in the Plan
or in the Confirmation Order), will remain in full force and effect until the
Effective Date. All injunctions or stays contained in the Plan or the
Confirmation Order will remain in full force and effect in accordance with
their terms.

10.  Binding Effect

   The Plan will be binding upon and inure to the benefit of the Debtors, all
present and former holders of Claims against and Equity Interests in the
Debtors, their respective successors and assigns, including the Reorganized
Debtors, and all other parties-in-interest in the Chapter 11 Cases.

11.  Revocation, Withdrawal, or Non-Consummation

   The Debtors reserve the right to revoke or withdraw the Plan at any time
prior to the Confirmation Date and to file other plans of reorganization. If
the Debtors revoke or withdraw the Plan, or if Confirmation or consummation of
the Plan does not occur, then (i) the Plan will be null and void in all
respects, (ii) any settlement or compromise embodied in the Plan (including the
fixing or limiting to an amount any Claim or Class of Claims), assumption or
rejection of executory contracts or leases effected by the Plan, and any
document or agreement executed pursuant to the Plan will be deemed null and
void, and (iii) nothing contained in the Plan, and no acts taken in preparation
for consummation of the Plan, will (a) constitute or be deemed to constitute a
waiver or release of any Claims by or against, or any Equity Interests in, the
Debtors or any other Person, (b) prejudice in any manner the rights of the
Debtors or any Person in any further proceedings involving the Debtors, or (c)
constitute an admission of any sort by the Debtors or any other Person.

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<PAGE>

12.  Committees

   On the Effective Date, the duties of any Committee will terminate.

13.  Plan Supplement

   Any and all exhibits, lists or schedules referred to in the Plan but not
filed with the Plan will be contained in the Plan Supplement and filed with the
Clerk of the Bankruptcy Court at least five Business Days prior to the date of
the commencement of the Confirmation Hearing. Thereafter, any Person may
examine the Plan Supplement in the office of the Clerk of the Bankruptcy Court
during normal court hours. Holders of Claims against or Equity Interests in the
Debtors may obtain a copy of the Plan Supplement upon written request to the
Debtors in accordance with Section IV.R.14--"SUMMARY OF THE PLAN--MISCELLANEOUS
PROVISIONS--NOTICES TO DEBTORS."

14.  Notices to Debtors

   Any notice, request, or demand required or permitted to be made or provided
to or upon a Debtor or a Reorganized Debtor under the Plan will be (i) in
writing, (ii) served by (a) certified mail, return receipt requested, (b) hand
delivery, (c) overnight delivery service, (d) first class mail, or (e)
facsimile transmission, and (iii) deemed to have been duly given or made when
actually delivered or, in the case of notice by facsimile transmission, when
received and telephonically confirmed, addressed as follows:

                        ENCOMPASS SERVICES CORPORATION
                         3 Greenway Plaza, Suite 2000
                             Houston, Texas 77046
                           Attn: Gray H. Muzzy, Esq.
                           Telephone: (713) 860-0100
                           Facsimile: (713) 960-0126

                                with a copy to:

                          WEIL, GOTSHAL & MANGES LLP
                           700 Louisiana, Suite 1600
                             Houston, Texas 77002
                         Attn: Alfredo R. Perez, Esq.
                           Telephone: (713) 546-5000
                           Facsimile: (713) 224-9511

15.  Indemnification Obligations

   Any and all obligations, liabilities or rights of the Debtors or Reorganized
Debtors to defend, indemnify, reimburse, or limit the liability of the Debtors'
present or former directors, officers or employees (the "Covered Persons")
pursuant to applicable state law or the Debtors' or Reorganized Debtors'
certificates of incorporation, bylaws, policy of providing employee
indemnification, or specific agreement in respect of any claims, demands,
suits, causes of action or proceedings, whether existing or hereafter arising,
against any such Covered Persons, based upon any act or omission related to any
such Covered Persons' service with, for, or on behalf of the Debtors prior to
the Effective Date will be deemed executory contracts assumed by the
Reorganized Debtors under the Plan and will, in any event, survive Confirmation
of the Plan and remain unaffected thereby, and will not be discharged or
rejected, irrespective of whether such defense, indemnification, reimbursement,
or limitation of liability accrued or is owed in connection with a transaction,
occurrence before or after the Petition Date.

16.  Governing Law

   Unless a rule of law or procedure is supplied by federal law (including the
Bankruptcy Code and Bankruptcy Rules), the laws of (i) the State of Texas will
govern the construction and implementation of the Plan

                                      41

<PAGE>

and any agreements, documents and instruments executed in connection with the
Plan and (ii) the laws of the state of incorporation, formation or
organization, as applicable, of each Debtor will govern corporate governance
matters with respect to such Debtor, in either case without giving effect to
the principles of conflicts of law thereof.

17.  Prepayment

   Except as otherwise provided in the Plan or the Confirmation Order, the
Debtors will have the right to prepay, without penalty, all or any portion of
an Allowed Claim at any time; provided, however, that any such prepayment will
not be violative of, or otherwise prejudice, the relative priorities and
parities among the Classes of Claims.

18.  Section 1125(e) of the Bankruptcy Code

   As of the Confirmation Date, the Debtors will be deemed to have solicited
acceptances of the Plan in good faith and in compliance with the applicable
provisions of the Bankruptcy Code. As of the Confirmation Date, the Debtors and
their respective affiliates, agents, directors, officers, employees, investment
bankers, financial advisors, attorneys and other professionals will be deemed
to have participated in good faith and in compliance with the applicable
provisions of the Bankruptcy Code in the offer and issuance of the New
Securities under the Plan, and therefore are not, and on account of such offer,
issuance and solicitation will not be, liable at any time for the violation of
any applicable law, rule or regulation governing the Solicitation of
acceptances or rejections of the Plan or the offer and issuance of New
Securities under the Plan.

              V.  ANTICIPATED EVENTS DURING THE CHAPTER 11 CASES

A.  Commencement of the Chapter 11 Cases

   If the Debtors receive the Requisite Acceptances in response to the
Solicitation, one or more of the Debtors intend to promptly commence the
Chapter 11 Cases. From and after the Petition Date, the Debtors will continue
to operate their businesses and manage their properties as
debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
Code.

   To expedite their emergence from chapter 11, the Debtors intend to seek,
among other things, the relief detailed below from the Bankruptcy Court on the
Petition Date. If granted, this relief will facilitate the administration of
the Chapter 11 Cases. There can be no assurance, however, that the Bankruptcy
Court will grant the requested relief. Bankruptcy courts customarily provide
various other forms of administrative and other relief in the early stages of
chapter 11 cases. The Debtors intend to seek all necessary and appropriate
relief from the Bankruptcy Court in order to facilitate their reorganization
goals, including the matters described below.

1.  Designation as Complex Chapter 11 Cases

   To the extent the Chapter 11 Cases are filed in the Bankruptcy Court for the
Southern District of Texas, the Debtors will seek authority to qualify under
General Order 2000-2 of the Local Rules for the Southern District of Texas to
qualify as Complex Chapter 11 bankruptcy cases. Such a designation will allow
the Chapter 11 Cases to be governed in accordance with rules which are designed
to efficiently manage large and/or complex chapter 11 cases by establishing,
inter alia, weekly omnibus hearing dates, precise notice procedures, provisions
for expedited consideration of emergency matters, and other procedural matters
designed to facilitate efficient case administration.

2.  Administrative Expense Status to Postpetition Undisputed Obligations

   The Debtors will seek authority to grant various vendors and suppliers
administrative expense priority status under section 503(b) of the Bankruptcy
Code for undisputed obligations arising from outstanding prepetition

                                      42

<PAGE>

purchase orders that are delivered to the Debtors subsequent to the Petition
Date. Such requested relief will also seek to permit the Debtors, in the
exercise of their business judgment and in accordance with their customary
business practices, to satisfy such undisputed obligations to vendors in the
ordinary course of business under section 363(c) of the Bankruptcy Code.

3.  Payment of Prepetition Employee Wages, Compensation and Employee Benefits

   The Debtors will seek authority to pay all accrued but unpaid amounts due
for employee wages, salaries and benefit programs in the ordinary course of the
Debtors' businesses. Such employee benefit plans and policies include: (i)
medical, health, dental and vision insurance, (ii) life, disability, workers'
compensation and employee counseling and assistance, (iii) severance benefits,
(iv) incentive benefits, and (v) 401(k) matching plan benefits. The Debtors
will also request that they be permitted (a) to pay all accrued but unpaid
expense reimbursements, vacation benefits, employee payroll deductions
associated with the Debtors' payroll and other employee benefit obligations,
and (b) to maintain and pay all accrued but unpaid prepetition amounts owed to
the Debtors' payroll and employee benefits administrators.

4.  Authority to Pay Prepetition Claims of Critical Vendors

   The Debtors will seek authority to pay the prepetition fixed, liquidated,
and undisputed Claims of certain suppliers of materials, equipment, goods and
services with whom the Debtors continue to do business and whose materials,
equipment, goods and services are essential and critical to the Debtors'
reorganization. The Debtors will submit that the payment of such Claims should
be authorized on a number of grounds, including that: (i) payment of the
critical vendor Claims is necessary to the preservation of the Debtors'
businesses under the necessity of payment doctrine; (ii) management estimates
that a substantial percentage of the critical vendors are M&M Lien Claimants
whose Claims may be asserted against the Debtors' property interests
irrespective of the initiation of the Chapter 11 Cases; (iii) that a
substantial number of the critical vendors are parties to executory contracts
whose Claims would be subject to priority treatment if the Debtors elected to
assume such contracts; (iv) that the Debtors anticipate filing the Plan which
provides for the full payment of all General Unsecured Claims, and, as such,
the critical vendors would ultimately be paid in full whether pursuant to the
critical vendor motion or under the terms of the Plan; (v) that absent payment
of any outstanding prepetition utility obligations, the Debtors could be
required to post substantial postpetition utility deposits under section 366 of
the Bankruptcy Code; and (vi) that certain critical vendors have reclamation
rights, which, if exercised, would undermine the Debtors' ability to complete
existing work projects, and which, in turn, would undermine the Debtors'
ability to generate revenues.

5.  Continuation of Existing Investment Practices

   The Debtors intend to seek authority to maintain their existing investment
practices, and to the extent required, to seek authority to waive any
requirement of section 345(b) of the Bankruptcy Code which requires that if the
Debtors maintain deposits or investments not "insured or guaranteed by the
United States or by a department, agency or instrumentality of the United
States or backed by the full faith and credit of the United States," that the
Debtors obtain from the entity with which the money is deposited or invested a
bond in favor of the United States secured by the undertaking of an adequate
corporate surety.

6.  Adequate Assurance to Utility Companies

   The Debtors intend to seek authority (a) prohibiting any utility companies
which provide them with utility services from altering, refusing or
discontinuing any such utility services, (b) determining that the utility
companies have "adequate assurance of payment" within the meaning of section
366 of the Bankruptcy Code without the need for payment of additional deposits
or security, and (c) establishing procedures for determining requests by
utility companies for additional assurances of future payment.

                                      43

<PAGE>

7.  Honoring Prepetition Warranty Claims and Customer Obligations

   The Debtors intend to seek authority to honor, in the ordinary course of
their businesses, the various warranty programs and other practices designed to
ensure customer and vendor satisfaction.

8.  Payment of Prepetition Sales and Use Taxes

   The Debtors intend to seek authority to pay all prepetition sales and use
tax, and regulatory and licensing, obligations owed to any taxing authority or
other entity, including all sales and use tax obligations that are subsequently
determined upon audit to have accrued during the period prior to the Petition
Date.

9.  Payment of Prepetition Insurance Charges and Other Charges

   The Debtors intend to seek authority to maintain certain insurance policies
and to pay any amounts due on account of any loss fund and premium finance
payments accrued and unpaid on the Petition Date.

10.  Retention of Professionals Utilized in Ordinary Course of Business

   The Debtors intend to seek authority, pursuant to sections 105 and 327 of
the Bankruptcy Code, authorizing them to retain Professionals utilized in the
ordinary course of their businesses. The Debtors will seek to employ such
ordinary course professionals on terms similar to those rendered prior to the
Petition Date without the need to file individual retention applications for
such professionals.

11.  Procedures for Interim Compensation and Reimbursement of Expenses of
Professionals

   The Debtors intend to seek authority to establish procedures which would
require each Professional retained by the Debtors, and subject to a formal
retention application, to present to the Debtors, the Creditors' Committee and
the United States Trustee a detailed statement of services rendered and
expenses incurred for the month preceding the rendering of such services. Such
procedures would provide that if no party timely objects to the Professional's
monthly statement, the Debtors would be authorized to pay each of the
Professionals eighty percent (80%) of the amount of fees incurred for the
month, with a twenty percent (20%) holdback, and one-hundred percent (100%) of
expense disbursements for the month. These payments would be subject to the
Bankruptcy Court's subsequent final approval as part of the normal interim fee
application process.

12.  Schedules and Statement of Financial Affairs

   Section 521 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure
1007 direct that, unless otherwise ordered by the court, the Debtors must
prepare and file Schedules of Claims, executory contracts and unexpired leases
and related information and a statement of financial affairs within 15 Business
Days of the commencement of their Chapter 11 Cases. The purpose of this
requirement is to provide the Debtors' creditors, equity security holders and
other interested parties with sufficient information to make informed decisions
with respect to the Debtors' reorganization. The Debtors intend to seek an
extension of the applicable 15-day deadline to file their Schedules and
statements of financial affairs.

13.  Approval of Prepetition Solicitation and Scheduling of Confirmation Hearing

   To facilitate the prompt Confirmation and consummation of the Plan, the
Debtors intend to seek an order scheduling a hearing to (i) approve the
prepetition Solicitation procedures, including this Disclosure Statement, and
(ii) confirm the Plan, for a date following the end of the applicable notice
period therefor.

14.  Cash Management System

   Because of the administrative hardship that any operating changes would
impose on the Debtors, the Debtors intend to seek Bankruptcy Court authority to
continue using their existing cash management system,

                                      44

<PAGE>

bank accounts and business forms. Absent the Bankruptcy Court's authorization
of the continued use of the cash management system, the Debtors' cash flow
could be severely impeded, to the detriment of the Debtors' Estates and
creditors.

   Continued use of the existing cash management system will facilitate the
Debtors' smooth and orderly transition into chapter 11, minimize the disruption
to their businesses while in chapter 11, and expedite their emergence from
chapter 11. Requiring the Debtors to adopt and implement a new cash management
system would likely increase the costs of the Chapter 11 Cases, primarily as a
result of the significant time and expense associated with the transition to a
new cash management system. For the same reasons, requiring the Debtors to
cancel their existing bank accounts and establish new accounts or requiring it
to create new business forms would only frustrate the Debtors' efforts to
reorganize expeditiously.

15.  Retention of Professionals

   The Debtors intend to seek Bankruptcy Court authority to retain and employ
certain Professionals to represent them and assist them in connection with the
Chapter 11 Cases. Some of these Professionals have been intimately involved
with the negotiation and development of the Plan and include: (i) Weil,
Gotshal, as counsel for the Debtors, (ii) Houlihan Lokey, as financial advisor
to the Debtors; (iii) Deloitte & Touche LLP, to provide tax advice on elections
available as part of the Chapter 11 process, (iv) CDG, as restructuring
managers, (v) KPMG LLP, as accountants to the Debtors, and (vi) Innisfree M&A
Incorporated, as Solicitation Agent for the Debtors. The Debtors may also seek
authority to retain certain professionals to assist with the operations of
their businesses in the ordinary course. These so-called "ordinary course
professionals" will not be involved in the administration of the Chapter 11
Cases.

   The Debtors also will retain additional Professionals to assist in the
Restructuring process, including, but not limited to, additional Professionals
to provide investment banking services and counsel to assist with respect to
asset dispositions and to pursue litigation claims.

16.  Joint Administration

   The Debtors will seek authority to consolidate all filings under a single
case name, in a single docket, for administrative purposes that would result if
the Bankruptcy Court maintained entirely separate dockets for each of the cases
and will reduce costs for parties making filings with the Bankruptcy Court.

B.  Debtor In Possession Financing

   It is a condition to the Confirmation of the Plan that the Debtors secure a
DIP Facility, which the Debtors anticipate will provide for a revolving credit
facility with a maximum borrowing capacity of up to $100 million in order to
provide additional liquidity prior to the Effective Date of the Plan. Although
Encompass has informed certain representatives of the Senior Lenders that
Encompass will require the DIP Facility during the pendency of the Chapter 11
Cases, Encompass has not engaged in any substantive negotiations with the
Senior Lenders or any other potential financing source with respect to the DIP
Facility, and Encompass has received no commitments for the DIP Facility from
any potential lender. In addition, the Bankruptcy Court must approve any
financing agreement. The following description outlines Encompass' expectations
as to the key terms of the DIP Facility.

1.  Structure

   The DIP Facility will provide Encompass, as borrower, a revolving credit
facility of up to $100 million. The Debtors may use up to the total commitment
amount of the DIP Facility for letters of credit. On the Effective Date, any
letters of credit issued and outstanding under the DIP Facility shall be deemed
outstanding under the Exit Facility.

                                      45

<PAGE>

2.  Interest Rates and Fees

   The Debtors anticipate that the interest and fee obligations under the DIP
Facility will be similar to those for revolving loans under their Existing
Credit Agreement. Therefore, the Debtors expect that they may choose to pay
interest on advances under the DIP Facility at either the Base Rate or the
Eurodollar Rate. Such advances will accrue interest at the Base Rate or the
Eurodollar Rate, as applicable, plus, in each case, the per annum percentage
margin applicable to such advances based upon the Debtors' Funded Debt to pro
forma EBITDA ratio (consistent with the determination of the applicable margin
for advances under the revolving credit facility under Encompass' Existing
Credit Agreement) as set forth in the following table.

<TABLE>
<CAPTION>
                                  Ratio         Ratio         Ratio         Ratio         Ratio
                               equal to or   equal to or   equal to or   equal to or   equal to or
                    Ratio     greater than  greater than  greater than  greater than  greater than
                 equal to or  6.00 to 1.00  5.00 to 1.00  4.00 to 1.00  3.50 to 1.00  2.75 to 1.00     Ratio
                 greater than and less than and less than and less than and less than and less than is less than
                 7.00 to 1.00 7.00 to 1.00  6.00 to 1.00  5.00 to 1.00  4.00 to 1.00  3.50 to 1.00  2.75 to 1.00
                 ------------ ------------- ------------- ------------- ------------- ------------- ------------
<S>              <C>          <C>           <C>           <C>           <C>           <C>           <C>
Base Rate Margin     2.50%        2.25%         2.00%         1.75%         1.00%          .75%          .50%
Eurodollar Rate
 Margin.........     4.00%        3.75%         3.50%         3.25%         2.50%         2.25%         2.00%
</TABLE>

   The Debtors anticipate that the default interest rate under the DIP Facility
will be 2.00% above the rate plus margin otherwise applicable. In addition, the
Debtors expect that any interest, fees and other amounts that are overdue under
the DIP Facility will bear interest at 2.00% above the Base Rate plus the
applicable margin.

   The Debtors also expect that they will be required to pay a customary per
annum percentage commitment fee, on the average daily unused portion of the DIP
Facility commitments, as determined based upon the Debtors' Funded Debt to pro
forma EBITDA ratio (consistent with the determination of the commitment fee for
the revolving credit facility under Encompass' Existing Credit Agreement).

   The Debtors also expect that they may be required to pay an upfront fee
under the DIP Facility.

3.  Security and Guarantees

   The Debtors anticipate that all of the Subsidiaries will be required to
jointly and severally guarantee Encompass' obligations under the DIP Facility
and that the collateral for the DIP Facility will be substantially the same
collateral as under the Existing Credit Agreement: all or substantially all of
the assets of Encompass and each guarantor. The liens and guarantees in respect
of the DIP Facility will prime, and be senior to, the liens and guarantees in
respect of the Existing Credit Agreement. If the holders of Allowed Existing
Credit Agreement Claims vote as a Class to accept the Plan, all holders of such
Claims will be deemed to have consented to the priority of all obligations,
liens and guarantees in respect of the DIP Facility.

4.  Covenants

   The Debtors anticipate that the DIP Facility will require Encompass to
observe certain customary conditions, affirmative covenants and negative
covenants which are similar in type to those found in the Existing Credit
Agreement.

5.  Maturity and Amortization

   The DIP Facility will cease to be available on the earlier of one year after
the filing of the Chapter 11 Cases and the Effective Date.

6.  Alternatives to the DIP Facility

   If the Debtors are unable to negotiate a DIP Facility prior to the Petition
Date, the Debtors intend to file a motion seeking to use cash collateral on the
Petition Date.

                                      46

<PAGE>

C.  Anticipated Timetable for the Chapter 11 Cases

   Following the Petition Date, the Debtors expect the Chapter 11 Cases to
proceed on the following estimated timetable. There can be no assurance,
however, that the Bankruptcy Court's orders to be entered on or shortly after
the Petition Date will permit the Chapter 11 Cases to proceed as expeditiously
as anticipated.

   The Debtors anticipate that the hearing to consider the adequacy of the
Disclosure Statement and Confirmation of the Plan will occur within 45 days
after the Petition Date. Assuming that the Plan is confirmed at that hearing,
the Plan provides that the Effective Date will be the first Business Day (i) on
which all conditions to the Plan's consummation (as set forth in Article IX of
the Plan) have been satisfied or waived and (ii) that is the date on which the
Plan is consummated. See Section IV.N--"SUMMARY OF THE PLAN--CONDITIONS
PRECEDENT; WAIVER." Based upon information currently available, the Debtors
believe that the Effective Date could occur as early as 10 Business Days
following the Confirmation Date. Under this timetable, the Debtors would emerge
from chapter 11 within 60 days after the Petition Date. There can be no
assurance, however, that this projected timetable can be achieved.

               VI.  CAPITAL STRUCTURE OF THE REORGANIZED DEBTORS

A.  Estimated Post-Restructuring Indebtedness

   The estimated post-Restructuring indebtedness, as of March 31, 2003, of the
Reorganized Debtors is as follows.

<TABLE>
<CAPTION>
                                            (Millions)
                         <S>                <C>
                         Exit Facility.....   $  0.0*
                         New Term Loan.....    200.0**
                         Other Secured Debt      0.6
                                              ------
                            Total Debt.....   $200.6
</TABLE>
--------
*  Assumes that no drawings have been made on Exit Facility availability of up
   to $100 million as of March 31, 2003. In the event there are any issued and
   outstanding letters of credit under the DIP Facility as of the Effective
   Date, the commitments for those letters of credit will be deemed to be
   issued and outstanding under the Exit Facility as of the Effective Date.

** Excludes approximately $25.4 million of issued and undrawn letters of credit
   under the Existing Credit Agreement as of September 30, 2002 that, if drawn
   on or after the Petition Date, will increase the principal amount of the New
   Term Loan in an amount equal to such drawing.

B.  New Securities

   The following discussion summarizes the material provisions of the New
Securities including references, where applicable, to the Reorganized Encompass
Certificate of Incorporation and Bylaws. This summary does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Plan and the Reorganized Encompass Certificate of Incorporation and Bylaws.

1.  New Common Stock

   The Reorganized Encompass Certificate of Incorporation will authorize the
issuance of 150 million shares of New Common Stock having a par value of $0.001
per share. Holders of New Common Stock will be entitled to vote upon all
matters submitted to a vote of the stockholders of Reorganized Encompass and
will be entitled to one vote for each share of New Common Stock held. Holders
of New Common Stock will not have preemptive rights. Holders of New Common
Stock will be entitled to receive dividends as may be declared by the Board of
Directors of Reorganized Encompass from time to time.

                                      47

<PAGE>

2.  New Preferred Stock

   The Reorganized Encompass Certificate of Incorporation will authorize the
issuance of 50 million shares of New Preferred Stock having a par value of
$0.001 per share in one or more classes or series, including those described
below, and will reserve to Reorganized Encompass' Board of Directors the power
to designate for each class or series the following: (i) the terms and
conditions of any voting, dividend and conversion or exchange rights; (ii) the
amount payable on the class or series upon redemption and upon dissolution or
distribution of the assets of Reorganized Encompass, and (iii) the rights,
qualifications, limitations, or restrictions pertaining to the class or series;
provided, however, that Reorganized Encompass shall comply with section
1123(a)(6) of the Bankruptcy Code, which prohibits the issuance of non voting
equity securities, requires an appropriate distribution of voting power among
the classes of securities possessing voting power, and, in the case of any
classes of equity securities having a preference over another class with
respect to the payment of dividends, provides adequate provisions for the
election of directors representing such preferred class in the event of a
default.

3.  New Options

   Under the Stock Option Plan, New Options to purchase up to 7,500,000 shares
of New Common Stock, on a fully diluted basis as of the Effective Date, may be
granted to employees of the Reorganized Debtors. On the Effective Date,
Reorganized Encompass will issue New Options to purchase up to 7% of the
outstanding New Common Stock on a fully diluted basis, as determined by the
Reorganized Encompass' Board of Directors, in consultation with the Chief
Executive Officer of Reorganized Encompass regarding such allocation. The
remaining New Options to purchase New Common Stock will be available for future
grants at the discretion of Reorganized Encompass' Board of Directors. The
terms of the New Options, including, without limitation, vesting provisions and
exercise price, will be established by Reorganized Encompass' Board of
Directors. See III.B--"MANAGEMENT AND CORPORATE STRUCTURE OF THE REORGANIZED
DEBTORS--EMPLOYEE INCENTIVE PROGRAMS."

4.  Securities Law Matters

   The Debtors are relying on section 3(a)(9) and section 1145(a)(1) of the
Bankruptcy Code to exempt the offer of the New Common Stock that may be deemed
to occur through the solicitation of acceptances of the Plan and the issuance
of those securities pursuant to the Plan from the registration requirements of
the Securities Act and applicable state securities and blue sky laws.

   Section 1145(a)(1) exempts the offer or sale of securities pursuant to a
plan of reorganization from the registration requirements of the Securities Act
and from registration under state securities laws if the following conditions
are satisfied: (i) the securities are issued by a company (a "debtor" under the
Bankruptcy Code) (or its affiliates or successors) under a plan of
reorganization; (ii) the recipients of the securities hold a claim against, an
interest in, or a claim for an administrative expense against, the debtor; and
(iii) the securities are issued in exchange for the recipients' claim against
or interest in the debtor, or principally in such exchange and partly for cash
or property. In general, offers and sales of securities made in reliance on the
exemption afforded under section 1145(a)(1) of the Bankruptcy Code are deemed
to be made in a public offering, so that the recipients thereof, other than
underwriters, are free to resell such securities without registration under the
Securities Act. In addition, such securities generally may be resold without
registration under state securities laws pursuant to various exemptions
provided by the respective laws of the several states.

   The exemption from the registration requirements of the Securities Act for
resales provided by section 1145(a) is not available to a recipient of New
Common Stock if such recipient is deemed to be an "underwriter" with respect to
such securities, as that term is defined in section 1145(b) of the Bankruptcy
Code. Section 1145(b) of the Bankruptcy Code defines the term "underwriter" as
one who (a) purchases a claim with a view toward distribution of any security
to be received in exchange for the claim, or (b) offers to sell securities
issued

                                      48

<PAGE>

under a plan for the holders of such securities, or (c) offers to buy
securities issued under a plan from persons receiving such securities, if the
offer to buy is made with a view toward distribution, or (d) is a control
person of the issuer of the securities. Notwithstanding the foregoing,
statutory underwriters may be able to sell securities without registration
pursuant to Rule 144 under the Securities Act (subject, however, to any resale
limitations contained therein), which, in effect, permits the resale of
securities (including those securities received by statutory underwriters
pursuant to a chapter 11 plan) subject to applicable volume limitations, notice
and manner of sale requirements and certain other conditions.

   THE FOREGOING SUMMARY DISCUSSION IS GENERAL IN NATURE AND HAS BEEN INCLUDED
IN THIS DISCLOSURE STATEMENT SOLELY FOR INFORMATIONAL PURPOSES. THE DEBTORS
MAKE NO REPRESENTATIONS CONCERNING, AND DO NOT HEREBY PROVIDE, ANY OPINIONS OR
ADVICE WITH RESPECT TO THE SECURITIES AND BANKRUPTCY MATTERS DESCRIBED HEREIN.
IN LIGHT OF THE UNCERTAINTY CONCERNING THE AVAILABILITY OF EXEMPTIONS FROM THE
RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS, THE DEBTORS ENCOURAGE
EACH CREDITOR AND PARTY-IN-INTEREST TO CONSIDER CAREFULLY AND CONSULT WITH ITS
OWN LEGAL ADVISORS WITH RESPECT TO ALL SUCH MATTERS. BECAUSE OF THE COMPLEX,
SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR HOLDER MAY BE AN
UNDERWRITER, THE DEBTORS MAKE NO REPRESENTATION CONCERNING THE ABILITY OF A
PERSON TO DISPOSE OF THE SECURITIES TO BE DISTRIBUTED UNDER THE PLAN.

C.  New Senior Credit Agreement

1.  New Term Loan

   The Debtors anticipate that, on the Effective Date, Reorganized Encompass
will enter into the New Senior Credit Agreement pursuant to which the Existing
Credit Agreement Claims of the Senior Lenders will be exchanged, in part, for
indebtedness under the New Term Loan. Although Encompass informed certain
representatives of the Senior Lenders that it expects a New Term Loan to be
entered on the Effective Date, Encompass has not engaged in any substantive
negotiations with the Senior Lenders with respect to the New Term Loan. The
following description outlines Encompass' expectations as to key terms of the
New Term Loan as part of the New Senior Credit Agreement.

  a.  Structure

   Encompass anticipates that the New Senior Credit Facility will provide for a
New Term Loan in the aggregate amount of $200 million, subject to increase as
described below.

   Encompass expects that at the time of entry into the New Senior Credit
Agreement, Reorganized Encompass may retain outstanding letters of credit
issued prior to the Petition Date under the Existing Credit Agreement.
Encompass also expects that the New Senior Credit Agreement will permit the
Reorganized Debtors to issue new letters of credit under the Exit Facility. If
there is any drawing under letters of credit issued and outstanding under the
Existing Credit Agreement as of the Petition Date, the principal amount of the
New Term Loan will be increased in an amount equal to such drawing. Senior
Lenders that had reimbursement obligations in respect of such letters of credit
under the Existing Credit Agreement must reimburse the issuing bank for their
pro rata share of such drawing and treat such reimbursement as an additional
loan to Reorganized Encompass. The amount of such reimbursement will be added
to the amount of the New Term Loan and allocated to the reimbursing Senior
Lenders. Encompass anticipates that the amount of such reimbursement shall be
repaid on the fifth anniversary of the Effective Date.

   The New Term Loan, and the liens and guarantees in respect thereof, will be
junior to the Exit Facility, and the liens and guarantees in respect thereof.

                                      49

<PAGE>

  b.  Interest Rates and Fees

   Encompass anticipates that the interest and fee obligations under the New
Term Loan will generally be similar to those for its Tranche A Term Loan under
its Existing Credit Agreement. Therefore, Encompass expects that Reorganized
Encompass may choose to pay interest on advances under the New Term Loan at
either the Base Rate or the Eurodollar Rate. Such advances will accrue interest
at the Base Rate or Eurodollar Rate, as applicable, plus, in each case, the per
annum percentage margin applicable to such advances based upon the Reorganized
Encompass' Funded Debt to pro forma EBITDA ratio (consistent with the
determination of the applicable margin for advances under Encompass' Existing
Credit Agreement) as set forth in the following table.

<TABLE>
<CAPTION>
                                   Ratio             Ratio             Ratio             Ratio
                   Ratio        equal to or       equal to or       equal to or       equal to or
                equal to or  greater than 6.00 greater than 5.00 greater than 4.00 greater than 3.50    Ratio
                greater than to 1.00 and less  to 1.00 and less  to 1.00 and less  to 1.00 and less  is less than
                7.00 to 1.00 than 7.00 to 1.00 than 6.00 to 1.00 than 5.00 to 1.00 than 4.00 to 1.00 3.50 to 1.00
                ------------ ----------------- ----------------- ----------------- ----------------- ------------
<S>             <C>          <C>               <C>               <C>               <C>               <C>
Base Rate
 Margin........    2.75%           2.50%             2.25%             2.00%             1.25%          1.00%
Eurodollar Rate
 Margin........    4.25%           4.00%             3.75%             3.50%             2.75%          2.50%
</TABLE>

   Encompass anticipates that the default interest rate on the New Term Loan
will be 2.00% per annum above the rate plus margin otherwise applicable. In
addition, Encompass expects that any interest, fees and other amounts that are
overdue on the New Term Loan will bear interest at 2.00% per annum above the
rate applicable for Base Rate loans plus the applicable margin.

   Encompass also anticipates that Reorganized Encompass will be required to
pay all reasonable costs and expenses of the administrative agent (including
all reasonable fees, expenses and disbursements of outside counsel and other
professional advisors retained by the administrative agent) in connection with
(i) the preparation, execution and delivery of the definitive credit
documentation and the funding of all loans in connection therewith or (ii) the
Restructuring and other transactions, contemplated hereby and thereby.

  c.  Security and Guarantees

   Encompass anticipates that the Reorganized Subsidiaries will be required to
jointly and severally guarantee Reorganized Encompass' obligations under the
New Term Loan and that the collateral for the New Term Loan will be
substantially the same collateral as under the Existing Credit Agreement: all
or substantially all of the assets of Reorganized Encompass and each guarantor.
The New Term Loan and the liens and guarantees in respect thereof, will be
junior to the Exit Facility, and the liens and guarantees in respect thereof.

  d.  Conditions to New Senior Credit Agreement

   Encompass expects that the New Senior Credit Agreement will be conditioned
upon satisfaction of customary conditions for facilities of this type,
including the following conditions precedent on or prior to the Effective Date:

  .   payment by the Reorganized Debtors of all fees and expenses due and
      payable by it in connection with the entry into the New Senior Credit
      Agreement;

  .   conversion of the Senior Subordinated Notes into New Common Stock;

  .   cancellation of all Junior Subordinated Notes; and

  .   cancellation of all Existing Stock.

  e.  Covenants

   Encompass anticipates that the New Senior Credit Agreement will require
Reorganized Encompass to observe certain customary conditions, affirmative
covenants and negative covenants.

                                      50

<PAGE>

  f.  Maturity and Amortization

   Encompass anticipates that the New Term Loan will be repayable in equal
consecutive quarterly installments, each in an amount equal to 0.25% of the
aggregate outstanding principal amount under the New Term Loan on the Effective
Date, on the first Business Day of each January, April, July and October
following the Effective Date, commencing with the first such date following the
Effective Date, and ending, with the payment in full of the outstanding balance
of the New Term Loan, on or after the fifth anniversary of the Effective Date.

   Encompass expects that, in the event that amortization payments are made
with respect to the Existing Credit Agreement subsequent to the date hereof and
prior to the Petition Date, the full amount of any such payments shall reduce
the respective amortization payments dollar-for-dollar on the New Term Loan on
a pro rata basis. In addition, Encompass anticipates that the amount of any
draws on letters of credit issued under the Existing Credit Agreement and
assumed under the New Senior Credit Agreement that are reimbursed by Senior
Lenders having reimbursement obligations with respect to such letters of credit
under the Existing Credit Agreement shall be added to the final amortization
payment on the New Term Loan.

  g.  Prepayments

   Optional Prepayments.  Encompass expects that optional prepayments will be
permitted under the New Senior Credit Agreement, including the right to prepay
the loans under the Exit Facility and reduce the commitments under the Exit
Facility in a minimum amount of $5,000,000 and additional integral amounts in
multiples of $1,000,000.

   Mandatory Prepayments.  Encompass expects that certain mandatory prepayments
may be required under the New Senior Credit Agreement. Encompass expects that
such mandatory prepayments will be required upon the occurrence of certain
events, as is customary for such borrowings, but which in any event shall
include prepayments of cash proceeds up to $50 million, from any sale or other
disposition by Reorganized Encompass or any of its Reorganized Subsidiaries
after the Effective Date of any material assets, except for (i) the sale of
inventory or obsolete or worn-out property in the ordinary course of business,
(ii) transfers resulting from casualty or condemnation and (iii) other
customary exceptions.

2.  Exit Facility

   It is a condition to the Confirmation of the Plan that the Debtors secure an
Exit Facility in the amount of up to $100 million. Although Encompass has
informed certain representatives of the Senior Lenders that Encompass will
require the Exit Facility upon consummation of the Plan, Encompass has not
engaged in any substantive negotiations with the Senior Lenders or any other
potential financing source with respect to the Exit Facility, and Encompass has
received no commitments for the Exit Facility from any potential lender. The
following description outlines Encompass' expectations as to key terms of the
Exit Facility.

  a.  Structure

   Encompass anticipates the Exit Facility will provide Reorganized Encompass,
as borrower, a revolving credit facility of up to $100 million, with the total
amount of such committed credit available for the issuance of letters of
credit. All letters of credit issued and outstanding under the DIP Facility
will be deemed to be issued and outstanding under the Exit Facility as of the
Effective Date.

   Encompass expects the Exit Facility, and the liens and guarantees in respect
thereof, will be senior to the New Term Loan, and the liens and guarantees in
respect thereof.

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<PAGE>

  b.  Interest Rates and Fees

   Encompass anticipates that the interest and fee obligations under the Exit
Facility will generally be similar to those for revolving loans under its
Existing Credit Agreement. Therefore, Encompass expects that Reorganized
Encompass may choose to pay interest on advances under the Exit Facility at
either the Base Rate or the Eurodollar Rate. Such advances will accrue interest
at the Base Rate or Eurodollar Rate, as applicable, plus, in each case, the per
annum percentage margin applicable to such advances based upon Reorganized
Encompass' Funded Debt to pro forma EBITDA ratio (consistent with the
determination of the applicable margin for the revolving credit facility under
Encompass' Existing Credit Agreement) as set forth in the following table.

<TABLE>
<CAPTION>
                                            Ratio         Ratio         Ratio         Ratio         Ratio
                                         equal to or   equal to or   equal to or   equal to or   equal to or
                              Ratio     greater than  greater than  greater than  greater than  greater than
                           equal to or  6.00 to 1.00  5.00 to 1.00  4.00 to 1.00  3.50 to 1.00  2.75 to 1.00     Ratio
                           greater than and less than and less than and less than and less than and less than is less than
                           7.00 to 1.00 7.00 to 1.00  6.00 to 1.00  5.00 to 1.00  4.00 to 1.00  3.50 to 1.00  2.75 to 1.00
                           ------------ ------------- ------------- ------------- ------------- ------------- ------------
<S>                        <C>          <C>           <C>           <C>           <C>           <C>           <C>
Base Rate Margin..........    2.50%         2.25%         2.00%         1.75%         1.00%         .75%         .50%
Eurodollar Rate Margin....    4.00%         3.75%         3.50%         3.25%         2.50%         2.25%        2.00%
</TABLE>

Encompass anticipates that the default interest rate under the Exit Facility
will be 2.00% above the rate plus margin otherwise applicable. In addition,
Encompass expects that any interest, fees and other amounts that are overdue
under the Exit Facility will bear interest at 2.00% above the Base Rate plus
the applicable margin.

   Encompass also expects that Reorganized Encompass will be required to pay a
customary commitment fee on the average daily unused portion of the Exit
Facility and a customary fee for the aggregate initial commitments for the Exit
Facility.

  c.  Security and Guarantees

   Encompass anticipates that the Reorganized Subsidiaries will be required to
jointly and severally guarantee Reorganized Encompass' obligations under the
Exit Facility and that the collateral for the Exit Facility will be
substantially the same collateral as under the Existing Credit Agreement: all
or substantially all of the assets of Reorganized Encompass and each guarantor.
Encompass anticipates that the Exit Facility, and the liens and guarantees in
respect thereof, will be senior to the New Term Loan, and the liens and
guarantees in respect thereof.

  d.  Covenants

   Encompass expects that the Exit Facility will require Reorganized Encompass
to observe customary affirmative and negative covenants (including financial
covenants).

  e.  Maturity and Amortization

   Encompass expects the Exit Facility will cease to be available on fourth
anniversary of the Effective Date.

  f.  Prepayments

   Encompass anticipates that the Exit Facility will provide for customary
prepayments.

                                      52

<PAGE>

           VII.  CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN

A.  Introduction

   THE FOLLOWING DISCUSSION IS A SUMMARY OF CERTAIN OF THE SIGNIFICANT FEDERAL
INCOME TAX CONSEQUENCES OF THE PLAN TO THE DEBTORS, TO HOLDERS OF CLAIMS WHO
ACQUIRED SUCH CLAIMS ON ORIGINAL ISSUE AND TO HOLDERS OF EQUITY INTERESTS, AND
IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED TO THE DATE HEREOF
(THE "TAX CODE"), TREASURY REGULATIONS PROMULGATED AND PROPOSED THEREUNDER
("TREASURY REGULATIONS"), JUDICIAL DECISIONS AND PUBLISHED ADMINISTRATIVE RULES
AND PRONOUNCEMENTS OF THE INTERNAL REVENUE SERVICE ("IRS") AS IN EFFECT ON THE
DATE HEREOF. CHANGES IN SUCH RULES OR NEW INTERPRETATIONS THEREOF COULD
SIGNIFICANTLY AFFECT THE TAX CONSEQUENCES DESCRIBED BELOW. NO RULINGS HAVE BEEN
REQUESTED FROM THE IRS. MOREOVER, NO LEGAL OPINIONS HAVE BEEN REQUESTED FROM
COUNSEL WITH RESPECT TO ANY OF THE TAX ASPECTS OF THE PLAN.

   THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE PLAN TO THE
HOLDERS OF CLAIMS AND EQUITY INTERESTS MAY VARY BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER. IN ADDITION, THIS DISCUSSION DOES NOT COVER ALL
ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO THE DEBTORS OR TO
HOLDERS OF ALLOWED CLAIMS OR EQUITY INTERESTS, NOR DOES THE DISCUSSION DEAL
WITH TAX ISSUES PECULIAR TO CERTAIN TYPES OF TAXPAYERS (SUCH AS DEALERS IN
SECURITIES, S CORPORATIONS, LIFE INSURANCE COMPANIES, FINANCIAL INSTITUTIONS,
TAX-EXEMPT ORGANIZATIONS AND FOREIGN TAXPAYERS). NO ASPECT OF FOREIGN, STATE,
LOCAL OR ESTATE AND GIFT TAXATION IS ADDRESSED.

   THE FOLLOWING SUMMARY IS, THEREFORE, NOT A SUBSTITUTE FOR CAREFUL TAX
PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF A
CLAIM OR EQUITY INTEREST. HOLDERS OF CLAIMS OR EQUITY INTERESTS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS FOR THE FEDERAL, STATE, LOCAL AND OTHER TAX
CONSEQUENCES PECULIAR TO THEM UNDER THE PLAN.

B.  Consequences to Holders of Claims or Interests

1.  Realization and Recognition of Gain or Loss in General

   The federal income tax consequences of the implementation of the Plan to a
holder of a Claim will depend, among other things, upon the origin of the
holder's Claim, when the holder's Claim becomes an Allowed Claim, when the
holder receives payment in respect of such Claim, whether the holder reports
income using the accrual or cash method of accounting, whether the holder has
taken a bad debt deduction or worthless security deduction with respect to such
Claim and whether the holder's Claim constitutes a "security" for federal
income tax purposes.

   Generally, a holder of an Allowed Claim will realize gain or loss on the
exchange under the Plan of its Allowed Claim for stock and other property (such
as Cash and new debt instruments), in an amount equal to the difference between
(i) the sum of the amount of any Cash, the issue price of any debt instrument,
and the fair market value on the date of the exchange of any other property
received by the holder (other than any consideration attributable to a Claim
for accrued but unpaid interest) and (ii) the adjusted tax basis of the Allowed
Claim exchanged therefor (other than basis attributable to accrued but unpaid
interest previously included in the holder's taxable income). With respect to
the treatment of accrued but unpaid interest and amounts allocable thereto, see
Section VII.B.8--"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN--CONSEQUENCES TO HOLDERS OF CLAIMS OR INTERESTS--ALLOCATION OF
CONSIDERATION TO INTEREST."

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<PAGE>

   Whether or not such realized gain or loss will be recognized (i.e., taken
into account) for federal income tax purposes will depend in part upon whether
such exchange qualifies as a recapitalization or other "reorganization" as
defined in the Tax Code, which may in turn depend upon whether the Claim
exchanged is classified as a "security" for federal income tax purposes. The
term "security" is not defined in the Tax Code or in the Treasury Regulations.
One of the most significant factors considered in determining whether a
particular debt instrument is a security is the original term thereof. In
general, the longer the term of an instrument, the greater the likelihood that
it will be considered a security. As a general rule, a debt instrument having
an original term of 10 years or more will be classified as a security, and a
debt instrument having an original term of fewer than five years will not. Debt
instruments having a term of at least five years but less than 10 years are
likely to be treated as securities, but may not be, depending upon their
resemblance to ordinary promissory notes, whether they are publicly traded,
whether the instruments are secured, the financial condition of the debtor at
the time the debt instruments are issued and other factors. Each holder of an
Allowed Claim should consult its own tax advisor to determine whether its
Allowed Claim constitutes a security for federal income tax purposes.

   When gain or loss is recognized as set forth below, such gain or loss may be
long-term capital gain or loss if the Claim or equity interest disposed of is a
capital asset in the hands of the holder and is held for more than one year.
Each holder of an Allowed Claim or Equity Interest should consult its own tax
advisor to determine whether gain or loss recognized by such holder will be
long-term capital gain or loss and the specific tax effect thereof on such
holder.

2.  Holders of Allowed Administrative Expense Claims (Unclassified) and Allowed
Other Priority Claims (Class 1)

   Holders of Allowed Administrative Expense Claims and Allowed Other Priority
Claims generally will be paid in full in Cash on, or subsequent to, the
Distribution Date. Such holders must include amounts received in excess of
their adjusted tax basis in their Claim (if any) in gross income in the taxable
year in which such amounts are actually or constructively received by them.
Where appropriate, income tax and employment tax will be withheld from such
payments as required by law. With respect to the treatment of accrued but
unpaid interest (if any) and amounts allocable thereto, see Section
VII.B.8--"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN--CONSEQUENCES TO
HOLDERS OF CLAIMS OR INTERESTS--ALLOCATION OF CONSIDERATION TO INTEREST."

3.  Holders of Allowed Other Secured Claims (Class 5)

   The legal, equitable and contractual rights of holders of Allowed Other
Secured Claims are unaltered by the Plan. Therefore, holders of Allowed Other
Secured Claims will not realize gain or loss for federal income tax purposes.

4.  Holders of Allowed Existing Credit Agreement Claims (Class 6)

   Each holder of an Allowed Existing Credit Agreement Claim will receive (i)
an amount of indebtedness under the New Term Loan (a "New Note") and (ii)
shares of New Common Stock in exchange for its Claim. Whether such distribution
is taxable depends upon whether all or a portion of a holder's Allowed Existing
Credit Agreement Claim constitutes a "security" for federal income tax
purposes. See Section VII.B.1--"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN--CONSEQUENCES TO HOLDERS OF CLAIMS OR INTERESTS--REALIZATION AND
RECOGNITION OF GAIN OR LOSS IN GENERAL." If an Allowed Existing Credit
Agreement Claim does not constitute a "security" for federal income tax
purposes, the holder of such a Claim would recognize gain or loss in an amount
equal to the difference between (a) the holder's basis in the Claim and (b) the
issue price of the New Note and the fair market value of the New Common Stock
received in excess of amounts allocable to accrued but unpaid interest. Amounts
received in respect of claims for accrued but unpaid interest will be taxed as
ordinary income, except to the extent previously included by a holder under his
method of accounting. See Section VII.B.8--"CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN--CONSEQUENCES TO HOLDERS OF CLAIMS OR

                                      54

<PAGE>

INTERESTS--ALLOCATION OF CONSIDERATION TO INTEREST." A holder's tax basis in
the New Note will equal the issue price thereof and the tax basis of any New
Common Stock received will equal the fair market value of such stock. In
general, the holder's holding period for the New Note and the New Common Stock
received will commence the day following the issuance thereof.

   If a holder's Allowed Existing Credit Agreement Claim constitutes a
"security" for federal income tax purposes, the exchange of such holder's Claim
for New Common Stock and the New Note will constitute a "recapitalization" for
federal income tax purposes. No loss will be recognized by a holder of such a
Claim. Whether and to what extent gain will be recognized will depend on
whether the New Note is a security for federal income tax purposes. If the New
Note is a security for federal income tax purposes, any gain realized will not
be recognized. Amounts received in respect of claims for accrued but unpaid
interest will be taxed as ordinary income, except to the extent previously
included by a holder under his method of accounting. See Section
VII.B.8--"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN-- CONSEQUENCES TO
HOLDERS OF CLAIMS OR INTERESTS--ALLOCATION OF CONSIDERATION TO INTEREST." A
holder's tax basis in any New Note or New Common Stock received in satisfaction
of its Claim (other than a claim for accrued but unpaid interest) will equal
the holder's aggregate adjusted tax basis in its Claim (not including any claim
for accrued but unpaid interest). In general, if the holder's Claim was a
capital asset in the holder's hands, the holder's holding period for the New
Note and New Common Stock received in satisfaction of its Claim (other than a
claim for accrued but unpaid interest) will include the holder's holding period
for its Claim. A holder's tax basis in any New Note received in satisfaction of
its claim for accrued but unpaid interest will be equal to the issue price
thereof and the tax basis of any New Common Stock so received will be equal to
the fair market value thereof. The holding period for any New Note or any New
Common Stock received in respect of a claim for accrued but unpaid interest
shall commence the day after the issuance thereof.

   If a New Note is not a security for federal income tax purposes, any gain
realized will be recognized in an amount not exceeding the issue price of such
New Note. A holder's tax basis in any New Note received in satisfaction of its
Claim will equal the issue price thereof and the tax basis of any New Common
Stock received in satisfaction of its Claim (other than a claim for accrued but
unpaid interest) will equal the holder's aggregate adjusted tax basis in its
Claim (not including any claim for accrued but unpaid interest) plus the amount
of any gain recognized. In general, if the holder's Claim was a capital asset
in the holder's hands, the holder's holding period for the New Common Stock
received in satisfaction of its Claim (other than a claim for accrued but
unpaid interest) will include the holder's holding period for its Claim. The
holding period for any New Note received shall commence on the day after the
issuance thereof. A holder's tax basis in any New Common Stock received in
satisfaction of its claim for accrued but unpaid interest will be equal to the
fair market value thereof. The holding period for any New Common Stock received
in respect of a claim for accrued but unpaid interest shall commence the day
after the issuance thereof.

5.  Holders of Allowed Senior Subordinated Note Claims (Class 7)

   A holder of an Allowed Senior Subordinated Note Claim will receive New
Common Stock on or after the Effective Date. Whether such distribution is
taxable depends upon whether a holder's Allowed Senior Subordinated Note Claim
constitutes a "security" for federal income tax purposes. See Section VII.B.1--
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN--CONSEQUENCES TO HOLDERS
OF CLAIMS OR INTERESTS--REALIZATION AND RECOGNITION OF GAIN OR LOSS IN
GENERAL." The Debtors believe that the notes evidencing the Senior Subordinated
Note Claims are "securities" for federal income tax purposes.

   If an Allowed Senior Subordinated Note Claim constitutes a "security" for
federal income tax purposes, the receipt of New Common Stock in satisfaction of
such Claim will constitute a "recapitalization" for federal income tax
purposes. Therefore, any realized gain or loss will not be recognized for
federal income tax purposes. Amounts received in respect of claims for accrued
but unpaid interest will be taxed as ordinary income, except to the extent
previously included by a holder under his method of accounting. See Section
VII.B.8--"CERTAIN

                                      55

<PAGE>

FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN--CONSEQUENCES TO HOLDERS OF CLAIMS
OR INTERESTS--ALLOCATION OF CONSIDERATION TO INTEREST." A holder's tax basis in
any New Common Stock received in satisfaction of its Claim (other than a claim
for accrued but unpaid interest) will equal the holder's aggregate adjusted tax
basis in its Claim (not including any claim for accrued but unpaid interest).
In general, if the holder's Claim was a capital asset in the holder's hands,
the holder's holding period for the New Common Stock received will include the
holder's holding period for its Claim, except to the extent the New Common
Stock was issued in respect of a claim for accrued but unpaid interest. A
holder's tax basis in any New Common Stock received in satisfaction of its
claim for accrued but unpaid interest will be equal to the fair market value of
any New Common Stock so received and the holding period for any New Common
Stock so received will commence the day following the issuance thereof.

6. Holders of Junior Subordinated Note Claims (Class 8), Litigation Claims
   (Class 10), Mandatorily Redeemable Convertible Preferred Stock Equity
   Interests (Class 11), Existing Common Stock Equity Interests and Section
   510(b) Claims (Class 12), and Existing Other Equity Interests (Class 13)

   On the Effective Date, all Junior Subordinated Note Claims, Litigation
Claims, Mandatorily Redeemable Convertible Preferred Stock Equity Interests,
Existing Common Stock Equity Interests, Section 510(b) Claims, and Existing
Other Equity Interests will be cancelled. Accordingly, each holder of such a
Claim or Equity Interest will realize and recognize a loss equal to its
adjusted tax basis in its Claim or Equity Interest upon implementation of the
Plan, except to the extent such holder has properly claimed a deduction for
worthlessness in a prior taxable year.

7.  Holders of Allowed General Unsecured Claims (Class 9)

   The legal, equitable and contractual rights of holders of Allowed General
Unsecured Claims are unaltered by the Plan. Therefore, holders of Allowed
General Unsecured Claims will not realize gain or loss for federal income tax
purposes.

8.  Allocation of Consideration to Interest

   Pursuant to the Plan, all Distributions in respect of Allowed Claims will be
allocated first to the principal amount of the Allowed Claim, with any excess
allocated to unpaid accrued interest. However, there is no assurance that such
allocation would be respected by the IRS for federal income tax purposes. In
general, to the extent any amount received (whether stock, Cash or other
property) by a holder of a debt is received in satisfaction of accrued interest
during its holding period, such amount will be taxable to the holder as
interest income (if not previously included in the holder's gross income).
Conversely, a holder generally recognizes a deductible loss to the extent any
accrued interest claimed was previously included in its gross income and is not
paid in full. Each holder of an Allowed Claim is urged to consult its own tax
advisor regarding the allocation of consideration and the deductibility of
unpaid interest for tax purposes.

9.  Tax Treatment of Gain Recognized on Subsequent Sale of Certain Stock

   Any gain recognized by a holder upon a subsequent taxable disposition of New
Common Stock received pursuant to the Plan in satisfaction of a holder's Claims
will be treated as ordinary income to the extent of (i) any bad debt deductions
(or additions to a bad debt reserve) claimed with respect to its Claims and any
ordinary loss deduction incurred upon satisfaction of such Claims, less any
income (other than interest income) recognized by the holder upon satisfaction
of such Claims, and (ii) with respect to a cash-basis holder, also any amounts
which would have been included in its gross income if such Claims had been
satisfied in full but which were not included by reason of the cash method of
accounting.

10. Withholding

   All Distributions under the Plan are subject to any applicable withholding.
Under federal income tax law, interest, dividends, and other reportable
payments may, under certain circumstances, be subject to "backup

                                      56

<PAGE>

withholding" at the fourth-lowest tax rate applicable to unmarried individuals.
That rate is currently 30 percent. Backup withholding generally applies if the
holder (a) fails to furnish its social security number or other taxpayer
identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails
properly to report interest or dividends, or (d) under certain circumstances,
fails to provide a certified statement, signed under penalty of perjury, that
the TIN provided is its correct number and that it is not subject to backup
withholding. Backup withholding is not an additional tax but merely an advance
payment, which may be refunded to the extent it results in an overpayment of
tax. Certain persons are exempt from backup withholding, including, in certain
circumstances, corporations and financial institutions.

C.  Consequences to Debtors or Reorganized Debtors

1.  Discharge-of-Indebtedness Income Generally

   In general, the discharge of a debt obligation by a debtor for an amount
less than the adjusted issue price (generally, the amount received upon
incurring the obligation plus the amount of any previously amortized original
issue discount and less the amount of any previously amortized bond issue
premium) gives rise to cancellation-of-indebtedness ("COD") income which must
be included in a debtor's income for federal income tax purposes, unless, in
accordance with section 108(e)(2) of the Tax Code, payment of the liability
would have given rise to a deduction. A corporate debtor that issues its own
stock or its own debt in satisfaction of its debt is treated as realizing COD
income to the extent the fair market value of the stock or the issue price of
new debt issued is less than the adjusted issue price of the old debt. COD
income is not recognized by a taxpayer that is a debtor in a title 11
(bankruptcy) case if a discharge is granted by the court or pursuant to a plan
approved by the court (the "bankruptcy exclusion rules").

   Pursuant to the Plan, Administrative Expense Claims, Priority Tax Claims,
Other Priority Claims, Secured Claims and General Unsecured Claims generally
will be paid in full and, therefore, the treatment of such Claims should not
give rise to COD income. With respect to other Claims, there could be COD
income if such Claims are not satisfied in full. Based upon current estimates
of value, the Debtors believe that consummation of the Plan will give rise to
approximately $318 million of COD income that will be excluded from gross
income as described above, but will reduce attributes as described below.

2.  Attribute Reduction

   The relief accorded to COD income by the bankruptcy exclusion rules is not
without cost. If a taxpayer excludes COD income because of the bankruptcy
exclusion rules, it is required to reduce prescribed tax attributes in the
following order and at the following rates: (i) net operating losses ("NOLs")
for the taxable year of the discharge and NOL carryovers to such taxable year,
dollar for dollar; (ii) general business credit carryovers, 33 1/3 cents for
each dollar of excluded income; (iii) the minimum tax credit available under
section 53(b) of the Tax Code as of the beginning of the taxable year
immediately following the taxable year of the discharge, 33 1/3 cents for each
dollar of excluded income; (iv) any capital losses for the taxable year of the
discharge and any capital loss carryovers to such taxable year, dollar for
dollar; (v) the basis of the taxpayer's assets both depreciable and
nondepreciable, dollar for dollar, but the basis cannot be reduced below an
amount based on the taxpayer's aggregate liabilities immediately after the
discharge (the "Aggregate Liabilities Limitation"); (vi) passive activity loss
or credit carryovers of the taxpayer under section 469(b) of the Tax Code from
the taxable year of the discharge, dollar for dollar in the case of loss
carryovers and 33 1/3 cents for each dollar of excludible income in the case of
any passive activity credit carryovers; and (vii) foreign tax credit
carryovers, 33 1/3 cents for each dollar of excluded income. However, under
section 108(b)(5) of the Tax Code the taxpayer may elect to avoid the
prescribed order of attribute reduction and instead reduce the basis of
depreciable property first, without regard to the Aggregate Liabilities
Limitation. This election extends to stock of a subsidiary if the subsidiary
consents to reduce the basis of its depreciable property. If the Reorganized
Debtors make this election, the Aggregate Liabilities Limitation would not
apply. The Debtors are considering whether it would be advantageous to make the
election to reduce the basis of their depreciable assets first under section
108(b)(5) of the Tax Code.


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<PAGE>

   In general, a taxpayer determines its tax liability for the year of
discharge without regard to the attribute reduction rules, which are applied as
of the beginning of the following taxable year.

   It is not settled whether, in the case of affiliated corporations filing a
consolidated return (such as the Debtors or Reorganized Debtors), the attribute
reduction rules apply separately to the particular corporation whose debt is
being discharged, or to the tax attributes of the entire group without regard
to the identity of the debtor. Although the IRS has informally taken the
position that NOLs are reduced on a consolidated basis, there is also support
for a separate entity approach. The Debtors do not believe that the resolution
of this issue would have a material impact on them.

3.  Utilization of Net Operating Loss Carryovers

   In general, whenever there is a 50% ownership change of a debtor corporation
during a three-year period, the ownership change rules in section 382 of the
Tax Code limit the utilization of NOLs on an annual basis to an amount equal to
the product of the fair market value of the corporate entity immediately before
the ownership change, multiplied by a hypothetical interest rate published
monthly by the IRS called the "long-term tax-exempt rate." The long-term
tax-exempt rate as of the date of this Disclosure Statement is 4.78%. In any
given year, this limitation may be increased by certain built-in gains realized
after, but accruing economically before, the ownership change and the carryover
of unused section 382 limitations from prior years.

   On the other hand, if at the date of an ownership change the aggregate
adjusted basis for federal income tax purposes of a debtor's assets exceeds the
fair market value of such assets by prescribed amounts, (a "net unrealized
built-in loss") then, upon the realization of such built-in losses during a
five-year period beginning on the date of the ownership change, such losses are
treated as if they were part of the NOL carryover, rather than a current
deduction, and are also subject to the section 382 limitation.

   The Debtors believe that implementation of the Plan will create a section
382 change of ownership. The harsh effects of the ownership change rules can be
ameliorated by an exception that applies in the case of reorganizations under
the Bankruptcy Code. Under the so-called "section 382(1)(5) bankruptcy
exception" to section 382 of the Tax Code, if the reorganization results in an
exchange by qualifying creditors and stockholders of their claims and interests
for at least 50% of the debtor's stock (in vote and value), then the general
ownership change rules will not apply. Instead, the debtor will be subject to a
different tax regime under which the NOL is not limited on an annual basis but
is instead reduced by the amount of interest deductions claimed during the
three taxable years plus the part year, if any, immediately preceding the
Effective Date, in respect of debt converted into stock in the reorganization.
Moreover, if the section 382(1)(5) bankruptcy exception applies, any further
ownership change of the debtor within a two-year period will result in
forfeiture of all of the debtor's NOLs incurred prior to the date of the second
ownership change.

   In determining whether a debtor satisfies the 50% test described above, and
hence qualifies for section 382(l)(5) treatment, only creditors who have held
their claims for prescribed periods of time and exchange such claims for stock
may be counted. Thus, active trading in the claims may prevent a debtor from
meeting the tests of section 382(l)(5). The Debtors do not know at this time
whether, as a result of such claims trading, it will fail to qualify under
section 382(l)(5).

   If the debtor would otherwise qualify for the section 382(1)(5) bankruptcy
exception, but the NOL reduction rules mandated thereby would greatly reduce
the NOL, the debtor may elect instead to be subject to the annual limitation
rules of section 382 of the Tax Code, but is permitted to value the equity of
the corporation for purposes of applying the formula by using the value
immediately after the ownership change (by increasing the value of the old loss
corporation to reflect any surrender or cancellation of creditors' claims)
instead of immediately before the ownership change (the "section 382(1)(6)
limitation"). Alternatively, if the debtor does not qualify for the section
382(1)(5) bankruptcy exception, the utilization of its NOL would automatically
be governed by the section 382(1)(6) limitation.

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   Based on their returns as filed and upon estimates at the close of the
taxable year ending December 31, 2002, the Debtors believe they will have
carried back all available NOLs for regular tax purposes and alternative
minimum tax purposes. See Section VII.C.5--"CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN--CONSEQUENCES TO DEBTORS OR REORGANIZED
DEBTORS--ALTERNATIVE MINIMUM TAX." In addition, they will a have a capital loss
carryover of approximately $13 million. The Debtors believe they will have a
net unrealized built-in loss as of the ownership change arising from
implementation of the Plan that may limit the utilization of losses and
depreciation arising in taxable years ending after the Effective Date of the
Plan. However, the foregoing amounts could be changed as a result of audit
adjustments by the IRS that result from IRS examinations of the Debtors'
returns, or any COD income as a result of the attribute reduction rules
discussed above in Section VII.C.2--"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
THE PLAN--CONSEQUENCES TO DEBTORS OR REORGANIZED DEBTORS--ATTRIBUTE REDUCTION."

   The amount of NOLs and built-in losses subject to limitation is based on
factual and legal issues with respect to which there can be no certainty. The
actual annual utilization of the NOL carryovers and built-in losses will be
determined by actual market value and the actual long-term tax-exempt rate at
the date of reorganization and may be different from amounts described herein.
Accordingly, the utility of the section 382(l)(5) bankruptcy exception versus
an election to apply the 382(l)(6) limitation cannot be ascertained at this
time.

4.  Consolidated Return Items

   The confirmation of the Plan may result in the recognition of income or loss
attributable to the existence of deferred intercompany transactions, excess
loss accounts or similar items. The Debtors, however, do not believe that the
consequence of such items (if any) would have a material effect on them.

5.  Alternative Minimum Tax

   A corporation is required to pay alternative minimum tax to the extent that
20% of "alternative minimum taxable income" ("AMTI") exceeds the corporation's
regular tax liability for the year. AMTI is generally equal to regular taxable
income with certain adjustments. For purposes of computing AMTI, a corporation
is entitled to offset no more than 90% of its AMTI with NOLs (as computed for
alternative minimum tax purposes). Thus, if the Reorganized Debtors'
consolidated group is subject to the alternative minimum tax in future years, a
federal tax of not less than 2% (20% of the 10% of AMTI not offset by NOLs)
will apply to any net taxable income earned by the Reorganized Debtors'
consolidated group in future years that would otherwise be offset by NOLs.

   Certain legislative proposals now pending before Congress would, if enacted,
repeal the Alternative Minimum Tax for corporations.

    VIII.  FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST

A.  Feasibility of the Plan

   In connection with Confirmation of the Plan, section 1129(a)(11) of the
Bankruptcy Code requires that the Bankruptcy Court find that Confirmation of
the Plan is not likely to be followed by the liquidation or the need for
further financial reorganization of the Debtors. This is the so-called
"feasibility" test. To support their belief in the feasibility of the Plan, the
Debtors, with the assistance of their financial advisors, have prepared the
Financial Projections attached hereto as Exhibit D.

   The Financial Projections indicate that the Reorganized Debtors should have
sufficient cash flow to make the payments required under the Plan on the
Effective Date, repay and service debt obligations and maintain operations on a
going-forward basis. Accordingly, the Debtors believe that the Plan complies
with the standard of section 1129(a)(11) of the Bankruptcy Code. As noted in
the Financial Projections, however, the Debtors caution that no representations
can be made as to the accuracy of the Financial Projections or as to the
Reorganized

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Debtors' ability to achieve the projected results. Many of the assumptions upon
which the Financial Projections are based are subject to uncertainties outside
the control of the Debtors. Some assumptions inevitably will not materialize,
and events and circumstances occurring after the date on which the Financial
Projections were prepared may be different from those assumed or may be
unanticipated, and may adversely affect the Debtors' financial results. See
Section X--"CERTAIN FACTORS TO BE CONSIDERED" for a discussion of certain risk
factors that could affect financial feasibility of the Plan.

   THE FINANCIAL PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE
WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION REGARDING FINANCIAL PROJECTIONS. FURTHERMORE, THE FINANCIAL
PROJECTIONS HAVE NOT BEEN AUDITED BY ENCOMPASS' INDEPENDENT CERTIFIED
ACCOUNTANTS. ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, THE FINANCIAL
PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS, SOME OF WHICH HAVE NOT
BEEN ACHIEVED TO DATE AND MAY NOT BE REALIZED IN THE FUTURE, AND ARE SUBJECT TO
SIGNIFICANT BUSINESS, LITIGATION, ECONOMIC, AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES, MANY, IF NOT ALL, OF WHICH ARE BEYOND THE CONTROL OF THE
DEBTORS. CONSEQUENTLY, THE FINANCIAL PROJECTIONS SHOULD NOT BE REGARDED AS A
REPRESENTATION OR WARRANTY BY THE DEBTORS, OR ANY OTHER PERSON, THAT THE
FINANCIAL PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM
THOSE PRESENTED IN THE FINANCIAL PROJECTIONS.

B.  Best Interests Test

   Even if the Plan is accepted by all holders of Eligible Claims, the
Bankruptcy Code requires that the Bankruptcy Court find that the Plan is in the
best interests of all holders of Claims and Equity Interests that are Impaired
by the Plan or that have not accepted the Plan as a requirement to confirm the
Plan. The "best interests" test, set forth in section 1129(a)(7) of the
Bankruptcy Code, requires the Bankruptcy Court to find either that all members
of an Impaired class of Claims or Equity Interests have accepted the plan or
that the plan will provide a member who has not accepted the plan with a
recovery of property of a value, as of the effective date of the plan, that is
not less than the amount that such holder would receive or retain if the debtor
were liquidated under Chapter 7 of the Bankruptcy Code on such date.

   To calculate the probable distribution to members of each Impaired class of
Claims and Equity Interests if a debtor were liquidated under chapter 7, the
Bankruptcy Court must first determine the aggregate dollar amount that would be
generated from the disposition of the Debtors' assets if their Chapter 11 Cases
were converted to chapter 7 cases under the Bankruptcy Code. This "liquidation
value" would consist primarily of the proceeds from a forced sale of the
Debtors' assets by a chapter 7 trustee.

   The amount of liquidation value available to holders of unsecured Claims
against the Debtors would be reduced, first, by the costs and expenses of
liquidation, as well as by other administrative expenses and costs of both the
chapter 7 cases and the Chapter 11 Cases, and second, by the claims of secured
creditors (to the extent of the value of their collateral). Costs of a
liquidation of the Debtors under chapter 7 of the Bankruptcy Code would include
the compensation of a chapter 7 trustee, as well as of counsel and other
professionals retained by the trustee, asset disposition expenses, all unpaid
expenses incurred by the Debtors in the Chapter 11 Cases (such as compensation
of attorneys, financial advisors, and accountants) that are allowed in the
chapter 7 cases, litigation costs, and claims arising from the operations of
the Debtors during the pendency of the Chapter 11 Cases. The liquidation itself
would trigger certain priority payments that otherwise would be due in the
ordinary course of business. Those priority claims would be paid in full from
the liquidation proceeds before the balance would be made available to pay
unsecured Claims or to make any distribution in respect of Equity Interests.
The liquidation would also prompt the rejection of executory contracts and
unexpired leases and thereby create a significantly greater amount of unsecured
Claims.

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   In a chapter 7 liquidation, no junior class of Claims or Equity Interests
may be paid unless all classes of Claims or Equity Interests senior to such
junior class are paid in full. Section 510(a) of the Bankruptcy Code provides
that subordination agreements are enforceable in a bankruptcy case to the same
extent that such subordination agreements are enforceable under applicable
non-bankruptcy law. Therefore, no class of Claims or Equity Interests that is
contractually subordinated to another class would receive any payment on
account of its Claims or Equity Interests, unless and until such senior class
were paid in full.

   Once the Bankruptcy Court ascertains the recoveries in liquidation of the
Debtors' secured and priority creditors, it would then determine the probable
distribution to unsecured creditors from the remaining available proceeds of
the liquidation. If this probable distribution has a value greater than the
value of distributions to be received by the unsecured creditors under the
Plan, then the Plan is not in the best interests of creditors and cannot be
confirmed by the Bankruptcy Court. As shown in the Liquidation Analysis
attached hereto as Exhibit C, the Debtors believe that each member of each
Class of Impaired Claims and Equity Interests will receive at least as much, if
not more, under the Plan as they would receive if the Debtors were liquidated.

C.  Liquidation Analysis

   As noted above, the Debtors believe that under the Plan all holders of
Impaired Claims and Equity Interests will receive property with a value not
less than the value such holder would receive in a liquidation of the Debtors
under chapter 7 of the Bankruptcy Code. The Debtors' belief is based primarily
on (i) consideration of the effects that a chapter 7 liquidation would have on
the ultimate proceeds available for distribution to holders of Impaired Claims
and Equity Interests, including (a) the increased costs and expenses of a
liquidation under chapter 7 arising from fees payable to a chapter 7 trustee
and professional advisors to the trustee, (b) the erosion in value of assets in
a chapter 7 case in the context of the rapid liquidation required under chapter
7 and the "forced sale" atmosphere that would prevail, (c) the adverse effects
on the Debtors' businesses as a result of the likely departure of key employees
and the probable loss of customers, (d) the substantial increases in claims,
such as estimated contingent claims, which would be satisfied on a priority
basis or on parity with the holders of Impaired Claims and Equity Interests of
the Chapter 11 Cases, (e) the reduction of value associated with a chapter 7
trustee's operation of the Debtors' businesses, and (f) the substantial delay
in distributions to the holders of Impaired Claims and Equity Interests that
would likely ensue in a chapter 7 liquidation and (ii) the liquidation analysis
prepared by the Debtors, which is attached hereto as Exhibit C.

   The Debtors believe that any liquidation analysis is speculative, as such an
analysis necessarily is premised on assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of
which would be beyond the control of the Debtors. Thus, there can be no
assurance as to values that would actually be realized in a chapter 7
liquidation, nor can there be any assurance that a Bankruptcy Court would
accept the Debtors' conclusions or concur with such assumptions in making its
determinations under section 1129(a)(7) of the Bankruptcy Code.

   For example, the Liquidation Analysis necessarily contains an estimate of
the amount of Claims which will ultimately become Allowed Claims. This estimate
is based solely upon the Debtors' review of their books and records and the
Debtors' estimates as to additional Claims that may be filed in the Chapter 11
Cases or that would arise in the event of a conversion of the cases from
chapter 11 to chapter 7. No order or finding has been entered by the Bankruptcy
Court or any other court estimating or otherwise fixing the amount of Claims at
the projected-amounts of Allowed Claims set forth in the Liquidation Analysis.
In preparing the Liquidation Analysis, the Debtors have projected an amount of
Allowed Claims that is at the lower end of a range of reasonableness such that,
for purposes of the Liquidation Analysis, the largest possible liquidation
dividend to holders of Allowed Claims can be assessed. The estimate of the
amount of Allowed Claims set forth in the Liquidation Analysis should not be
relied on for any other purpose, including any determination of the value of
any distribution to be made on account of Allowed Claims under the Plan.

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   To the extent that Confirmation of the Plan requires the establishment of
amounts for the chapter 7 liquidation value of the Debtors, funds available to
pay Claims, and the reorganization value of the Debtors, the Bankruptcy Court
will determine those amounts at the Confirmation Hearing. Accordingly, the
annexed Liquidation Analysis is provided solely to disclose to holders the
effects of a hypothetical chapter 7 liquidation of the Debtors, subject to the
assumptions set forth therein.

D.  Valuation of the Reorganized Debtors

   In connection with certain matters relating to the Plan, the Debtors
directed Houlihan Lokey to prepare a valuation analysis of the Debtors'
business and New Securities to be issued under the Plan. The valuation analysis
was prepared by Houlihan Lokey based on the Financial Projections and financial
and market conditions prevailing as of September 30, 2002. Specifically, the
valuation was developed for purposes of assisting the Debtors in evaluating (i)
the relative recoveries of holders of Allowed Claims and Equity Interests and
(ii) whether the Plan met the "best interest test" under the Bankruptcy Code.

   In preparing its analysis, Houlihan Lokey has, among other things: (i)
reviewed certain recent publicly available financial results of the Debtors;
(ii) reviewed certain internal financial and operating data of the Debtors;
(iii) discussed with certain senior executives the current operations and
prospects of the Debtors; (iv) reviewed certain operating and financial
forecasts prepared by the Debtors, including the Financial Projections; (v)
discussed with certain senior executives of the Debtors key assumptions related
to the Financial Projections; (vi) prepared discounted cash flow analyses based
on the Financial Projections, utilizing various discount rates; (vii)
considered the market value of certain publicly-traded companies in businesses
reasonably comparable to the operating business of the Debtors; (viii)
considered certain economic and industry information relevant to the operating
business of the Debtors; and (ix) conducted such other analyses as Houlihan
Lokey deemed necessary under the circumstances.

   Houlihan Lokey assumed, without independent verification, the accuracy and
completeness of all of the financial and other information available to it from
public sources or as provided to Houlihan Lokey by the Debtors or their
representatives. Houlihan Lokey also assumed that the Financial Projections
have been reasonably prepared on a basis reflecting the Debtors' best estimates
and judgment as to future operating and financial performance. The Financial
Projections assume the Debtors will obtain adequate surety bonding capacity in
order to achieve the revenue projections forecasted in the Debtors' Financial
Projections. To the extent that the Debtors do not obtain adequate surety
bonding necessary to provide such revenues during the projected period, such
variances may have a material impact on the operating and financial forecast
and on the valuation. Houlihan Lokey did not make any independent evaluation of
the Debtors' assets, nor did Houlihan Lokey verify any of the information it
reviewed. To the extent the valuation is dependent upon the Reorganized
Debtors' achievement of the Financial Projections, the valuation must be
considered speculative.

   In addition to the foregoing, Houlihan Lokey relied upon the following
assumptions with respect to the valuation of the Debtors:

  .   the Effective Date occurs on or about March 31, 2003;

  .   general financial and market conditions as of the date of this Disclosure
      Statement do not differ materially from those conditions prevailing as of
      September 30, 2002;

  .   the Debtors will have adequate surety bonding capacity;

  .   the Debtors will have access to availability of $100 million under each
      of the DIP Facility and Exit Facility;

  .   the pro forma debt levels of the Debtors estimated as of March 31, 2003
      on a post-Restructuring basis, would be $200 million of secured debt
      (assuming no prepetition letters of credit issued and outstanding under
      the Existing Credit Agreement are drawn) and $607,000 of other secured
      obligations; and

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  .   asset sales are achieved in accordance with the schedule of timing and
      magnitude of proceeds provided by Encompass management.

   As a result of such analyses, review, discussions, considerations and
assumptions, Houlihan Lokey presented to the Debtors estimates that the total
enterprise value ("TEV") of the Debtors on a post-Restructuring basis is in a
range of approximately $600 million to $650 million with a mid-point value of
$625 million. Houlihan Lokey reduced such mid-point TEV estimate by the
estimated pro forma debt levels of the Debtors as of September 30, 2002
(approximately $200 million) to calculate the implied reorganized equity value
of Encompass. Houlihan Lokey estimates that the Debtors' mid-point total
reorganized equity value will equal $425 million. Based on the foregoing
valuations and the distribution of the New Common Stock described herein,
holders of Allowed Class 6 Claims will receive approximately 90.3% recovery
(assuming no prepetition letters of credit issued and outstanding under the
Existing Credit Agreement are drawn) on their Allowed Claims on an aggregate
basis (including the indebtedness under the New Term Loan and the New Common
Stock) and holders of Allowed Class 7 Claims will receive approximately 24.3%
recovery on their Allowed Claims. These estimated ranges of values represent a
hypothetical value that reflects the estimated intrinsic value of the Debtors
derived through the application of various valuation methodologies. The equity
value ascribed in the analysis does not purport to be an estimate of the
post-Restructuring market trading value. Such trading value may be materially
different from the implied equity value ranges associated with Houlihan Lokey's
valuation analysis. Houlihan Lokey's estimate is based on economic, market,
financial and other conditions as they exist on, and on the information made
available to Houlihan Lokey as of, September 30, 2002. It should be understood
that, although subsequent developments may affect Houlihan Lokey's conclusions,
Houlihan Lokey does not have any obligation to update, revise or reaffirm its
valuation estimate.

   The summary set forth above does not purport to be a complete description of
the analyses performed by Houlihan Lokey. The preparation of valuation
estimates involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods in
the particular circumstances and, therefore, such an estimate is not readily
susceptible to summary description. The value of an operating business is
subject to uncertainties and contingencies that are difficult to predict and
will fluctuate with changes in factors affecting the financial conditions and
prospects of such a business. As a result, the estimate of implied equity value
set forth herein is not necessarily indicative of actual outcomes, which may be
significantly more or less favorable than those set forth herein. In addition,
estimates of implied equity value do not purport to be appraisals, nor do they
necessarily reflect the values that might be realized if assets were sold. The
estimates prepared by Houlihan Lokey assume that the Reorganized Debtors will
continue as the owners and operators of their businesses and assets (except
such assets as are targeted to be sold in the asset dispositions). Depending on
the results of the Debtors' operations or changes in the financial markets,
actual total enterprise value may differ from Houlihan Lokey's valuation
analysis disclosed herein.

   In addition, the valuation of New Securities is subject to additional
uncertainties and contingencies, all of which are difficult to predict. Actual
market prices of such securities at issuance will depend upon, among other
things, prevailing interest rates, conditions in the financial markets, the
anticipated initial securities holdings of prepetition creditors, some of which
may prefer to liquidate their investment rather than hold it on a long-term
basis, and other factors that generally influence the prices of securities.
Actual market prices of such securities also may be affected by other factors
not possible to predict. Accordingly, the implied equity value estimated by
Houlihan Lokey does not necessarily reflect, and should not be construed as
reflecting, values that will be attained in the public or private markets.
Houlihan Lokey does not make any representation or warranty as to the fairness
of the terms of the Plan.

   THE FOREGOING VALUATION IS BASED UPON A NUMBER OF ESTIMATES AND ASSUMPTIONS
WHICH ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES
BEYOND THE CONTROL OF THE DEBTORS OR THE REORGANIZED DEBTORS. ACCORDINGLY,
THERE CAN BE NO ASSURANCE THAT THE RANGES REFLECTED IN THE VALUATION WOULD BE
REALIZED IF THE PLAN WERE TO BECOME EFFECTIVE, AND ACTUAL RESULTS COULD VARY
MATERIALLY FROM THOSE SHOWN HERE.

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        IX.  ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN

   The Debtors believe that the Plan affords holders of Eligible Claims the
potential for the greatest realization on the Debtors' assets and, therefore,
is in the best interests of such holders. If, however, the Requisite
Acceptances are not received, or the Requisite Acceptances are received, the
Chapter 11 Cases are commenced, and the Plan is not subsequently confirmed and
consummated, the theoretical alternatives include: (i) commencement of
"non-prepackaged" or "traditional" Chapter 11 Cases, (ii) formulation of an
alternative plan or plans of reorganization, and (iii) liquidation of the
Debtors under chapter 7 or 11 of the Bankruptcy Code.

A.  Commencement of a "Traditional" Chapter 11 Case

   If the Requisite Acceptances are not received, the Debtors nevertheless
could commence "traditional" chapter 11 cases, in which circumstance they could
continue to operate their businesses and manage their properties as
debtors-in-possession, but would become subject to the numerous restrictions
imposed on debtors-in-possession by the Bankruptcy Code. The Debtors could have
difficulty sustaining operations in the face of the high costs, erosion of
customer confidence, loss of key employees, difficulty in obtaining performance
bonds and general liquidity difficulties that could well result if they
remained chapter 11 debtors-in-possession for a protracted length of time.
Ultimately, the Debtors (or other parties in interest) could propose another
plan or liquidate the Debtors under chapter 7 or chapter 11 of the Bankruptcy
Code.

B.  Alternative Plan(s)

   If the Requisite Acceptances are not received or if the Plan is not
confirmed, the Debtors (or, if the Debtors' exclusive periods in which to file
and solicit acceptances of a reorganization plan have expired, any other
party-in-interest) could attempt to formulate and propose a different plan or
plans of reorganization. Such a plan or plans might involve either a
reorganization and continuation of the Debtors' businesses or an orderly
liquidation of assets.

   With respect to an alternative plan, the Debtors have explored various other
alternatives in connection with the extensive negotiation process involved in
the formulation and development of the Plan. The Debtors believe that the Plan,
as described herein, enables holders of Eligible Claims to realize the greatest
possible value under the circumstances, and that, as compared to any
alternative plan of reorganization, the Plan has the greatest chance to be
confirmed and consummated.

C.  Liquidation under Chapter 7 or Chapter 11

   If no plan is confirmed, the Chapter 11 Cases may be converted to cases
under chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be
elected or appointed to liquidate the Debtors' assets for distribution to
creditors in accordance with the priorities by the Bankruptcy Code. It is
impossible to predict precisely how the proceeds of the liquidation would be
distributed to the respective holders of Claims against or Equity Interests in
the Debtors.

   The Debtors believe that in liquidation under chapter 7, before creditors
received any distribution, additional administrative expenses involved in the
appointment of a trustee or trustees and attorneys, accountants and other
Professionals to assist such trustees would cause a substantial diminution in
the value of the Debtors' assets. The assets available for distribution to
creditors would be reduced by such additional expenses and by Claims, some of
which would be entitled to priority, which would arise by reason of the
liquidation and from the rejection of leases and other executory contracts in
connection with the cessation of operations and the failure to realize the
greater going concern value of the Debtors' assets.

   The Debtors could also be liquidated pursuant to the provisions of chapter
11 plans of reorganization. In a liquidation under chapter 11, the Debtors'
assets could be sold in an orderly fashion over a more extended period

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of time than in a liquidation under chapter 7. Thus, a chapter 11 liquidation
might result in larger recoveries than in a chapter 7 liquidation, but the
delay in distributions could result in lower present values received and higher
administrative costs. Because a trustee is not required in a chapter 11 case,
expenses for professional fees could be lower than in a chapter 7 case, in
which a trustee must be appointed. Any distribution to the holders of Claims
and Equity Interests under a chapter 11 liquidation plan probably would be
delayed substantially.

   Although preferable to a chapter 7 liquidation, the Debtors believe that any
alternative liquidation under chapter 11 is a much less attractive alternative
to creditors than the Plan because of the greater return the Debtors anticipate
will be provided by the Plan. THE DEBTORS BELIEVE THAT THE PLAN AFFORDS
SUBSTANTIALLY GREATER BENEFITS TO HOLDERS OF ELIGIBLE CLAIMS THAN WOULD ANY
OTHER REASONABLY CONFIRMABLE REORGANIZATION PLAN OR LIQUIDATION UNDER ANY
CHAPTER OF THE BANKRUPTCY CODE.

   The Liquidation Analysis, prepared by the Debtors with their financial
advisors, is premised upon a liquidation in a chapter 7 case and is attached
hereto as Exhibit C. In the analysis, the Debtors have taken into account the
nature, status, and underlying value of the assets of the Debtors, the ultimate
realizable value of such assets, and the extent to which the assets are subject
to liens and security interests.

   Based on the Debtors' experience in seeking investors and potential
purchasers during the past year, the Debtors have no knowledge of a buyer
ready, willing, and able to purchase the Debtors as a whole or even to purchase
significant portions of the Debtors as ongoing businesses in a time frame that
would be realistic under their current liquidity situation. Therefore, the
likely form of any liquidation would be the sale of individual assets. Based on
this analysis, it is likely that a liquidation of the Debtors' assets would
produce less value for distribution to creditors than that recoverable in each
instance under the Plan. In the opinion of the Debtors, the recoveries
projected to be available in liquidation are not likely to afford holders of
Claims as great a realization potential as does the Plan.

                     X.  CERTAIN FACTORS TO BE CONSIDERED

   Holders of Eligible Claims should consider the risks and uncertainties below
in making their decisions regarding whether to vote to accept the Plan. The
risks and uncertainties described below are not the only ones the Debtors face.
Additional risks and uncertainties not presently known to the Debtors or that
they currently deem immaterial may also harm their businesses.

A.  Bankruptcy Proceedings and Debtors' Circumstances

   While the Debtors would hope that a chapter 11 filing solely for the purpose
of implementing an agreed-upon restructuring would be of short duration and
would not be seriously disruptive to their business, the Debtors cannot be
certain that this would be the case. Although the Plan is designed to minimize
the length of the Chapter 11 Cases, it is impossible to predict with certainty
the amount of time that the Debtors might spend in chapter 11 or to assure that
the Plan will be confirmed.

   Although Encompass has presented an outline of the material terms of the
Plan to certain representatives of the Senior Lenders, Encompass has not
engaged in any substantive negotiations with any of its creditors or their
representatives with respect to the Plan. None of Encompass' creditors have
indicated that they intend to support or vote for the Plan, or any other
possible plan to reorganize the Debtors.

   It is a condition to the Confirmation of the Plan that the Debtors secure a
DIP Facility in an amount of up to $100 million. Although Encompass has
informed certain representatives of the Senior Lenders that Encompass will
require the DIP Facility during the pendency of the Chapter 11 Cases, Encompass
has not engaged in any substantive negotiations with the Senior Lenders or any
other potential financing source with respect to the DIP

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Facility, and Encompass has received no commitments for the DIP Facility from
any potential lender. The Debtors cannot assure that they will be able to
successfully negotiate a DIP Facility, or that, if they do, such DIP Facility
will be on the terms currently anticipated by the Debtors or otherwise on terms
favorable to the Debtors. The Debtors anticipate that, if they are unsuccessful
in obtaining a satisfactory DIP Facility, they may be unable to continue
operating their businesses as part of the Chapter 11 Cases and may have to seek
to liquidate under Bankruptcy Court supervision.

   It is a condition to the Confirmation of the Plan that the Debtors secure an
Exit Facility in the amount of up to $100 million. Although Encompass has
informed certain representatives of the Senior Lenders that Encompass will
require the Exit Facility upon consummation of the Plan, Encompass has not
engaged in any substantive negotiations with the Senior Lenders or any other
potential financing source with respect to the Exit Facility, and Encompass has
received no commitments, and no indications of interest, for the Exit Facility
from any potential lender. The Debtors cannot assure that they will be able to
successfully negotiate an Exit Facility, or that, if they do, such Exit
Facility will be on the terms currently anticipated by the Debtors or otherwise
on terms favorable to the Debtors.

   In addition to the Debtors' lack of commitments for a DIP Facility and an
Exit Facility, the Debtors have not secured commitments from their surety
providers to provide bid and performance bonds after the Petition Date. The
Debtors require such bid and performance bonds to continue performing under
existing business contracts and to obtain new business engagements. See Section
X.B.7. "CERTAIN FACTORS TO BE CONSIDERED - BUSINESS AND INDUSTRY RISKS -
PERFORMANCE BONDING REQUIREMENTS." Although the Debtors have commenced
discussions with their surety providers concerning the provision of bid and
performance bonds after the Petition Date, there can be no assurance that the
Debtors will be able to come to agreement with their surety providers on terms
for the provision of such bonds or whether such terms will be satisfactory to
the Debtors, or whether they will be able to secure surety bonding capacity
adequate to achieve their financial projections. If the Debtors are unable to
successfully negotiate satisfactory arrangements with their surety providers
for the continued provision of bid and performance bonds, the Debtors would
likely be unable to continue operating their businesses as part of the Chapter
11 Cases and may have to seek to liquidate under Bankruptcy Court supervision.

   Even if the Plan is confirmed on a timely basis, a prolonged Chapter 11
proceeding could have an adverse effect on the Debtors' business. Among other
things, it is possible that a protracted bankruptcy proceeding could adversely
affect (i) Encompass' or its Subsidiaries' relationships with their key
suppliers, (ii) Encompass' or its Subsidiaries' relationships with their
customers, particularly those that depend on Encompass or any Subsidiary as
primary service provider, (iii) Encompass' or any of the Subsidiaries' ability
to secure bid and performance bonds, (iv) Encompass' or any of the
Subsidiaries' relationships with their employees, and (v) Encompass' ability to
list or quote the New Securities on a national securities exchange, or United
States automated interdealer quotation system.

   A chapter 11 proceeding will also result in the Debtors' incurrence of
substantial Administrative Expense Claims and Professional Fee Claims and will
require the Debtors' management to devote substantial time and energy which
could otherwise be directed at improving the operation of the Debtors'
businesses and implementing a strategic business plan.

   The extent to which a chapter 11 proceeding disrupts the Debtors' business
will likely be directly related to the length of time it takes to complete the
proceeding. If the Debtors are unable to obtain Confirmation of the Plan on a
timely basis because of a challenge to the Plan or a failure to satisfy the
conditions to the Plan, they may be forced to operate in chapter 11 for an
extended period while they try to develop an alternative reorganization plan
that can be confirmed. Such a circumstance would increase both the probability
and the magnitude of the adverse effects described above.

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B.  Business and Industry Risks

1.  Debt and Cash Flow

   Upon Confirmation and effectiveness of the Plan, Reorganized Encompass and
the Reorganized Subsidiaries will continue to have substantial outstanding
indebtedness. On the Effective Date, the Reorganized Debtors' total outstanding
debt obligations will be approximately $200 million (assuming no prepetition
letters of credit issued and outstanding under the Existing Credit Agreement
are drawn). In addition, Encompass anticipates it will have up to approximately
$100 million in additional borrowing capacity under the Exit Facility. See
Section IV.I.7--"SUMMARY OF THE PLAN--MEANS FOR IMPLEMENTATION OF THE PLAN--NEW
SENIOR CREDIT AGREEMENT." This substantial (albeit significantly reduced)
leverage may have important consequences for the Debtors, including (i) making
it difficult for the Debtors to satisfy their other financial obligations, (ii)
making it difficult to obtain surety bonding capacity, (iii) placing the
Debtors at a competitive disadvantage compared to their competitors that have
less debt, (iv) making it difficult for the Debtors to obtain additional
financing in the future for working capital, capital expenditures and other
purposes, (v) increasing the Debtors' vulnerability to adverse economic and
industry conditions, and (vi) increasing the Debtors' vulnerability to interest
rate increases because borrowings under the New Senior Credit Agreement are
primarily at variable interest rates.

   Assuming consummation of the Plan, the Debtors' ability to meet their
deleveraged debt service obligations will depend on the Debtors' future
operating performance. The Debtors' future operating performance may depend on
their ability to maintain their existing customer base, expand service
offerings, secure bid and performance bonds and attract new customers. In
addition, the Debtors' future operating performance will depend on economic,
competitive, regulatory, legislative and other factors affecting their business
that are beyond their control.

   The Debtors, on a consolidated basis, incurred a net loss of approximately
$51.1 million for the year ended December 31, 2001 and may incur significant
losses in the foreseeable future.

2.  Facilities Services Industry Competition

   The facilities services industry is very competitive with few barriers to
entry. It is served by small, owner-operated private companies, by larger
companies operating nationwide, including unregulated affiliates of electric
and gas public utilities and heating, ventilating and air conditioning
equipment manufacturers, and by property management companies and real estate
investment trusts that offer facilities services for the properties they own or
manage. Some of the smaller competitors have lower overhead cost structures and
may be able to provide their services at lower rates than the Debtors can. Some
of the larger competitors have greater financial resources, name recognition or
other competitive advantages. Consequently, the Reorganized Debtors may
encounter significant competition in their efforts to achieve their profit
objective.

3.  Cyclical Market Conditions

   Continued depressed conditions in the construction industry, as well as
future downturns in the construction industry and the overall economy, could
further reduce the Debtors' level of business activity and adversely impact
their profitability, the cash the Debtors have available for debt service and
the Debtors' ability to meet the financial covenants contained in the New
Senior Credit Agreement. A substantial portion of the Debtors' business
involves installation of mechanical and electrical systems in newly constructed
commercial, industrial and residential facilities. The level of new commercial
and industrial installation services is cyclical and affected by changes in
economic conditions and interest rates in North America and, to a lesser
extent, the global economy. The Debtors' revenues from new installation
services in the residential market are dependent upon the level of housing
starts in the areas in which the Debtors operate. The housing industry is
cyclical and the Debtors' revenues from new residential installation will be
affected by the factors that affect the housing industry. These factors include
changes in employment and income levels, the availability and cost of financing
for new homebuyers and general economic conditions. General downturns in
housing starts or in new

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commercial and industrial construction in the areas in which the Debtors
operate could reduce the Debtors' level of business activity and adversely
impact their profitability and the cash they have available for debt service of
the indebtedness under the New Senior Credit Agreement, as well as other
indebtedness.

   The U.S. Department of Commerce construction reports indicate that private
non-residential construction has declined approximately 20% (seasonally
adjusted annual rate) from June 2001 to June 2002, with the largest declines in
the industrial, office building and hotel sectors. Overcapacity in the industry
has resulted in a very competitive pricing environment in many markets,
resulting in downward pressure on profit margins. The Debtors' profitability
and profit margins have declined accordingly. The Debtors' operating income
margins, calculated on a consolidated basis, for the years ended December 31,
2000 and 2001, and for the six-month period ended June 30, 2002 were 5.2%, 2.3%
and 1.8%, respectively. The Debtors' backlog was approximately $1.4 billion at
June 30, 2002, compared to $1.6 billion at December 31, 2001 and June 30, 2001.
The estimated gross profit margin in backlog at June 30, 2002 was approximately
15 basis points lower than at December 31, 2001. The Debtors cannot predict
with certainty when this downward trend in their gross profit margin will
stabilize.

4.  Dependence Upon Key Personnel and Skilled Labor Force

   The Debtors depend on their executive officers, senior management and key
operations managers. The Debtors only maintain key-man insurance on certain
employees who may be deemed to be essential to the operation of their
businesses. Nevertheless the Debtors' business could be adversely affected if
such key personnel do not continue in their roles and the Debtors are unable to
attract and retain qualified replacements.

   Shortages of a skilled labor force, union disruptions or unfavorable union
negotiations may adversely affect the Debtors' profitability and their planned
internal growth. The Debtors' ability to provide high-quality mechanical and
electrical services on a timely basis requires an adequate supply of skilled
technicians. Many companies in the Debtors' industry are currently experiencing
shortages of qualified technicians. A shortage of skilled labor may require the
Debtors to use less-skilled labor which could adversely affect the Debtors'
ability to perform work.

   The Debtors intend to seek Bankruptcy Court approval of certain employee
programs designed to retain and provide incentives of their key employees, but
there is no guarantee that such programs will be if approved or, if approved,
will have the intended effect. See Section I.C.3 "INTRODUCTION AND EXECUTIVE
SUMMARY--OTHER ELEMENTS OF THE PLAN--EMPLOYEE INCENTIVE PROGRAMS."

   Although fewer than 15% of the Debtors' employees are members of unions,
many sectors of the facilities services industry involve unionized employees.
Expanded unionization of the Debtors' workforce could increase their costs.
Union activity may be disruptive to the Debtors' business and may increase
their costs. To the extent any of the Debtors' union contracts expire, they may
be required to renegotiate union contracts in an environment of increasing wage
rates. The Debtors may not be able to renegotiate union contracts on terms
favorable to the Debtors or without experiencing a work stoppage which may
affect their profitability.

5.  Nature of Industry Contracts

   Many of the Debtors' customer contracts have termination clauses permitting
the customer to cancel the contract on less than 90 days' notice. The Debtors
may not be able to keep customers from exercising their rights to terminate
their contracts prior to the contract expiration date. Early contract
terminations reduce the level of the Debtors' ongoing business activity and
could adversely impact their profitability and the cash the Debtors have
available for debt service.

   A substantial portion of the Debtors' mechanical and electrical installation
contracts are "fixed price" contracts. The terms of these contracts require the
Debtors to guarantee the price of the services they provide and

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assume the risk that the Debtors' costs to perform the services and provide the
materials will be greater than anticipated. The Debtors' profitability in this
market is therefore dependent on their ability to accurately predict the costs
associated with their services. These costs may be affected by a variety of
factors, some of which may be beyond the Debtors' control. If the Debtors are
unable to accurately predict the costs of fixed price contracts, certain
projects could have lower profit margins than anticipated or even generate
losses as has occurred in the recent past. In either event, the level of the
Debtors' earnings may decline.

   The construction business has always been subject to unusual risks,
including unforeseen conditions encountered during construction, the impact of
inflation upon costs and financing requirements of clients and changes in
political and legal circumstances, particularly since contracts for major
projects are performed over extended periods of time. Other risks include the
failure of third party project participants, including joint venture partners
and subcontractors, to obtain required permits or to perform essential
functions on a timely basis, the failure of local governing authorities to take
certain necessary actions, opposition by community groups in the locality of a
project or by other interested third parties to the project's development, and
the failure to obtain adequate financing for the project. In respect of the
Debtors' fixed price contracts, all of these risks expose the Debtors to
uncertainties in the performance of their contracts.

6.  Reliance Upon Depressed Industry Sectors

   Included in the Debtors' customer base are a number of companies involved in
the telecommunications industry, including fiber-optic network companies,
wireless phone companies and high-speed Internet providers. The Debtors
estimate that, during the years ended December 31, 1999, 2000 and 2001 and the
six months ended June 30, 2002, they generated revenues from companies involved
in the telecommunications industry approximating $130 million, $480 million,
$320 million and $50 million, respectively, representing approximately 7%, 12%,
8% and 3%, respectively, of the Debtors' total consolidated revenues during the
corresponding periods. The Debtors estimate that their backlog from companies
in the telecommunications industry at June 30, 2002 was approximately $23
million, or less than 2% of their total backlog.

   Since early 2001 many companies in the telecommunications sector, including
some of the Debtors' customers, have experienced a dramatic reduction in the
amount of new capital available to them, upon which certain of them are reliant
to successfully achieve their business plans. Consequently, the Debtors have
experienced reduced revenue and slower payment from certain customers, several
of which have filed for protection under chapter 11 of the U.S. Bankruptcy Code.

   As previously indicated, as of June 30, 2002, revenue from companies
involved in the telecommunications industry is down from an average monthly
amount of approximately $40.0 million in 2000 and $26.7 million in 2001 to
approximately $8.3 million in 2002, and the Debtors may continue to experience
a reduction in revenue from these customers as they continue to cut costs or
file for bankruptcy.

7.  Performance Bonding Requirements

   The Debtors' inability to secure bid and performance bonds may affect their
ability to obtain future construction contracts and thus reduce the Debtors'
cash flow and impair their ability to comply with the terms of the DIP Facility
or the New Senior Credit Agreement. Particularly in connection with larger
construction contracts, the Debtors are often required to post bid or
performance bonds issued by a financial institution known as a surety. The
surety industry has become an unsettled and volatile market in recent months,
in the aftermath of certain notable corporate bankruptcies with significant
surety exposure, other recent loss exposures and other factors. Collectively,
these events have caused certain reinsurers and sureties to reevaluate their
committed levels of underwriting and required returns. The ultimate impact of
these developments, if any, on the surety market in general, or the Debtors
specifically, cannot be determined at this time. Additionally, the Debtors'
ability to obtain adequate bonding has been severely impacted by the Debtors'
poor financial position and lack of liquidity. If the Debtors are unable to
arrange sufficient bonding capacity to satisfy their future bonding
requirements, the

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Debtors may be precluded from bidding on and securing larger construction
projects, including those with governmental entities. Even if the Debtors are
able to obtain sufficient bonding capacity, they will likely be required to put
up a significant amount of cash collateral. The Debtors' inability to secure
these types of contracts could have a material adverse effect on the level of
cash generated by their operations. Moreover, the Debtors may be required to
collaborate or partner with competitors to obtain adequate bonding capacity
with which to bid on new projects. Such collaborations could mean that the
Debtors would be forced to surrender some benefits from new bidding
opportunities to their competitors at a cost to the Debtors' operating
performance.

   There can be no assurance that the Debtors will be able to come to agreement
with their surety providers on terms for the provision of such bonds or whether
such terms will be satisfactory to the Debtors, or whether they will be able to
secure surety bonding capacity adequate to achieve their financial projections.

8.  Unfavorable Weather or Seasonal Variations

   The Debtors' business tends to be affected adversely by moderate weather
patterns. Comparatively warm winters and cool summers reduce the demand for the
Debtors' maintenance, repair and replacement services. Additionally, the
Debtors' new installation business is affected adversely by extremely cold
weather and large amounts of rain. Prolonged unfavorable weather conditions or
seasonal variations may cause unpredictable fluctuations in the Debtors'
operating results.

9.  Integration of Acquired Businesses

   The Debtors' future success depends in part on Reorganized Encompass'
ability to integrate the businesses it has acquired into one enterprise with a
common operating plan. Most of these acquired businesses have recently changed,
or in certain cases, are in the process of changing their past processes and
systems, such as accounting, employment, purchasing, sales, estimating and
project management. The Debtors may not be successful in efforts to integrate
acquired companies or monitor their performance. If the Debtors are unable to
do so, or if the Debtors experience delays or unusual expenses in doing so,
their operating costs could increase and their profitability could decrease.

C.  Transactions with Affiliates

1.  Directors' Affiliation with Apollo

   Michael Gross, Andrew Africk and Scott Kleinman, each members of Encompass'
Board of Directors, are principals of Apollo and have substantial economic
interests therein.

2.  Acquisition of Encompass Indebtedness and Equity Interests

   Encompass believes that certain Senior Lenders may hold a sufficient amount
of Existing Credit Agreement Claims that are, and will be, able to exert
significant influence over the Plan approval process and the governance of the
Reorganized Debtors following consummation of the Plan.

3.  Management Transactions

   Mr. Ivey is an officer and stockholder of two corporations that lease real
property and an airplane to Encompass Mechanical Services Southeast, Inc. The
leases provide for lease payments in the aggregate amount of $8,330 per month,
or $99,960 annually. In addition, Encompass pays a fee based upon the use of
the airplane. In 2001, Encompass paid $66,560 in usage fees for the airplane.

   Encompass Mechanical Services Southeast, Inc. also leases a facility from J.
Marlin Ivey, father of Mr. Ivey, for $18,429 per month, or $221,148 annually.

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   The foregoing leases, other than the airplane lease (which will be rejected
by the Debtors), are expected to be assumed by the Debtors pursuant to the Plan.

D.  Failure to Receive Requisite Acceptances

   If the Requisite Acceptances are received, the Debtors intend to file
voluntary petitions for relief under chapter 11 of the Bankruptcy Code and to
seek, as promptly thereafter as practicable, Confirmation of the Plan. If the
Requisite Acceptances are not received, the Debtors may nevertheless file
petitions for relief under chapter 11 and seek confirmation of a modified plan
notwithstanding the dissent of certain Classes of Claims or Equity Interests.
The Bankruptcy Court may confirm a modified plan pursuant to the "cramdown"
provisions of the Bankruptcy Code which allow the Bankruptcy Court to confirm a
plan that has been rejected by an Impaired class of Claims or Equity Interests
if it determines that the rejecting class is being treated appropriately given
the relative priority of the Claims or Equity Interests in such class. In order
to confirm a plan against a dissenting class, the Bankruptcy Court must also
find that at least one Impaired class has accepted the plan, with such
acceptance being determined without including the acceptance of any "insider"
in such class.

   There can be no assurance that the terms of any such alternative
restructuring arrangement or plan would be similar to or as favorable to the
holders of Impaired Claims and Equity Interests as those proposed in the Plan.

E.  Failure to Confirm the Plan

   Even if the Requisite Acceptances are received and, with respect to those
Classes deemed to have rejected the Plan, the requirements for "cramdown" are
met, the Bankruptcy Court, which as a court of equity may exercise substantial
discretion, may choose not to confirm the Plan. Section 1129 of the Bankruptcy
Code requires, among other things, a showing that Confirmation of the Plan will
not be followed by liquidation or the need for further financial reorganization
of the Debtors (see Section VIII.A--"FEASIBILITY OF THE PLAN AND THE BEST
INTERESTS OF CREDITORS TEST--FEASIBILITY OF THE PLAN") and that the value of
distributions to dissenting holders of Claims and Equity Interests may not be
less than the value such holders would receive if the Debtors were liquidated
under chapter 7 of the Bankruptcy Code. See Section VIII.B--"FEASIBILITY OF THE
PLAN AND THE BEST INTERESTS OF CREDITORS TEST--BEST INTERESTS TEST." Although
the Debtors believe that the Plan will meet such tests, there can be no
assurance that the Bankruptcy Court will reach the same conclusion.

   Additionally, the Solicitation must comply with the requirements of section
1126(b) of the Bankruptcy Code and the applicable Federal Rules of Bankruptcy
Procedure with respect to the length of the Solicitation period, compliance
with applicable non-bankruptcy law, if any, and in the absence of applicable
non-bankruptcy law, the adequacy of the information contained in this
Disclosure Statement (as defined in section 1125(a)(1) of the Bankruptcy Code).
If the Bankruptcy Court were to find that the Solicitation did not so comply,
all acceptances received pursuant to the Solicitation could be deemed invalid
and the Debtors could be forced to resolicit acceptances under section 1125(b)
of the Bankruptcy Code, in which case Confirmation of the Plan could be delayed
and possibly jeopardized. The Debtors believe that the Solicitation complies
with the requirements of section 1126(b) of the Bankruptcy Code, that duly
executed Ballots will be in compliance with applicable provisions of the
Bankruptcy Code, and that if the Requisite Acceptances are received, the Plan
should be confirmed by the Bankruptcy Court.

   The Debtors' ability to propose and confirm an alternative reorganization
plan is uncertain. Confirmation of any alternative reorganization plan under
chapter 11 of the Bankruptcy Code would likely take significantly more time and
result in delays in the ultimate distributions to the holders of Eligible
Claims. If confirmation of an alternative plan of reorganization was not
possible, the Debtors would likely be liquidated. Based upon the Debtors'
analysis, liquidation under chapter 7 would result in distributions of reduced
value to holders of Eligible Claims. See Section VIII--"FEASIBILITY OF THE PLAN
AND THE BEST INTERESTS OF CREDITORS TEST." In a liquidation under chapter 11,
the Debtors' assets could be sold in an orderly fashion over a more

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extended period of time than in a liquidation under chapter 7. However, it is
unlikely that any liquidation would realize the full going concern value of
their businesses. Instead, the Debtors' assets would be sold separately.
Consequently, the Debtors believe that a liquidation under chapter 11 would
also result in smaller distributions, if any, to the holders of Eligible Claims
than those provided for in the Plan.

F.  Failure to Consummate the Plan

   Consummation of the Plan is conditioned upon, among other things, entry of
the Confirmation Order and an order (which may be the Confirmation Order)
approving the assumption and assignment of all executory contracts and
unexpired leases (other than those specifically rejected by the Debtors) to the
Reorganized Debtors or their assignees. As of the date of this Disclosure
Statement, there can be no assurance that any or all of the foregoing
conditions will be met (or waived) or that the other conditions to
consummation, if any, will be satisfied. Accordingly, even if the Plan is
confirmed by the Bankruptcy Court, there can be no assurance that the Plan will
be consummated and the Restructuring completed.

G.  New Stock Risks

   Encompass does not anticipate that, following consummation of the
Restructuring, the Reorganized Debtors will have any class of New Common Stock
listed on a national securities exchange or the NASDAQ Stock Market. The
trading price of any class of New Common Stock in any market, if any, will be
affected by numerous factors. These include the risk factors set forth in this
Disclosure Statement, as well as prevailing economic and financial trends and
conditions in the public securities markets. The trading price, if any, of New
Common Stock may be affected by developments which may not have any direct
relationship with the Reorganized Debtors' business or long-term prospects.

   Reorganized Encompass will continue to comply with the reporting
requirements of sections 13 or 15(d) of the Exchange Act.

   Following consummation of the Restructuring, the ownership of the New Stock
will be significantly more concentrated than was the ownership of the Existing
Encompass Stock prior to the Restructuring. Assuming that the current Senior
Lenders and holders of Senior Subordinated Notes do not significantly change
prior to the consummation of the Restructuring, Reorganized Encompass may be
controlled by certain Senior Lenders who may seek to influence the direction of
Reorganized Encompass and may have the ability to control its management,
policies and financing decisions, to elect a majority of the members of its
board and to control the vote on all matters coming before its holders of New
Common Stock.

   Reorganized Encompass does not anticipate that any dividends will be paid
with respect to the New Common Stock in the foreseeable future.

H.  Claims Estimations

   There can be no assurance that the estimated amount of Claims set forth
herein are correct and the actual Allowed amounts of Claims may differ from
estimates. The estimated amounts are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties materialize
or should underlying assumptions prove incorrect, the actual Allowed amounts of
Claims may vary from those estimated therein.

I.  Certain Tax Considerations

   THERE ARE A NUMBER OF MATERIAL INCOME TAX CONSIDERATIONS, RISKS AND
UNCERTAINTIES ASSOCIATED WITH CONSUMMATION OF THE PLAN. INTERESTED PARTIES
SHOULD READ CAREFULLY THE DISCUSSION SET FORTH IN SECTION VII--"CERTAIN FEDERAL

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INCOME TAX CONSEQUENCES OF THE PLAN" FOR A DISCUSSION OF CERTAIN FEDERAL INCOME
TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED UNDER THE PLAN BOTH TO
ENCOMPASS AND TO HOLDERS OF CLAIMS THAT ARE IMPAIRED UNDER THE PLAN.

J.  Inherent Uncertainty of Financial Projections

   The Financial Projections cover the Debtors' operations through the period
ending December 31, 2007. These Financial Projections are based on numerous
assumptions that are an integral part of the Financial Projections, including
Confirmation and consummation of the Plan in accordance with its terms and on
an accelerated time frame, the anticipated future performance of the
Reorganized Debtors, industry performance, general business and economic
conditions, competition, adequate financing, absence of material contingent or
unliquidated litigation or indemnity claims, and other matters, many of which
are beyond the control of the Reorganized Debtors and some or all of which may
not materialize. In addition, unanticipated events and circumstances occurring
subsequent to the date of this Disclosure Statement may affect the actual
financial results of Reorganized Debtors' operations. These variations may be
material and may adversely affect the ability of the Reorganized Debtors to pay
the obligations owing to certain holders of Claims entitled to distributions
under the Plan and other post-Effective Date indebtedness. Because the actual
results achieved throughout the periods covered by the Financial Projections
may vary from the projected results, the Financial Projections should not be
relied upon as a guaranty, representation or other assurance of the actual
results that will occur.

   The Financial Projections assume that the Debtors will be able to achieve a
successful arrangement with their surety providers for the continued provision
of bid and performance bonds. There can be no assurance that the Debtors will
be able to come to agreement with their surety providers on terms for the
provision of such bonds or whether such terms will be satisfactory to the
Debtors, or whether they will be able to secure surety bonding capacity
adequate to achieve their financial projections. Even if the Debtors are able
to obtain adequate bonding capacity, they will likely be required to secure
such bonds with a significant amount of cash collateral.

                   XI.  THE SOLICITATION; VOTING PROCEDURES

A.  Voting Deadline

   The period during which Ballots with respect to the Plan will be accepted by
the Debtors (and may be withdrawn or revoked unless the Bankruptcy Court issues
an order to the contrary) will terminate on the Voting Deadline. Except to the
extent the Debtors so determine or as permitted by the Bankruptcy Court,
Ballots that are received after the Voting Deadline will not be counted or
otherwise used by the Debtors in connection with the Debtors' request for
Confirmation of the Plan (or any permitted modification thereof).

   The Debtors reserve the absolute right, at any time or from time to time, to
extend, by oral or written notice to the Solicitation Agent, the period of time
(on a daily basis, if necessary) during which Ballots will be accepted for any
reason including determining whether or not the Requisite Acceptances have been
received, by making a public announcement of such extension no later than 8:00
a.m., Eastern time, on the first Business Day next succeeding the previously
announced Voting Deadline. Without limiting the manner in which the Debtors may
choose to make any public announcement, the Debtors will not have any
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by issuing a news release through the Dow Jones News
Service. There can be no assurance that the Debtors will exercise their right
to extend the Solicitation period for the receipt of Ballots.

B.  Voting Procedures

   Under the Bankruptcy Code, for purposes of determining whether the Requisite
Acceptances have been received, only holders of Impaired Claims who actually
vote will be counted. The failure of a holder to deliver a

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duly executed Ballot will be deemed to constitute an abstention by such holder
with respect to voting on the Plan and such abstentions will not be counted as
votes for or against the Plan.

   The Debtors are providing the Solicitation Package to holders of Eligible
Claims whose names (or the names of whose Nominees) appear as of the Voting
Record Date in the records maintained by the Debtors, the securityholders list
maintained by the indenture trustee and the list of participants provided by
The Depository Trust Company. Nominees should provide copies of the
Solicitation Package to the beneficial owners of the Eligible Claims. Any
beneficial owner of Eligible Claims who has not received a Ballot should
contact his/her or its Nominee or the Solicitation Agent.

   Holders of Eligible Claims should provide all of the information requested
by the Ballots holders of Eligible Claims receive. Holders of Eligible Claims
should complete and return all Ballots that holders of Eligible Claims receive
in the return envelope provided with each such Ballot.

C.  Special Note for Holders of Senior Subordinated Notes

   For purposes of the Senior Subordinated Notes, only holders of Senior
Subordinated Notes as of the Voting Record Date are entitled to vote on the
Plan. The indenture trustee will not vote on behalf of the holders of such
notes. Holders must submit their own Ballots.

1.  Beneficial Owners

   A beneficial owner holding Senior Subordinated Notes as record holder in its
own name should vote on the Plan by completing and signing the enclosed Ballot
and returning it directly to the Solicitation Agent on or before the Voting
Deadline using the enclosed self-addressed, postage-paid envelope.

   Any beneficial owner holding Senior Subordinated Notes in "street name"
through a Nominee may vote on the Plan by one of the following two methods (as
selected by such beneficial owner's Nominee).

  .   Complete and sign the enclosed beneficial owner Ballot. Return the Ballot
      to your Nominee as promptly as possible and in sufficient time to allow
      such Nominee to process the Ballot and return it to the Solicitation
      Agent by the Voting Deadline. If no self-addressed, postage-paid envelope
      was enclosed for this purpose, contact the Solicitation Agent for
      instructions.

  .   Complete and sign the pre-validated Ballot (as described below) provided
      to you by your Nominee. Return the pre-validated Ballot to the
      Solicitation Agent by the Voting Deadline using the enclosed
      self-addressed, postage-paid envelope.

   Any Ballot returned to a Nominee by a beneficial owner will not be counted
for purposes of acceptance or rejection of the Plan until such Nominee properly
completes and delivers to the Solicitation Agent that Ballot or a Master Ballot
that reflects the vote of such beneficial owner.

2.  Nominees

   A Nominee that on the Voting Record Date is the registered holder of Senior
Subordinated Notes for a beneficial owner should obtain the votes of the
beneficial owners of such Senior Subordinated Notes, consistent with customary
practices for obtaining the votes of securities held in "street name," in one
of the following two ways:

  a.  Pre-Validated Ballots

      A Nominee may pre-validate a Ballot by: (i) signing the Ballot; (ii)
   indicating on the Ballot the name of the registered holder and the amount of
   Senior Subordinated Notes held by the Nominee; and (iii) forwarding such
   Ballot together with the Solicitation Package and other materials requested
   to be forwarded,

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   to the beneficial owner for voting. The beneficial owner must then complete
   the information requested in the Ballot, review the certifications contained
   in the Ballot, and return the Ballot directly to the Solicitation Agent in
   the pre-addressed, postage paid envelope so that it is received by the
   Solicitation Agent before the Voting Deadline. A list of the beneficial
   owners to whom "pre-validated" Ballots were delivered should be maintained
   by the Nominee for inspection for at least one year from the Voting Deadline.

  b.  Master Ballots

      A Nominee may obtain the votes of beneficial owners by forwarding to the
   beneficial owners the unsigned Ballots, together with the Disclosure
   Statement, a return envelope provided by, and addressed to, the Nominee, and
   other materials requested to be forwarded. Each such beneficial owner must
   then indicate his/her or its vote on the Ballot, complete the information
   requested in the Ballot, review the certifications contained in the Ballot,
   execute the Ballot, and return the Ballot to the Nominee. After collecting
   the Ballots, the Nominee should, in turn, complete a Master Ballot compiling
   the votes and other information from the Ballot, execute the Master Ballot,
   and deliver the Master Ballot to the Solicitation Agent so that it is
   received by the Solicitation Agent before the Voting Deadline. All Ballots
   returned by beneficial owners should either be forwarded to the Solicitation
   Agent (along with the Master Ballot) or retained by Nominees for inspection
   for at least one year from the Voting Deadline.

   EACH NOMINEE SHOULD ADVISE ITS BENEFICIAL OWNERS TO RETURN THEIR BALLOTS TO
THE NOMINEE BY A DATE CALCULATED BY THE NOMINEE TO ALLOW IT TO PREPARE AND
RETURN THE MASTER BALLOT TO THE SOLICITATION AGENT SO THAT IT IS RECEIVED BY
THE SOLICITATION AGENT BEFORE THE VOTING DEADLINE.

3.  Securities Clearing Agencies

   The Debtors expect that The Depository Trust Company, as a Nominee holder of
Senior Subordinated Notes, will arrange for its participants to vote by
providing a record date listing of participants entitled to vote. Such
participants will be authorized to vote their Voting Record Date positions held
in the name of such securities clearing agencies.

4.  Miscellaneous

   For purposes of voting to accept or reject the Plan, the beneficial owners
of Senior Subordinated Notes will be deemed to be the "holders" of the Claims
represented by such Senior Subordinated Notes. Unless otherwise ordered by the
Bankruptcy Court, Ballots that are signed, dated and timely received, but on
which a vote to accept or reject the Plan has not been indicated, will not be
counted. The Debtors, in their sole discretion, may request that the
Solicitation Agent attempt to contact such voters to cure any such defects in
the Ballots.

   Except as provided below, unless the Ballot is timely submitted to the
Solicitation Agent before the Voting Deadline together with any other documents
required by such Ballot, the Debtors may, in their sole discretion, reject such
Ballot as invalid, and therefore decline to utilize it in connection with
seeking Confirmation of the Plan.

   In the event of a dispute with respect to any Senior Subordinated Note
Claim, any vote to accept or reject the Plan cast with respect to such Claim
will not be counted for purposes of determining whether the Plan has been
accepted or rejected, unless the Bankruptcy Court orders otherwise.

D.  Fiduciaries and other Representatives

   If a Ballot is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, or another acting in a fiduciary or
representative capacity, such Person should indicate such capacity when

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<PAGE>

signing and, unless otherwise determined by Encompass, must submit proper
evidence satisfactory to Encompass of authority to so act. Authorized
signatories should submit the separate Ballot of each beneficial owner for whom
they are voting.

   UNLESS THE BALLOT BEING FURNISHED IS TIMELY SUBMITTED TO THE SOLICITATION
AGENT ON OR PRIOR TO THE VOTING DEADLINE, SUCH BALLOT WILL BE REJECTED AS
INVALID AND WILL NOT BE COUNTED AS AN ACCEPTANCE OR REJECTION OF THE PLAN;
PROVIDED, HOWEVER, THAT THE DEBTORS RESERVE THE RIGHT, IN THEIR SOLE
DISCRETION, TO REQUEST OF THE BANKRUPTCY COURT THAT ANY SUCH BALLOT BE COUNTED.
IN NO CASE SHOULD A BALLOT BE DELIVERED TO ANY ENTITY OTHER THAN THE NOMINEE OR
THE SOLICITATION AGENT.

E.  Parties Entitled to Vote

   Under section 1124 of the Bankruptcy Code, a class of claims or equity
interests is deemed to be "Impaired" under a plan unless (i) the plan leaves
unaltered the legal, equitable and contractual rights to which such claim or
equity interest entitles the holder thereof or (ii) notwithstanding any legal
right to an accelerated payment of such claim or equity interest, the plan
cures all existing defaults (other than defaults resulting from the occurrence
of events of bankruptcy) and reinstates the maturity of such claim or equity
interest as it existed before the default.

   In general, a holder of a claim or equity interest may vote to accept or to
reject a plan if the claim or equity interest is "allowed," which means
generally that no party-in-interest has objected to such claim or equity
interest, and the claim or equity interest is Impaired by the plan. If,
however, the holder of an Impaired claim or equity interest will not receive or
retain any property under the plan on account of such claim or equity interest,
the Bankruptcy Code deems such holder to have rejected the plan, and,
accordingly, holders of such claims and equity interests do not actually vote
on the plan. If a claim or equity interest is not Impaired by the plan, the
Bankruptcy Code deems the holder of such claim or equity interest to have
accepted the plan and, accordingly, holders of such claims and equity interests
are not entitled to vote on the plan.

   Classes 1, 2, 3, 4, 5 and 9 of the Plan are not Impaired. Accordingly, under
section 1126(f) of the Bankruptcy Code, all such Classes of Claims and Equity
Interests are deemed to have accepted the Plan and are not entitled to vote in
respect of the Plan.

   Classes 8, 10, 11, 12 and 13 will not receive or retain any property under
the Plan on account of their Claims and Equity Interests. Accordingly, under
section 1126(g) of the Bankruptcy Code, Classes 8, 10, 11, 12 and 13 are deemed
to have rejected the Plan and are not entitled to vote in respect of the Plan.

   Therefore, in accordance with sections 1126 and 1129 of the Bankruptcy Code,
the Debtors are soliciting acceptances only from holders of Claims and Equity
Interests in Classes 6 and 7.

   A vote may be disregarded if the Bankruptcy Court determines, pursuant to
section 1126(e) of the Bankruptcy Code, that it was not solicited or procured
in good faith or in accordance with the provisions of the Bankruptcy Code.

F.  Agreements Upon Furnishing Ballots

   The delivery of an accepting Ballot to the Solicitation Agent by a holder of
Eligible Claims pursuant to one of the procedures set forth above will
constitute the agreement of such holder to accept (i) all of the terms of, and
conditions to the Solicitation and (ii) the terms of the Plan; provided,
however, all parties in interest retain their right to object to Confirmation
of the Plan pursuant to section 1128 of the Bankruptcy Code.

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<PAGE>

G.  Waivers of Defects, Irregularities, Etc.

   Unless otherwise directed by the Bankruptcy Court, all questions as to the
validity, form, eligibility (including time of receipt), acceptance and
revocation or withdrawal of Ballots will be determined by the Solicitation
Agent and the Debtors in their sole discretion, which determination will be
final and binding. As indicated in Section XI.H, effective withdrawals of
Ballots must be delivered to the Solicitation Agent prior to the Voting
Deadline. The Debtors reserve the absolute right to contest the validity of any
such withdrawal. The Debtors also reserve the right to reject any and all
Ballots not in proper form, the acceptance of which would, in the opinion of
the Debtors or their counsel, be unlawful. The Debtors further reserve the
right to waive any defects or irregularities or conditions of delivery as to
any particular Ballot. The interpretation (including the Ballot and the
respective instructions thereto) by the Debtors, unless otherwise directed by
the Bankruptcy Court, will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with deliveries of Ballots must be
cured within such time as the Debtors (or the Bankruptcy Court) determine.
Neither the Debtors nor any other Person will be under any duty to provide
notification of defects or irregularities with respect to deliveries of Ballots
nor will any of them incur any liabilities for failure to provide such
notification. Unless otherwise directed by the Bankruptcy Court, delivery of
such Ballots will not be deemed to have been made until such irregularities
have been cured or waived. Ballots previously furnished (and as to which any
irregularities have not theretofore been cured or waived) will be invalidated.

H.  Withdrawal of Ballots; Revocation

   Any party who has delivered a valid Ballot for the acceptance or rejection
of the Plan may withdraw such acceptance or rejection by delivering a written
notice of withdrawal to the Solicitation Agent at any time prior to the Voting
Deadline. A notice of withdrawal, to be valid, must (i) contain the description
of the Claim(s) to which it relates and the aggregate principal amount
represented by such Claim(s), (ii) be signed by the withdrawing party in the
same manner as the Ballot being withdrawn, (iii) contain a certification that
the withdrawing party owns the Claim(s) and possesses the right to withdraw the
vote sought to be withdrawn and (iv) be received by the Solicitation Agent in a
timely manner at the address set forth in Section XI.J. Prior to the filing of
the Plan, the Debtors intends to consult with the Solicitation Agent to
determine whether any withdrawals of Ballots were received and whether the
Requisite Acceptances of the Plan have been received. As stated above, the
Debtors expressly reserve the absolute right to contest the validity of any
such withdrawals of Ballots.

   Unless otherwise directed by the Bankruptcy Court, a purported notice of
withdrawal of Ballots which is not received in a timely manner by the
Solicitation Agent will not be effective to withdraw a previously cast Ballot.

   Any party who has previously submitted to the Solicitation Agent prior to
the Voting Deadline a properly completed Ballot may revoke such Ballot and
change his or its vote by submitting to the Solicitation Agent prior to the
Voting Deadline a subsequent properly completed Ballot for acceptance or
rejection of the Plan. In the case where more than one timely, properly
completed Ballot is received, only the Ballot which bears the latest date will
be counted for purposes of determining whether the Requisite Acceptances have
been received.

   The Debtors will pay all costs, fees and expenses relating to the
Solicitation, including customary mailing and handling costs of Nominees.

I.  Delivery of Extinguished Securities

   The Debtors are not at this time requesting the delivery of, and neither the
Debtors nor the Solicitation Agent will accept, certificates representing any
securities which will, on and after the Effective Date, be Extinguished
Securities. In connection with the Effective Date, the Debtors will furnish all
record holders of Extinguished Securities with appropriate letters of
transmittal to be used to remit their Extinguished Securities in exchange for
the distribution under the Plan. Information regarding such remittance
procedure (together with all appropriate materials) will be distributed by the
Reorganized Debtors after the Confirmation Date.

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J.  Further Information; Additional Copies

   If you have any questions or require further information about the voting
procedure for voting your Claim or about the Solicitation Package, or if you
wish to obtain an additional copy of the Plan, the Disclosure Statement, or any
exhibits to such documents (at your own expense, unless otherwise specifically
required by Federal Rule of Bankruptcy Procedure 3017(d)), please contact the
Solicitation Agent:

                          Innisfree M&A Incorporated
                              501 Madison Avenue
                                  20th Floor
                           New York, New York 10022
                           Telephone: (877) 750-2689
                     Banks and Brokers call (212) 750-5833

                      XII. RECOMMENDATION AND CONCLUSION

   For all of the reasons set forth in this Disclosure Statement, the Debtors
believe that Confirmation and consummation of the Plan is preferable to all
other alternatives. Consequently, the Debtors urge all holders of Eligible
Claims to vote to accept the Plan, and to complete and return their ballots so
that they will be received by the Solicitation Agent on or before 5:00 p.m.,
Eastern time, on November 18, 2002.

Dated: October 18, 2002

ENCOMPASS SERVICES CORPORATION, ON
BEHALF OF ITSELF AND THE SUBSIDIARIES
SET FORTH ON EXHIBIT E

By:  /s/   JOSEPH M. IVEY, JR.
---------------------------
Name:  Joseph M. Ivey, Jr.
Title:  Chief Executive
Officer

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<PAGE>

                                    ANNEX I

                                   Glossary

Administrative Expense Claim  A Claim for payment of an administrative expense
                              of a kind specified in section 503(b) or
                              1114(e)(2) of the Bankruptcy Code and entitled to
                              priority under section 507(a)(1) of the
                              Bankruptcy Code, including (i) actual, necessary
                              costs and expenses, incurred after the Petition
                              Date, of preserving the Debtors' Estates and
                              operating their businesses, including wages,
                              salaries, or commissions for services rendered
                              after the Petition Date, (ii) Professional Fee
                              Claims, (iii) all fees and charges assessed
                              against the Estates under chapter 123 of title
                              28, United States Code, (iv) all Allowed Claims
                              that are entitled to be treated as Administrative
                              Expense Claims by virtue of a Final Order entered
                              under section 546(c)(2)(A) of the Bankruptcy
                              Code, (v) the reasonable post-petition fees and
                              expenses of indenture trustees, including
                              successors thereto, including reasonable
                              attorney's fees and expenses of such indenture
                              trustees and (vi) any obligations under the DIP
                              Facility.

Administrative Expense
  Claims Bar Date...........  The date, if any, designated by the Bankruptcy
                              Court as the last date for filing proofs of
                              Administrative Expense Claims against the Debtors.

Affiliate or affiliate......  Any entity that directly, or indirectly, through
                              one or more intermediaries, controls or is
                              controlled by, or is under common control with, a
                              specified entity; for purposes of the definition
                              of "Affiliate" or "affiliate," any entity that
                              own, controls, or holds with power to vote 20% or
                              more of the outstanding voting securities of, or
                              controls or directs the management of, the entity
                              specified shall be deemed to be an Affiliate of
                              such entity.

Allowed.....................  With respect to a Claim or Equity Interest within
                              a particular Class, an Allowed Claim or Allowed
                              Equity Interest of the type described in such
                              Class.

Allowed Claim/Allowed Equity
  Interest..................  With reference any Claim or Equity Interest, (i)
                              a Claim or Equity Interest which is listed by any
                              Debtor in its books and records as liquidated in
                              amount and not disputed or contingent; (ii) any
                              Claim or Equity Interest which has been, or is
                              hereafter, listed by a Debtor in its Schedules
                              (as such Schedules may be amended by any such
                              Debtor from time to time in accordance with
                              Bankruptcy Rule 1009), as liquidated in amount
                              and not disputed or contingent and for which no
                              contrary proof of claim or interest has been
                              filed; (iii) any Claim or Equity Interest which
                              is not Disputed; or (iv) any Claim or Equity
                              Interest, if Disputed, (a) as to which the
                              liability of the Debtor and the amount thereof
                              are determined by a final order of a court of
                              competent jurisdiction other than the Bankruptcy
                              Court, or (b) which has been Allowed by Final
                              Order; provided, however, that to the extent that
                              a Claim or Equity Interest is a Disputed Claim or
                              Disputed Equity Interest, the determination of
                              whether such Claim or Equity Interest will be
                              Allowed Claim or an Allowed Equity Interest and/or

                                  Annex I - 1

<PAGE>

                              the amount of any such Claim or Equity Interest
                              will be determined in accordance with the terms
                              of the Plan. An "Allowed Claim" or an "Allowed
                              Equity Interest" will not, for purposes of
                              distributions under the Plan, include (i) for
                              prepetition Claims, interest on such Claim or
                              Claims accruing from or after the Petition Date,
                              (ii) punitive or exemplary damages, or (iii) any
                              fine, penalty or forfeiture.

Apollo......................  Collectively, (i) Apollo Investment Fund IV, L.P.
                              and Apollo Overseas Partners IV, L.P.,
                              collectively the sole holders of Mandatorily
                              Redeemable Convertible Preferred Stock, (ii)
                              Apollo Advisors IV, L.P. and (iii) Apollo
                              Management IV, L.P.

Ballots.....................  Each of the ballot forms (including Master
                              Ballots) distributed with this Disclosure
                              Statement to holders of Eligible Claims.

Bankruptcy Code.............  The Bankruptcy Reform Act of 1978, as codified in
                              title 11 of the United States Code, 11 U.S.C.
                              (S)(S) 101-1330, as now in effect or hereafter
                              amended.

Bankruptcy Court............  The United States Bankruptcy Court for the
                              Southern District of Texas, Houston Division, or
                              any other court with jurisdiction over the
                              Chapter 11 Cases, or another appropriate forum.

Bankruptcy Rules............  Collectively, the Federal Rules of Bankruptcy
                              Procedure and the Official Bankruptcy Forms, the
                              Federal Rules of Civil Procedure, as applicable
                              to the Chapter 11 Cases or proceedings therein,
                              and the Local Rules of the Bankruptcy Court, all
                              as now in effect or hereafter amended.

Base Rate...................  For any day, a rate per annum (adjusted, to the
                              nearest  1/16 of 1%) equal to the greater of (i)
                              the Federal Funds Effective Rate in effect on
                              such day plus 1/2 of 1% and (ii) the Prime Rate
                              in effect on such day. For purposes hereof, the
                              term "Prime Rate" means, as of a particular date,
                              the prime rate of Bank of America, N.A. most
                              recently announced by Bank of America, N.A. and
                              in effect on such date, automatically fluctuating
                              upward or downward, as the case may be, with and
                              at the time of each change therein without notice
                              to Encompass or any other Person, which prime
                              rate may not necessarily represent the lowest or
                              best rate actually charged to a customer.
                              "Federal Funds Effective Rate" means, for any
                              day, the weighted average of the rates on
                              overnight federal funds transactions with members
                              of the Federal Reserve System arranged by federal
                              funds brokers, as published for such day (or, if
                              such day is not a Business Day, for the next
                              preceding Business Day) by the Federal Reserve
                              Bank of New York, or, if such rate is not so
                              published for any day which is a Business Day,
                              the average of the quotations for such day on
                              such transactions received by the Bank of
                              America, N.A. from three federal funds brokers of
                              recognized standing selected by it. If, for any
                              reason, the Bank of America, N.A. shall have
                              determined (which determination shall be
                              conclusive absent manifest error) that it is
                              unable to ascertain the Federal Funds Effective
                              Rate, including the inability or failure of Bank
                              of America, N.A. to obtain sufficient quotations
                              in accordance with the terms hereof, the Base
                              Rate shall be determined without regard to clause
                              (i) of the first sentence of this definition
                              until the circumstances giving rise to such
                              inability no

                                  Annex I - 2

<PAGE>

                              longer exist. Any change in the Base Rate due to
                              a change in the Prime Rate or the Federal Funds
                              Effective Rate shall be effective on the
                              effective date of such change in the Prime Rate
                              or the Federal Funds Effective Rate, respectively.

Business Day................  Any day, excluding Saturdays, Sundays or "legal
                              holidays" as defined in Bankruptcy Rule 9006(a)),
                              on which commercial banks are open for business
                              in New York, New York and Houston, Texas.

Cash........................  Legal tender of the United States of America.

CDG.........................  Conway, Del Genio, Gries & Co., LLC, employer of
                              the CRO.

Certificate.................  Any certificate, instrument or other document
                              evidencing an Extinguished Security.

Chapter 11 Cases............  The jointly administered chapter 11 cases of the
                              Debtors.

Claim.......................  A claim, as defined in section 101(5) of the
                              Bankruptcy Code, against any Debtor.

Class.......................  One of the classes of Claims or Equity Interests
                              described in the Plan.

Committee...................  Any official committee appointed in the Chapter
                              11 Cases, as such committee may be reconstituted
                              from time to time.

Confirmation................  The Bankruptcy Court's confirmation of the Plan.

Confirmation Date...........  The date of entry of the Confirmation Order on
                              the docket of the Bankruptcy Court.

Confirmation Hearing........  The Bankruptcy Court's hearing to consider
                              Confirmation of the Plan, as it may be adjourned
                              or continued from time to time.

Confirmation Order..........  The Bankruptcy Court's order confirming the Plan
                              under section 1129 of the Bankruptcy Code.

Credit Facility Restructuring The restructuring of the Existing Credit
                              Agreement, including the availability of the Exit
                              Facility.

Critical Vendor Order.......  Any Final Order approving the Debtors' request
                              (whether by way of a motion to pay prepetition
                              trade claims in the ordinary course, a motion to
                              pay claims of critical vendors or otherwise), to
                              pay substantially all prepetition, fixed,
                              liquidated and undisputed Claims of certain
                              suppliers of materials, equipment, goods and
                              services with whom the Debtors continue to do
                              business and whose materials, equipment, goods
                              and services the Debtors deem essential,
                              necessary or critical to the operation of their
                              businesses and/or their ability to reorganize
                              under chapter 11 of the Bankruptcy Code.

CRO.........................  Chief Restructuring Officer, Michael F. Gries (or
                              his successor).

Cure........................  The payment of Cash by a Debtor, or the
                              distribution of other property (as the parties
                              may agree or the Bankruptcy Court may order), as
                              necessary to cure a default by a Debtor under an
                              executory contract or unexpired lease of a Debtor
                              and to permit a Debtor to assume that contract or
                              lease under section 365(a) of the Bankruptcy Code.

                                  Annex I - 3

<PAGE>

Debtor......................  Each of Encompass and its Subsidiaries and
                              "Debtors" means all of them collectively, and
                              when the context so requires, in their capacity
                              as debtors and debtors-in-possession under
                              sections 1107 and 1108 of the Bankruptcy Code.

DIP Facility................  The debtor-in-possession credit facility expected
                              to be entered into in the Chapter 11 Cases by and
                              among Encompass, the Subsidiaries, as guarantors,
                              and the lenders party thereto.

Disallowed Claim............  Any Claim that has been disallowed, in whole or
                              in part, by Final Order, or by final order of a
                              court of competent jurisdiction, or any Claim
                              that has been withdrawn, in whole or in part, by
                              the holder thereof.

Disallowed Equity Interest..  Any Equity Interest that has been disallowed, in
                              whole or in part, by Final Order, or by final
                              order or a court of competent jurisdiction or any
                              Claim that has been withdrawn, in whole or in
                              part, by the holder thereof.

Disbursing Agent............  Reorganized Encompass or any party designated by
                              Reorganized Encompass, in its sole discretion,
                              and approved by the Bankruptcy Court if other
                              than a Debtor, to serve as a disbursing agent
                              under the Plan.

Disputed Claim..............  Any Claim, or any portion thereof, that is not an
                              Allowed Claim or a Disallowed Claim.

Disputed Equity Interest....  Every Equity Interest that is not an Allowed
                              Equity Interest or a Disallowed Equity Interest.

Distribution Date...........  The date, occurring as soon as practicable after
                              the Effective Date, on which the Disbursing Agent
                              first makes distributions to holders of Allowed
                              Claims and Allowed Equity Interests as provided
                              in the Plan.

Distribution Notification
  Date......................  The date for purposes of making distributions
                              under the Plan on account of Allowed Claims on
                              which the transfer ledgers for the Existing Bank
                              Debt (maintained by Bank of America, as
                              administrative agent under the Existing Credit
                              Agreement) and Senior Subordinated Notes will be
                              closed at the close of business and after which
                              there will be no further changes in the record
                              holders of such debt.

EBITDA......................  Earnings before interest, taxes, depreciation and
                              amortization, as such term is defined in the
                              Existing Credit Agreement.

Effective Date..............  The first Business Day (i) on which all
                              conditions to the Plan's consummation have been
                              satisfied or waived and (ii) that is the date on
                              which the Plan is consummated.

Eligible Claims.............  Collectively, the Existing Credit Agreement
                              Claims and Senior Subordinated Note Claims,
                              holders of which are entitled to vote under
                              Article VIII of the Plan and section 1126 of the
                              Bankruptcy Code to accept or reject the Plan.

Encompass...................  Encompass Services Corporation, a Texas
                              corporation.

Equity Interest.............  The legal, equitable, contractual and other
                              rights of any Person with respect to any capital
                              stock or other ownership interest in any Debtor,

                                  Annex I - 4

<PAGE>

                              whether or not transferable, and any option,
                              warrant or right to purchase, sell or subscribe
                              for an ownership interest or other equity
                              security in any Debtor.

Estate......................  The estate of any of the Debtors in the Chapter
                              11 Cases, and "Estates" means, collectively, the
                              estates of all of the Debtors in the Chapter 11
                              Cases, as created under section 541 of the
                              Bankruptcy Code.

Eurodollar Rate.............  The rate per annum (rounded to the nearest whole
                              multiple of  1/100 of 1%) appearing on Telerate
                              Page 3750 (or any successor page) as the London
                              interbank offered rate for deposits in United
                              States dollars at approximately 11:00 a.m.
                              (London time) two Business Days prior to the
                              first day of a period equal to one, two, three,
                              six, nine or twelve months. If for any reason
                              such rate is not available, the term "Eurodollar
                              Rate" means the rate per annum (rounded upwards,
                              if necessary, to the nearest  1/100 of 1%)
                              appearing on Reuters Screen LIBO Page as the
                              London interbank offered rate for deposits in
                              United States dollars at approximately 11:00 a.m.
                              (London time) two Business Days prior to the
                              first day of a period equal to one, two, three,
                              six, nine or twelve months; provided, however, if
                              more than one rate is specified on Reuters Screen
                              LIBO Page, the applicable rate shall be the
                              arithmetic mean of all such rates (rounded
                              upwards, if necessary, to the nearest  1/100 of
                              1%).

Exchange Act................  The Securities Exchange Act of 1934, as now in
                              effect or hereafter amended.

Existing Bank Debt..........  Indebtedness under the Existing Credit Agreement.

Existing Credit Agreement...  That certain Credit Agreement, dated as of
                              February 22, 2000, as amended by the First
                              Amendment dated as of March 23, 2000, the Second
                              Amendment dated as of May 10, 2000, the Third
                              Amendment dated as of June 8, 2001, the Fourth
                              Amendment dated as of November 9, 2001 and the
                              Fifth Amendment dated as of June 26, 2002, as it
                              may be further amended from time to time, among
                              Encompass, the Subsidiaries, as guarantors, the
                              several banks and other financial institutions
                              from time to time parties thereto, Banc of
                              America Securities llc and Chase Securities Inc.,
                              as co-lead arrangers and co-book managers, Bank
                              of America, N.A., as the administrative agent,
                              JPMorgan Chase Bank, as the syndication agent,
                              Wachovia Bank National Association, as the
                              documentation agent, ABN-AMRO Bank NV, The Bank
                              of Nova Scotia, Bank One, N.A., Credit Lyonnais,
                              New York Branch, GMAC Commercial Credit LLC,
                              Mercantile Bank National Association and Union
                              Bank of California, N.A., all as co-managing
                              agents.

Existing Credit Agreement
  Claim.....................  Any claim arising under the Existing Credit
                              Agreement.

Existing Encompass Common
  Stock.....................  Encompass common stock, par value $.001 per
                              share, issued and outstanding immediately before
                              the Petition Date.

Existing Encompass Stock....  Collectively, the Existing Encompass Common Stock
                              and the Mandatorily Redeemable Convertible
                              Preferred Stock.

Existing Other Equity
  Interests.................  Collectively, (i) all incentive stock options,
                              non-qualified stock options, and stock
                              appreciation rights granted under any Debtor-

                                  Annex I - 5

<PAGE>

                              sponsored stock option plans and (ii) any other
                              options, warrants, or rights, contractual or
                              otherwise, if any, to acquire or receive an
                              Equity Interest existing immediately before the
                              Petition Date.

Exit Facility...............  The revolving credit facility expected to be
                              entered into by and among Reorganized Encompass,
                              the Reorganized Subsidiaries, as guarantors, the
                              banks and other financial institutions party
                              thereto dated as of the Effective Date, and all
                              ancillary agreements, documents, and instruments
                              to be issued or given in connection therewith,
                              which facility will replace the DIP Facility and
                              will fund the Reorganized Debtors' working
                              capital and general corporate needs.

Extinguished Securities.....  All Existing Common Stock, Mandatorily Redeemable
                              Convertible Preferred Stock, Existing Other
                              Equity Interests, Senior Subordinated Notes and
                              Junior Subordinated Notes.

Face Amount.................  When used in reference to (i) a Disputed Claim,
                              the full stated amount claimed by the holder
                              thereof in any proof of Claim timely filed with
                              the Bankruptcy Court, (ii) an Allowed Claim, the
                              Allowed amount thereof, and (iii) an Equity
                              Interest, the number of shares evidencing such
                              Equity Interests.

Final Order.................  An order or judgment, entered by the Bankruptcy
                              Court, that has not been amended, modified, or
                              reversed, and as to which (i) no stay is in
                              effect, (ii) the time to seek rehearing, review,
                              modification, or amendment or to file a notice of
                              appeal has expired, and (iii) no appeal or
                              request for modification, amendment, a stay,
                              rehearing or other review is pending.

Financial Projections.......  The projected financial information attached
                              hereto as Exhibit D, which was prepared by
                              management of the Debtors and projects the
                              financial performance of the Reorganized Debtors
                              through December 31, 2007 and is based upon
                              information available as of September 30, 2002.

Funded Debt.................  All indebtedness for borrowed money of Encompass
                              evidenced by a written document and subject to
                              periodic, required payments of interest and/or
                              principal.

General Unsecured Claim.....  An unsecured Claim other than a Senior
                              Subordinated Note Claim, a Junior Subordinated
                              Note Claim, an Intercompany Claim or a Litigation
                              Claim that is not entitled to priority under
                              section 507 of the Bankruptcy Code.

Houlihan Lokey..............  Houlihan Lokey Howard & Zukin Capital, the
                              Debtors' financial advisors.

Impaired....................  When used with reference to a Claim or Equity
                              Interest, a Claim or Equity Interest that is
                              impaired within the meaning of section 1124 of
                              the Bankruptcy Code.

Intercompany Claim..........  Any claim held (i) by a Debtor against another
                              Debtor and/or (ii) by an Affiliate of a Debtor
                              against a Debtor or another Affiliate of a Debtor.

Junior Subordinated Note
  Claim.....................  Any Claim under the Junior Subordinated Notes.

                                  Annex I - 6

<PAGE>

Junior Subordinated Notes...  Collectively, the (i) 7.50% Subordinated Notes
                              due July 15, 2004 in the aggregate principal
                              amount of $1,250,000, payable to Deborah K.
                              Dillard Revocable Trust; (ii) 7.50% Subordinated
                              Notes due July 15, 2004 in the aggregate
                              principal amount of $1,250,000, payable to
                              William Mason Dillard Revocable Trust; (iii)
                              Subordinated Note due 2003, dated January 14,
                              1999, in the principal amount of $242,118.19,
                              payable to Randall A. Foco & Jan Marie Foco,
                              Trustees; (iv) Subordinated Note due 2003, dated
                              January 14, 1999, in the principal amount of
                              $534,899.70, payable to Theodore Keenan; and (v)
                              Subordinated Note due 2003, dated January 14,
                              1999, in the principal amount of $836,099.36,
                              payable to James T. Broyles.

Litigation Claim............  Without limitation, any Claim, over which the
                              Bankruptcy Court has jurisdiction, asserted in
                              litigation pending on or as of the Petition Date,
                              or that could have been asserted by any Person on
                              or prior to the Petition Date against any Debtor,
                              whether known or unknown, whether asserted
                              directly, derivatively, by way of subrogation or
                              otherwise, whether the subject of litigation
                              which has been or could have been certified as a
                              class action under applicable law, and whether
                              grounded in contract, tort, statute, the common
                              law, equity or other law, and including, without
                              limitation, Claims for personal injury, property
                              damage, wrongful death, products liability,
                              unfair labor and/or hiring practices, civil
                              rights violations, employment discrimination,
                              breach of contract, preferential transfers,
                              indemnity, contribution, fraud, environmental
                              damage and/or release, and claims related to
                              toxic mold. The Litigation Claims are Disputed
                              Claims. To the extent a Litigation Claim is
                              Allowed, settled or estimated by Final Order, a
                              Litigation Claim shall become a General Unsecured
                              Claim.

Mandatorily Redeemable
  Convertible Preferred Stock Encompass' 7.25% convertible participating
                              preferred stock, par value $.001 per share,
                              issued and outstanding immediately prior to the
                              Petition Date.

M&M Lien Claimant...........  A Person who furnishes services, labor, equipment
                              and/or material for the purpose of erecting,
                              repairing, improving or altering a building,
                              structure or other improvement and whose claim
                              for such services, labor, equipment and/or
                              material is secured by a valid and enforceable
                              lien created by local, state or other law.

M&M Lien Secured Claim......  A Secured Claim held by an M&M Lien Claimant.

Management Group............  Encompass' current management team consisting of
                              J. Patrick Millinor, Jr., Joseph M. Ivey, Henry
                              P. Holland, Darren B. Miller, Daniel W. Kipp,
                              Gray H. Muzzy, L. Scott Biar, Todd Matherne,
                              James L. Cocca, Patrick L. McMahon, James L.
                              Phillips, Steven A. Bate and William Hill.

Master Ballot...............  Each of the ballot forms distributed with this
                              Disclosure Statement to a Nominee.

New Common Stock............  The new common stock to be issued by Reorganized
                              Encompass pursuant to the Plan as of the
                              Effective Date.

New Options.................  The options to be issued by Reorganized Encompass
                              to purchase New Common Stock pursuant to the
                              provisions of the Stock Option Plan.

                                  Annex I - 7

<PAGE>

New Preferred Stock.........  Any class of preferred stock that may be
                              designated by the Board of Directors of
                              Reorganized Encompass in accordance with the
                              Reorganized Encompass Certificate of
                              Incorporation.

New Securities..............  Collectively, the New Common Stock, the New
                              Options and/or New Preferred Stock, as applicable.

New Senior Credit Agreement.  The credit agreement (pursuant to which the New
                              Senior Credit Facility is provided) to be entered
                              into by Reorganized Encompass, the Reorganized
                              Subsidiaries, as guarantors, and the banks and
                              other financial institutions parties thereto,
                              dated as of the Effective Date, and all ancillary
                              agreements, documents, and instruments to be
                              issued or given in connection therewith.

New Senior Credit Facility..  Collectively, (i) New Term Loan and (ii) the Exit
                              Facility.

New Stock...................  Collectively, the New Preferred Stock and the New
                              Common Stock.

New Term Loan...............  The term loan to be entered into by and among
                              Reorganized Encompass, the Reorganized
                              Subsidiaries, as guarantors, the banks and other
                              financial institutions party thereto in the
                              aggregate principal amount of $200,000,000, as
                              same may be increased for drawings under
                              prepetition letters of credit issued and
                              outstanding under the Existing Credit Agreement.

Nominee.....................  A bank, brokerage firm or other nominee holding
                              Eligible Claims in its own name on behalf of a
                              beneficial owner, or any agent thereof.

Other Priority Claim........  A Claim entitled to priority under section 507(a)
                              of the Bankruptcy Code, other than a Priority Tax
                              Claim or an Administrative Expense Claim.

Other Secured Claim.........  Any Secured Claim, including M&M Lien Secured
                              Claims, other than a Secured Tax Claim provided,
                              however that an Existing Credit Agreement Claim
                              is not an Other Secured Claim.

Person......................  An individual, corporation, partnership, joint
                              venture, association, joint stock company,
                              limited liability company, limited liability
                              partnership, trust, estate, unincorporated
                              organization or other entity.

Petition Date...............  The date on which the Debtors file their
                              petitions for relief commencing the Chapter 11
                              Cases.

Plan........................  The Debtors' Joint Plan of Reorganization under
                              chapter 11 of the Bankruptcy Code, in
                              substantially the form attached hereto as Exhibit
                              A, as it may be amended, modified or supplemented
                              from time to time, including all exhibits and
                              schedules to the Plan.

Plan Supplement.............  The compilation of documents, including any
                              exhibits to the Plan not included therewith, that
                              the Debtors may file with the Bankruptcy Court on
                              or before the date that is five (5) Business Days
                              prior to the Confirmation Hearing.

Postpetition Interest.......  Interest, accruing after the Petition Date, on a
                              Claim.

                                  Annex I - 8

<PAGE>

Priority Tax Claim..........  Any Claim that is entitled to priority under
                              section 507(a)(8) of the Bankruptcy Code.

Professional................  A professional Person, as that term is used in
                              sections 327 and 1103 of the Bankruptcy Code.

Professional Fee Claim......  A Professional's Claim for compensation or
                              reimbursement of costs and expenses relating to
                              services performed on and after the Petition Date
                              and before and including the Effective Date.

Pro Rata....................  At any time, the proportion that the Face Amount
                              of an Allowed Claim or Allowed Equity Interest in
                              a particular Class bears to the aggregate Face
                              Amount of all Claims or Equity Interests
                              (including Disputed Claims or Disputed Equity
                              Interests, but excluding Disallowed Claims and/or
                              Disallowed Equity Interests) in that Class,
                              unless the Plan provides otherwise.

Reorganized Debtor..........  Each of Reorganized Encompass and the Reorganized
                              Subsidiaries, and "Reorganized Debtors" means all
                              of them collectively.

Reorganized Encompass.......  Encompass, on and after the Effective Date.

Reorganized Encompass Bylaws  Reorganized Encompass' bylaws in effect under the
                              laws of the State of Texas, as amended by the
                              Plan and in the form to be filed with the Plan
                              Supplement.

Reorganized Encompass' Board
  of Directors..............  Reorganized Encompass' board of directors upon
                              and following the Effective Date.

Reorganized Encompass
  Certificate of
  Incorporation.............  Reorganized Encompass' certificate of
                              incorporation in effect under the laws of the
                              State of Texas, as amended by the Plan and in the
                              form to be filed with the Plan Supplement.

Reorganized Subsidiaries....  The means, collectively, Encompass' Debtor
                              Subsidiaries on and after the Effective Date.

Requisite Acceptances.......  With respect to each Impaired Class of Claims,
                              acceptance of the Plan by (i) holders of at least
                              two-thirds in amount of Allowed Claims in such
                              Impaired Class of Claims actually voting and (ii)
                              the holders of more than one-half in number of
                              Allowed Claims in such Impaired Class of Claims
                              actually voting, in each case not counting the
                              vote of any holder designated under section
                              1126(e) of the Bankruptcy Code.

Restructuring...............  Collectively, the transactions and transfers
                              described in Article III of the Plan.

Schedules...................  The schedules of assets and liabilities,
                              statements of financial affairs, and lists of
                              holders of Claims and Equity Interests filed by
                              the Debtors pursuant to section 521 of the
                              Bankruptcy Code and Bankruptcy Rule 1007,
                              including any amendments and supplements thereto.

                                  Annex I - 9

<PAGE>

Section 510(b) Claims.......  Any Claim against any Debtor, under applicable
                              federal or state law, whether or not such Claim
                              is listed on the Schedules or evidenced by a
                              filed proof of claim, and whether or not the
                              subject of an existing lawsuit, arising from or
                              seeking the rescission of a purchase or sale of
                              equity of any Debtor or any Affiliate of a
                              Debtor, for damages arising from the purchase or
                              sale of such a security, or for reimbursement,
                              indemnification or contribution allowed under
                              section 502 of the Bankruptcy Code on account of
                              such a Claim as provided in section 510(b) of the
                              Bankruptcy Code.

Secured Claim...............  A Claim that is secured by a lien that is valid,
                              perfected and enforceable, and not avoidable,
                              upon property in which a Debtor has an interest,
                              to the extent of the value, as of the Effective
                              Date, of such interest or lien as determined by a
                              Final Order pursuant to section 506 of the
                              Bankruptcy Court, or as otherwise agreed to in
                              writing by a Debtor or Reorganized Debtor and the
                              holder of such Claim.

Secured Tax Claim...........  Any Secured Claim which, absent its secured
                              status, would be entitled to priority in right of
                              payment under Section 507(a)(8) of the Bankruptcy
                              Code.

Securities Act..............  The Securities Act of 1933, as now in effect or
                              hereafter amended

Securities Purchase Agreement The Securities Purchase Agreement between
                              Encompass and Apollo, dated as of June 27, 2002,
                              under which Apollo agreed to purchase $35 million
                              of Existing Common Stock in the rights offering.

Senior Lender...............  The holder of a Claim under the Existing Credit
                              Agreement.

Senior Subordinated Note
  Claim.....................  Any Claim under the Senior Subordinated Notes.

Senior Subordinated Notes...  The 10 1/2% senior subordinated notes due 2009 of
                              Encompass in the aggregate principal amount of
                              $335 million (i) issued under that certain
                              Indenture, dated as of April 30, 1999, among
                              Building One Services Corporation, the
                              predecessor-in-interest to Encompass, the
                              guarantors named therein, and IBJ Whitehall Bank
                              & Trust Company, as trustee, (ii) as amended by
                              the First Supplemental, dated as of November 12,
                              1999, the Second Supplemental Indenture, dated as
                              of January 31, 2000, the Third Supplemental
                              Indenture, dated as of February 22, 2000, and
                              (iii) as amended and assumed by Encompass and
                              guaranteed by its subsidiaries by the Fourth
                              Supplemental Indenture, dated as of June 28,
                              2001, among Encompass, the guarantors named
                              therein and the Bank of New York, as successor
                              trustee.

Solicitation................  The solicitation by the Debtors from holders of
                              Eligible Claims of acceptances of the Plan
                              pursuant to the section 1126(b) of the Bankruptcy
                              Code.

Solicitation Agent..........  Innisfree M&A Incorporated.

Solicitation Package........  The package provided by the Debtors that includes
                              this Disclosure Statement and related materials
                              and, where appropriate, Ballots.

Special Committee...........  The special committee established by Encompass'
                              Board of Directors to evaluate recapitalization
                              and/or reorganization structures for the Debtors.


                                 Annex I - 10

<PAGE>

Stock Option Plan...........  The stock option plan to be adopted by
                              Reorganized Encompass pursuant to the Plan,
                              pursuant to which the New Options will be issued.

Subsidiary..................  A direct or indirect subsidiary of Encompass and
                              "Subsidiaries" means all of them collectively.

Subsidiary Interests........  Collectively, the issued and outstanding shares
                              of stock of the Subsidiary Debtors directly or
                              indirectly owned by Encompass on the Petition
                              Date.

Voting Deadline.............  5:00 p.m., Eastern time on November 18, 2002, or
                              5:00 p.m., Eastern time as such later dated as
                              may be determined by Encompass, in its sole
                              discretion; the date and time in which the
                              Ballots must be received by the Solicitation
                              Agent.

Voting Record Date..........  October 16, 2002; the date for the determination
                              of holders of record of Eligible Claims entitled
                              to receive the Solicitation Package.

Weil, Gotshal...............  Weil, Gotshal & Manges LLP.

                                 Annex I - 11

<PAGE>

                                   EXHIBIT A

                                   The Plan

                                  Exhibit A-1

<PAGE>

                        UNITED STATES BANKRUPTCY COURT
                          SOUTHERN DISTRICT OF TEXAS
                               HOUSTON DIVISION

--------------------------------------
In re:                          :   CHAPTER 11

ENCOMPASS SERVICES CORPORATION, :   Case No. 02:________
et al.
           Debtors.             :   JOINTLY ADMINISTERED
-------------------------------

                           PREPACKAGED JOINT PLAN OF
           REORGANIZATION OF ENCOMPASS SERVICES CORPORATION, ET AL.
                    UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

                                          WEIL, GOTSHAL & MANGES LLP

                                          Alfredo R. Perez
                                          700 Louisiana, Suite 1600
                                          Houston, Texas 77002
                                          (713) 546-5000

                                          Attorneys for Encompass Services
                                          Corporation, et al.

Dated: Houston, Texas
October 18, 2002

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
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INTRODUCTION...............................................................................   1

ARTICLE I.   DEFINITIONS, RULES OF INTERPRETATION, AND COMPUTATION OF TIME.................   1
     A.      Scope of Definitions; Rules of Construction...................................   1
     B.      Definitions...................................................................   1
     C.      Rules of Interpretation.......................................................   8

ARTICLE II.  TREATMENT OF UNCLASSIFIED CLAIMS..............................................   9
     A.      Administrative Expense Claims.................................................   9
     B.      Priority Tax Claims...........................................................   9

ARTICLE III. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS...................   9
     A.      Introduction..................................................................   9
     B.      Summary of Classes............................................................  10
     C.      Treatment of Classified Claims and Equity Interests...........................  10
     D.      Allowed Claims................................................................  12
     E.      Postpetition Interest.........................................................  12
     F.      Alternative Treatment.........................................................  12
     G.      Tax Allocation................................................................  13

ARTICLE IV.  MEANS FOR IMPLEMENTATION OF THIS PLAN.........................................  13
     A.      Continued Corporate Existence; Authorized Capital Stock.......................  13
     B.      Restructuring Transactions....................................................  13
     C.      Substantive Consolidation for Purposes of Treating Impaired Claims............  13
     D.      Corporate Action; Cancellation of Securities..................................  14
     E.      Directors and Executive Officers..............................................  14
     F.      New Securities................................................................  15
     G.      New Senior Credit Agreement...................................................  15
     H.      Stock Option Plan.............................................................  15
     I.      Revesting of Assets...........................................................  16
     J.      Preservation of Rights of Action; Settlement of Litigation Claims.............  16
     K.      Effectuating Documents; Further Transactions..................................  16
     L.      Exemption from Certain Transfer Taxes.........................................  16

ARTICLE V.   PROVISIONS GOVERNING DISTRIBUTIONS............................................  17
     A.      Distributions for Claims and Equity Interests Allowed as of the Effective Date  17
     B.      Disbursing Agent..............................................................  17
     C.      Surrender of Securities or Instruments........................................  17
     D.      Instructions to Disbursing Agent..............................................  17
     E.      Services of Indenture Trustee.................................................  18
     F.      Notification Date for Distributions...........................................  18
     G.      Means of Cash Payment.........................................................  18
     H.      Calculation of Distribution Amounts of New Common Stock.......................  18
     I.      Delivery of Distributions; Undeliverable or Unclaimed Distributions...........  18
     J.      Withholding and Reporting Requirements........................................  18
     K.      Setoffs.......................................................................  19

ARTICLE VI.  PROCEDURES FOR RESOLVING DISPUTED, CONTINGENT, AND
             UNLIQUIDATED CLAIMS...........................................................  19
     A.      Objections to Claims; Disputed Claims.........................................  19
     B.      No Distribution Pending Allowance.............................................  19
     C.      Distributions After Allowance.................................................  20
</TABLE>

<PAGE>

                               TABLE OF CONTENTS
                                  (Continued)

<TABLE>
<CAPTION>
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ARTICLE VII.  TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES...............  20
     A.       Assumed Contracts and Leases........................................  20
     B.       Payments Related to Assumption of Contracts and Leases..............  20
     C.       Rejected Contracts and Leases.......................................  20
     D.       Claims Based on Rejection of Executory Contracts or Unexpired Leases  20
     E.       Compensation and Benefit Plans and Treatment of Retirement Plans....  21

ARTICLE VIII. ACCEPTANCE OR REJECTION OF THIS PLAN................................  21
     A.       Classes Entitled To Vote............................................  21
     B.       Acceptance by Impaired Classes......................................  21
     C.       Elimination of Classes..............................................  21
     D.       Nonconsensual Confirmation..........................................  21

ARTICLE IX.   CONDITIONS PRECEDENT TO THIS PLAN'S CONFIRMATION AND
              CONSUMMATION........................................................  22
     A.       Conditions to Confirmation..........................................  22
     B.       Conditions to Effective Date........................................  22
     C.       Waiver of Conditions................................................  23

ARTICLE X.    MODIFICATIONS AND AMENDMENTS; WITHDRAWAL............................  23

ARTICLE XI.   RETENTION OF JURISDICTION...........................................  24

ARTICLE XII.  COMPROMISES AND SETTLEMENTS.........................................  25

ARTICLE XIII. MISCELLANEOUS PROVISIONS............................................  25
     A.       Bar Dates for Certain Claims........................................  25
     B.       Payment of Statutory Fees...........................................  26
     C.       Severability of Plan Provisions.....................................  26
     D.       Successors and Assigns..............................................  26
     E.       Discharge of the Debtors and Injunction.............................  26
     F.       Releases By the Debtors.............................................  27
     G.       Other Releases......................................................  27
     H.       Exculpation and Limitation of Liability.............................  28
     I.       Term of Injunctions or Stays........................................  28
     J.       Binding Effect......................................................  28
     K.       Revocation, Withdrawal, or Non-Consummation.........................  28
     L.       Committees..........................................................  28
     M.       Plan Supplement.....................................................  29
     N.       Notices to Debtors..................................................  29
     O.       Indemnification Obligations.........................................  29
     P.       Governing Law.......................................................  29
     Q.       Prepayment..........................................................  30
     R.       Section 1125(e) of the Bankruptcy Code..............................  30

TERMS OF NEW SENIOR CREDIT AGREEMENT.............................................. A-1

TERMS OF NEW STOCK................................................................ B-1
</TABLE>

                                      ii

<PAGE>

                                 INTRODUCTION

   Encompass Services Corporation and its direct and indirect subsidiaries,
jointly propose the following plan of reorganization under chapter 11 of the
Bankruptcy Code.

                                  ARTICLE I.

         DEFINITIONS, RULES OF INTERPRETATION, AND COMPUTATION OF TIME

A.  Scope of Definitions; Rules of Construction

   Except as expressly provided or unless the context otherwise requires,
capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in this Article I. Any term that is used and not defined herein, but is
defined in the Bankruptcy Code or the Bankruptcy Rules, shall have the meaning
ascribed to it therein. Where the context requires, any definition applies to
the plural as well as the singular number.

B.  Definitions

   1.1.  "Administrative Expense Claim" means a Claim for payment of an
administrative expense of a kind specified in section 503(b) or 1114(e)(2) of
the Bankruptcy Code and entitled to priority under section 507(a)(1) of the
Bankruptcy Code, including (a) actual, necessary costs and expenses, incurred
after the Petition Date, of preserving the Debtors' Estates and operating their
businesses, including wages, salaries, or commissions for services rendered
after the Petition Date, (b) Professional Fee Claims, (c) all fees and charges
assessed against the Estates under chapter 123 of title 28, United States Code,
(d) all Allowed Claims that are entitled to be treated as Administrative
Expense Claims by virtue of a Final Order entered section 546(c)(2)(A) of the
Bankruptcy Code, (e) the reasonable post-petition fees and expenses of
indenture trustees, including successors thereto, including reasonable
attorney's fees and expenses of such indenture trustees and (f) any obligations
under the DIP Facility.

   1.2.  "Administrative Expense Claims Bar Date" means the date, if any,
designated by the Bankruptcy Court as the last date for filing proofs of
Administrative Expense Claims against the Debtors.

   1.3.  "Affiliate" means any entity that directly, or indirectly, through one
or more intermediaries, controls or is controlled by, or is under common
control with, a specified entity; for purposes of the definition of "Affiliate"
or "affiliate," any entity that owns, controls, or holds with power to vote 20%
or more of the outstanding voting securities of, or controls or directs the
management of, the entity specified shall be deemed to be an Affiliate of such
entity.

   1.4.  "Allowed" means, with respect to a Claim or Equity Interest within a
particular Class, an Allowed Claim or Allowed Equity Interest of the type
described in such Class.

   1.5.  "Allowed Claim/Allowed Equity Interest" means, with reference to any
Claim or Equity Interest, (a) a Claim or Equity Interest which is listed by any
Debtor in its books and records as liquidated in amount and not disputed or
contingent; (b) any Claim or Equity Interest which has been, or is hereafter,
listed by a Debtor in its Schedules (as such Schedules may be amended by any
such Debtor from time to time in accordance with Bankruptcy Rule 1009), as
liquidated in amount and not disputed or contingent and for which no contrary
proof of claim or interest has been filed; (c) any Claim or Equity Interest
which is not Disputed; or (d) any Claim or Equity Interest which, if Disputed,
(i) as to which the liability of the Debtor and the amount thereof are
determined by a final order of a court of competent jurisdiction other than the
Bankruptcy Court, or (ii) has been Allowed by Final Order; provided, however,
that to the extent a Claim or Equity Interest is a Disputed Claim or Disputed
Equity Interest, the determination of whether such Claim or Equity Interest
shall be an Allowed Claim or Allowed Equity Interest and/or the amount of any
such Claim or Equity Interest shall be determined in accordance with the terms
of this Plan. An "Allowed Claim" or an "Allowed Equity Interest" shall not, for
purposes of distributions under this Plan, include (a) for prepetition Claims,
interest on such Claim or Claims accruing from or after the Petition Date, (b)
punitive or exemplary damages or (c) any fine, penalty or forfeiture.

<PAGE>

   1.6.  "Alternate Base Rate" means, for any day, a rate per annum (adjusted,
to the nearest 1/16 of 1%) equal to the greater of (a) the Federal Funds
Effective Rate in effect on such day plus 1/2 of 1% and (b) the Prime Rate in
effect on such day. For purposes hereof, the term "Prime Rate" means, as of a
particular date, the prime rate of Bank of America, N.A. most recently
announced by Bank of America, N.A. and in effect on such date, automatically
fluctuating upward or downward, as the case may be, with and at the time of
each change therein without notice to Encompass or any other Person, which
prime rate may not necessarily represent the lowest or best rate actually
charged to a customer. "Federal Funds Effective Rate" means, for any day, the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of
the quotations for such day on such transactions received by the Bank of
America, N.A. from three federal funds brokers of recognized standing selected
by it. If, for any reason, the Bank of America, N.A. shall have determined
(which determination shall be conclusive absent manifest error) that it is
unable to ascertain the Federal Funds Effective Rate, including the inability
or failure of Bank of America, N.A. to obtain sufficient quotations in
accordance with the terms hereof, the Alternate Base Rate shall be determined
without regard to clause (a) of the first sentence of this definition until the
circumstances giving rise to such inability no longer exist. Any change in the
Alternate Base Rate due to a change in the Prime Rate or the Federal Funds
Effective Rate shall be effective on the effective date of such change in the
Prime Rate or the Federal Funds Effective Rate, respectively.

   1.7.  "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as codified
in title 11 of the United States Code, 11 U.S.C. (S)(S) 101-1330, as now in
effect or hereafter amended.

   1.8.  "Bankruptcy Court" means the United States Bankruptcy Court for the
Southern District of Texas, Houston Division, or any other court with
jurisdiction over the Chapter 11 Cases, or another appropriate forum.

   1.9.  "Bankruptcy Rules" means, collectively, the Federal Rules of
Bankruptcy Procedure and the Official Bankruptcy Forms, the Federal Rules of
Civil Procedure, as applicable to the Chapter 11 Cases or proceedings therein,
and the Local Rules of the Bankruptcy Court, all as now in effect or hereafter
amended.

   1.10.  "Business Day" means any day, excluding Saturdays, Sundays or "legal
holidays" (as defined in Bankruptcy Rule 9006(a)), on which commercial banks
are open for business in the City of New York, New York and Houston, Texas.

   1.11.  "Cash" means legal tender of the United States of America.

   1.12.  "Certificate" means any certificate, instrument, or other document
evidencing an Extinguished Security.

   1.13.  "Chapter 11 Cases" means the jointly administered Chapter 11 cases of
the Debtors.

   1.14.  "Claim" means a claim, as defined in section 101(5) of the Bankruptcy
Code, against any Debtor.

   1.15.  "Class" means one of the classes of Claims or Equity Interests
described in Article III below.

   1.16.  "Committee" means any official committee appointed in the Chapter 11
Cases, as such committee may be reconstituted from time to time.

                                      2

<PAGE>

   1.17.  "Confirmation" means the Bankruptcy Court's confirmation of this Plan.

   1.18.  "Confirmation Date" means the date of entry of the Confirmation Order
on the docket of the Bankruptcy Court.

   1.19.  "Confirmation Hearing" means the Bankruptcy Court's hearing to
consider confirmation of this Plan, as it may be adjourned or continued from
time to time.

   1.20.  "Confirmation Order" means the Bankruptcy Court's order confirming
this Plan under section 1129 of the Bankruptcy Code.

   1.21.  "Critical Vendor Order" means any Final Order approving the Debtors'
request (whether by way of a motion to pay prepetition trade claims in the
ordinary course, a motion to pay claims of critical vendors or otherwise), to
pay substantially all prepetition, fixed, liquidated and undisputed Claims of
certain suppliers of materials, equipment, goods and services with whom the
Debtors continue to do business and whose materials, equipment, goods and
services the Debtors deem essential, necessary or critical to the operation of
their businesses and/or their ability to reorganize under chapter 11 of the
Bankruptcy Code.

   1.22.  "Cure" means the payment of Cash by a Debtor, or the distribution of
other property (as the parties may agree or the Bankruptcy Court may order), as
necessary to cure a default by a Debtor under an executory contract or
unexpired lease of a Debtor and to permit a Debtor to assume that contract or
lease under section 365(a) of the Bankruptcy Code.

   1.23.  "Debtor" means each of Encompass Services Corporation and its
Subsidiaries and "Debtors" means all of them collectively, and when the context
so requires, in their capacity as a debtor and debtor-in-possession under
sections 1107 and 1108 of the Bankruptcy Code.

   1.24.  "DIP Facility" means the debtor-in-possession credit facility to be
entered into in the Chapter 11 Cases by and among Encompass, the Subsidiaries,
as guarantors, the banks and other financial institutions party thereto.

   1.25.  "Disallowed Claim" means any Claim that has been disallowed, in whole
or in part, by Final Order, or by final order of a court of competent
jurisdiction, or any Claim that has been withdrawn, in whole or in part, by the
holder thereof.

   1.26.  "Disallowed Equity Interest" means any Equity Interest that has been
disallowed, in whole or in part, by Final Order, or by final order of a court
of competent jurisdiction or any Claim that has been withdrawn, in whole or in
part, by the holder thereof.

   1.27.  "Disbursing Agent" means Reorganized Encompass or any party
designated by Reorganized Encompass, in its sole discretion, and approved by
the Bankruptcy Court if other than a Debtor, to serve as a disbursing agent
under this Plan.

   1.28.  "Disclosure Statement" means the disclosure statement distributed to
holders of Claims in Classes 6 and 7 pursuant to section 1126(b) of the
Bankruptcy Code.

   1.29.  "Disputed Claim" means any Claim, or any portion thereof, that is not
an Allowed Claim or a Disallowed Claim.

   1.30.  "Disputed Equity Interest" means every Equity Interest that is not an
Allowed Equity Interest or a Disallowed Equity Interest.

   1.31.  "Distribution Date" means the date, occurring as soon as practicable
after the Effective Date, on which the Disbursing Agent first makes
distributions to holders of Allowed Claims as provided in Article V.

                                      3

<PAGE>

   1.32.  "Distribution Notification Date" means the date for purposes of
making distributions under this Plan on account of Allowed Claims on which the
transfer ledgers for the Existing Bank Debt (maintained by Bank of America, as
administrative agent under the Existing Credit Agreement) and Senior
Subordinated Notes will be closed at the close of business on such day and
after which there will be no further changes in the record holders of such debt.

   1.33.  "Effective Date" means the first Business Day (i) on which all
conditions to this Plan's consummation in Article IX.B have been satisfied or
waived and (ii) that is the date on which this Plan is consummated.

   1.34.  "Encompass" means Encompass Services Corporation, a Texas corporation.

   1.35.  "Equity Interest" means the legal, equitable, contractual and other
rights of any Person with respect to any capital stock or other ownership
interest in any Debtor, whether or not transferable, and any option, warrant or
right to purchase, sell, or subscribe for an ownership interest or other equity
security in any Debtor.

   1.36.  "Estate" means the estate of any of the Debtors in the Chapter 11
Cases, and "Estates" means, collectively, the estates of all of the Debtors in
the Chapter 11 Cases, as created under section 541 of the Bankruptcy Code.

   1.37.  "Eurodollar Rate" means the rate per annum (rounded to the nearest
whole multiple of 1/100 of 1%) appearing on Telerate Page 3750 (or any
successor page) as the London interbank offered rate for deposits in United
States dollars at approximately 11:00 a.m. (London time) two Business Days
prior to the first day of a period equal to one, two, three, six, nine or
twelve months. If for any reason such rate is not available, the term
"Eurodollar Rate" means the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in United States dollars at approximately
11:00 a.m. (London time) two Business Days prior to the first day of a period
equal to one, two, three, six, nine or twelve months; provided, however, if
more than one rate is specified on Reuters Screen LIBO Page, the applicable
rate shall be the arithmetic mean of all such rates (rounded upwards, if
necessary, to the nearest 1/100 of 1%).

   1.38.  "Existing Bank Debt" means indebtedness under the Existing Credit
Agreement.

   1.39.  "Existing Common Stock" means Encompass' common stock, par value
$0.001 per share, issued and outstanding immediately before the Petition Date.

   1.40.  "Existing Credit Agreement" means that certain Credit Agreement,
dated as of February 22, 2000, as amended by the First Amendment dated as of
March 23, 2000, the Second Amendment dated as of May 10, 2000, the Third
Amendment dated as of June 8, 2001, the Fourth Amendment dated as of November
9, 2001 and the Fifth Amendment dated as of June 26, 2002, as it may be further
amended from time to time, among Encompass, the Subsidiaries, as guarantors,
the several banks and other financial institutions from time to time parties
thereto, Banc of America Securities and Chase Securities Inc., as co-lead
arrangers and co-book managers, Bank of America, N.A., as administrative agent,
JPMorgan Chase Bank, as syndication agent, Wachovia Bank National Association,
as documentation agent, and ABN-AMRO Bank NV, The Bank of Nova Scotia, Bank
One, N.A., Credit Lyonnais, New York Branch, GMAC Commercial Credit LLC,
Mercantile Bank National Association and Union Bank of California, N.A., as
co-managing agents.

   1.41.  "Existing Credit Agreement Claim" means any Claim arising under the
Existing Credit Agreement.

   1.42.  "Existing Other Equity Interests" means, collectively, (i) all
incentive stock options, non-qualified stock options, and stock appreciation
rights granted under any Debtor-sponsored stock option plans and (ii) any other
options, warrants, or rights, contractual or otherwise, if any, to acquire or
receive an Equity Interest existing immediately before the Petition Date.

                                      4

<PAGE>

   1.43.  "Existing Preferred Stock" means Encompass' 7.25% convertible
participating preferred stock, par value $0.001 per share, issued and
outstanding immediately prior to the Petition Date.

   1.44.  "Existing Stock" means, collectively, the Existing Common Stock and
the Existing Preferred Stock.

   1.45.  "Exit Facility" means the New Revolving Credit Facility provided for
in the New Senior Credit Agreement, and all ancillary agreements, documents,
and instruments to be issued or given in connection therewith.

   1.46.  "Extinguished Securities" means all Existing Common Stock, Existing
Preferred Stock, Existing Other Equity Interests, Senior Subordinated Notes and
Junior Subordinated Notes.

   1.47.  "Face Amount" means when used in reference to (i) a Disputed Claim,
the full stated amount claimed by the holder thereof in any proof of Claim
timely filed with the Bankruptcy Court, (ii) an Allowed Claim, the Allowed
amount thereof, and (iii) an Equity Interest, the number of shares evidencing
such Equity Interests.

   1.48.  "Final Order" means an order or judgment, entered by the Bankruptcy
Court, that has not been amended, modified, or reversed, and as to which (i) no
stay is in effect, (ii) the time to seek rehearing, review, modification or
amendment or to file a notice of appeal has expired, and (iii) no appeal or
request for modification, amendment, a stay, rehearing or other review is
pending.

   1.49.  "General Unsecured Claim" means an unsecured Claim other than a
Senior Subordinated Note Claim, a Junior Subordinated Note Claim, an
Intercompany Claim or a Litigation Claim that is not entitled to priority under
section 507 of the Bankruptcy Code.

   1.50.  "Impaired" means, when used with reference to a Claim or Equity
Interest, a Claim or Equity Interest that is impaired within the meaning of
section 1124 of the Bankruptcy Code.


   1.51.  "Intercompany Claim" means any claim held (a) by a Debtor against
another Debtor and/or (b) by an Affiliate of a Debtor against a Debtor or
another Affiliate of a Debtor.

   1.52.  "Junior Subordinated Note Claim" means any Claim under the Junior
Subordinated Notes.

   1.53.  "Junior Subordinated Notes" means, collectively, (i) the 7.50%
Subordinated Notes due July 15, 2004 in the aggregate principal amount of
$1,250,000, payable to Deborah K. Dillard Revocable Trust; (ii) the 7.50%
Subordinated Notes due July 15, 2004 in the aggregate principal amount of
$1,250,000, payable to William Mason Dillard Revocable Trust; (iii) the
Subordinated Note due 2003, dated January 14, 1999, in the principal amount of
$242,118.19, payable to Randall A. Foco & Jan Marie Foco, Trustees; (iv) the
Subordinated Note due 2003, dated January 14, 1999, in the principal amount of
$534,899.70, payable to Theodore Keenan; and (v) the Subordinated Note due
2003, dated January 14, 1999, in the principal amount of $836,099.36, payable
to James T. Broyles.

   1.54.  "Litigation Claim" means, without limitation, any Claim, over which
the Bankruptcy Court has jurisdiction, asserted in litigation pending on or as
of the Petition Date, or that could have been asserted by any Person on or
prior to the Petition Date against any Debtor, whether known or unknown,
whether asserted directly, derivatively, by way of subrogation or otherwise,
whether the subject of litigation which has been or could have been certified
as a class action under applicable law, and whether grounded in contract, tort,
statute, the common law, equity or other law, and including, without
limitation, Claims for personal injury, property damage, wrongful death,
products liability, unfair labor and/or hiring practices, civil rights
violations, employment discrimination, breach of contract, preferential
transfers, indemnity, contribution, fraud, environmental damage and/or release,
and claims related to toxic mold. The Litigation Claims are Disputed Claims. To
the extent a Litigation Claim is Allowed, settled or estimated by Final Order,
a Litigation Claim shall become a General Unsecured Claim.


                                      5

<PAGE>

   1.55.  "M&M Lien Claimant" means a Person who furnishes services, labor,
equipment and/or material for the purpose of erecting, repairing, improving or
altering a building, structure or other improvement and whose claim for such
services, labor, equipment and/or material is secured by a valid and
enforceable lien created by local, state or other law.

   1.56.  "M&M Lien Secured Claim" means a Secured Claim held by an M&M Lien
Claimant.

   1.57.  "Management Group" means Encompass' current management team
consisting of J. Patrick Millinor, Jr., Joseph M. Ivey, Henry P. Holland,
Darren B. Miller, Daniel W. Kipp, Gray H. Muzzy, L. Scott Biar, Todd Matherne,
James L. Cocca, Patrick L. McMahon, James L. Phillips, Steven A. Bate and
William Hill.

   1.58.  "New Common Stock" means the new common stock to be issued by
Reorganized Encompass pursuant to this Plan as of the Effective Date.

   1.59.  "New Options" means the options to be issued by Reorganized Encompass
to purchase New Common Stock pursuant to the provisions of the Stock Option
Plan.

   1.60.  "New Preferred Stock" means any class of preferred stock that may be
designated by the Board of Directors of Reorganized Encompass in accordance
with the Reorganized Encompass Certificate of Incorporation.

   1.61.  "New Revolving Facility" means that revolving credit facility to be
entered into by and among Reorganized Encompass, the Reorganized Subsidiaries,
as guarantors, the banks and other financial institutions party thereto dated
as of the Effective Date, in the aggregate principal amount of $100,000,000,
which facility will replace the DIP Facility and will fund the Reorganized
Debtors' working capital and general corporate needs.

   1.62.  "New Securities" means, collectively, the New Common Stock, the New
Options and/or New Preferred Stock, as applicable.

   1.63.  "New Senior Credit Agreement" means the credit agreement (pursuant to
which the New Senior Credit Facility is provided) to be entered into by
Reorganized Encompass, the Reorganized Subsidiaries, as guarantors, and the
bank and other financial institutions parties thereto, dated as of the
Effective Date, and all ancillary agreements, documents, and instruments to be
issued or given in connection therewith.

   1.64.  "New Senior Credit Facility" means collectively, (i) the New
Revolving Facility, and (ii) the New Term Loan.

   1.65.  "New Stock" means, collectively, the New Preferred Stock and the New
Common Stock.

   1.66.  "New Term Loan" means that term loan to be entered into by and among
Reorganized Encompass, the Reorganized Subsidiaries, as guarantors, the banks
and other financial institutions party thereto in the aggregate principal
amount of $200,000,000, as same may be increased for drawings under prepetition
letters of credit issued and outstanding under the Existing Credit Agreement.

   1.67.  "Other Priority Claim" means a Claim entitled to priority under
section 507(a) of the Bankruptcy Code, other than a Priority Tax Claim or an
Administrative Expense Claim.

   1.68.  "Other Secured Claim" means any Secured Claim, including an M&M Lien
Secured Claim, other than a Secured Tax Claim, provided, however, that an
Existing Credit Agreement Claim is not an Other Secured Claim.

   1.69.  "Person" means an individual, corporation, partnership, joint
venture, association, joint stock company, limited liability company, limited
liability partnership, trust, estate, unincorporated organization, or other
entity.

                                      6

<PAGE>

   1.70.  "Petition Date" means the date on which the Debtors file their
petitions for relief commencing the Chapter 11 Cases.

   1.71.  "Plan" means this joint plan of reorganization of Encompass Services
Corporation, et al., as it may be amended, modified, or supplemented from time
to time, including all exhibits and schedules hereto.

   1.72.  "Plan Supplement" means the compilation of documents, including any
exhibits to this Plan not included herewith, that the Debtors may file with the
Bankruptcy Court on or before the date that is five (5) Business Days prior to
the Confirmation Hearing.

   1.73.  "Postpetition Interest" means interest, accruing after the Petition
Date, on a Claim.

   1.74.  "Priority Tax Claim" means a Claim that is entitled to priority under
section 507(a)(8) of the Bankruptcy Code.

   1.75.  "Professional" means a professional Person, as that term is used in
sections 327 and 1103 of the Bankruptcy Code.

   1.76.  "Professional Fee Claim" means a Professional's Claim for
compensation or reimbursement of costs and expenses relating to services
performed on and after the Petition Date and before and including the Effective
Date.

   1.77.  "Pro Rata" means, at any time, the proportion that the Face Amount of
an Allowed Claim or Allowed Equity Interest in a particular Class bears to the
aggregate Face Amount of all Claims or Equity Interests (including Disputed
Claims or Disputed Equity Interests, but excluding Disallowed Claims or
Disallowed Equity Interests) in that Class, unless this Plan provides otherwise.

   1.78.  "Reorganized Debtor" means each of Reorganized Encompass and the
Reorganized Subsidiaries, and "Reorganized Debtors" means all of them.

   1.79.  "Reorganized Encompass" means Encompass, on and after the Effective
Date.

   1.80.  "Reorganized Encompass Bylaws" means Reorganized Encompass' bylaws in
effect under the laws of the State of Texas, as amended by this Plan and in the
form to be filed with the Plan Supplement.

   1.81.  "Reorganized Encompass' Board of Directors" means Reorganized
Encompass' board of directors upon and following the Effective Date.

   1.82.  "Reorganized Encompass Certificate of Incorporation" means
Reorganized Encompass' certificate of incorporation in effect under the laws of
the State of Texas, as amended by this Plan and in the form to be filed with
the Plan Supplement.

   1.83.  "Reorganized Subsidiaries" means, collectively, Encompass' Debtor
Subsidiaries on and after the Effective Date.

   1.84.  "Schedules" means the schedules of assets and liabilities, statements
of financial affairs, and lists of holders of Claims and Equity Interests filed
by the Debtors pursuant to section 521 of the Bankruptcy Code and Bankruptcy
Rule 1007, including any amendments and supplements thereto.

   1.85.  "Section 510(b) Claim" means any Claim against any Debtor, under
applicable federal or state law, whether or not such Claim is listed on the
Schedules or evidenced by a filed proof of claim, and whether or not the
subject of an existing lawsuit, arising from or seeking the rescission of a
purchase or sale of equity of any Debtor or any Affiliate of a Debtor, for
damages arising from the purchase or sale of such a security, or for

                                      7

<PAGE>

reimbursement, indemnification or contribution allowed under section 502 of the
Bankruptcy Code on account of such a Claim as provided in section 510(b) of the
Bankruptcy Code.

   1.86.  "Secured Claim" means a Claim that is secured by a lien that is
valid, perfected and enforceable, and not avoidable, upon property in which a
Debtor has an interest, to the extent of the value, as of the Effective Date,
of such interest or lien as determined by a Final Order pursuant to section 506
of the Bankruptcy Code, or as otherwise agreed to in writing by a Debtor or
Reorganized Debtor and the holder of such Claim.

   1.87.  "Secured Tax Claim" means any Secured Claim which, absent its secured
status, would be entitled to priority in right of payment under Section
507(a)(8) of the Bankruptcy Code.

   1.88.  "Securities Act" means the Securities Act of 1933, as amended.

   1.89.  "Senior Lender" means the holder of a claim under the Existing Credit
Agreement.

   1.90.  "Senior Subordinated Note Claim" means any Claim under the Senior
Subordinated Notes.

   1.91.  "Senior Subordinated Notes" means the 10-1/2% senior subordinated
notes due 2009 of Encompass in the aggregate principal amount of $335 million
(i) issued under that certain Indenture, dated as of April 30, 1999, among
Building One Services Corporation, the predecessor-in-interest to Encompass,
the guarantors named therein, and IBJ Whitehall Bank & Trust Company, as
trustee, (ii) as amended by the First Supplemental Indenture dated as of
November 12, 1999, the Second Supplemental Indenture dated as of January 31,
2000, the Third Supplemental Indenture dated as of February 22, 2000, and (iii)
as amended and assumed by Encompass and guaranteed by its Subsidiaries by the
Fourth Supplemental Indenture dated as of June 28, 2001, among Encompass, the
guarantors named therein and The Bank of New York, as successor to IBJ
Whitehall Bank & Trust Company, as Trustee.

   1.92.  "Stock Option Plan" means the stock option plan to be adopted by
Reorganized Encompass pursuant to Article IV.F, pursuant to which New Options
will be issued.

   1.93.  "Subsidiary" means a direct or indirect subsidiary of Encompass, and
"Subsidiaries" means all of them collectively.

   1.94.  "Subsidiary Interests" means, collectively, the issued and
outstanding shares of stock of the Subsidiary Debtors directly or indirectly
owned by Encompass on the Petition Date.

C.  Rules of Interpretation

   1.  General

   In this Plan (a) any reference to a contract, instrument, release,
indenture, or other agreement or document as being in a particular form or on
particular terms and conditions means the agreement or document substantially
in that form or on those terms and conditions, (b) any reference to an existing
document or exhibit means that document or exhibit as it may have been or may
be amended, modified, or supplemented, (c) unless otherwise specified, all
references to Sections, Articles, Schedules, and Exhibits are references to
Sections, Articles, Schedules, and Exhibits of or to this Plan, (d) the words
"hereof," "herein," "hereby," "hereunder," and words of similar import refer to
this Plan in its entirety rather than to a particular portion of this Plan, (e)
captions and headings to Articles and Sections are for convenience of reference
only and are not intended to be a part of or to affect the interpretation of
this Plan, and (f) the rules of construction, in section 102 of the Bankruptcy
Code and in the Bankruptcy Rules shall apply.

   2.  "Including"

   As used in this Plan, "include," "includes," or "including" shall be deemed
to be followed by the words "without limitation."

                                      8

<PAGE>

   3.  "On"

   With reference to any distribution under this Plan, "on" a date (means on or
as soon as reasonably practicable after that date.

D.  Computation of Time

   In computing any period of time prescribed or allowed by this Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.

                                  ARTICLE II.

                       TREATMENT OF UNCLASSIFIED CLAIMS

   In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative
Expense Claims and Priority Tax Claims are not classified and are not entitled
to vote on this Plan.

A.  Administrative Expense Claims

   Each holder of an Allowed Administrative Expense Claim shall receive, on the
latest of (i) the Distribution Date, (ii) the date on which its Administrative
Expense Claim becomes an Allowed Administrative Expense Claim, or (iii) the
date on which its Administrative Expense Claim becomes payable under any
agreement relating thereto, or as soon as practicable thereafter, Cash equal to
the unpaid portion of its Allowed Administrative Expense Claim. Notwithstanding
the foregoing, (a) any Allowed Administrative Expense Claim based on a
liability incurred by the Debtors in the ordinary course of business during the
Chapter 11 Cases shall be paid in the ordinary course of business, in
accordance with the terms and conditions of any agreement relating thereto and
(b) any Allowed Administrative Expense Claim may be paid on such other terms as
may be agreed on between the holder of such Claim and the Debtors.

B.  Priority Tax Claims

   On the later of (i) the Distribution Date or (ii) the date such Priority Tax
Claim becomes an Allowed Priority Tax Claim, or as soon as practicable
thereafter, each holder of an Allowed Priority Tax Claim shall receive in full
satisfaction, settlement, release, and discharge of and in exchange for such
Allowed Priority Tax Claim, in the sole discretion of the Debtors, (a) Cash
equal to the unpaid portion of such Allowed Priority Tax Claim, (b) deferred
Cash payments over a period not exceeding six years after the date of
assessment of such Allowed Priority Tax Claim, of a value, as of the Effective
Date, equal to such Allowed Priority Tax Claim, or (c) such other treatment as
to which the Debtors and such holder shall have agreed upon in writing;
provided, however, that the Debtors reserve the right to prepay any Allowed
Priority Tax Claim, or any remaining balance of any Allowed Priority Tax Claim,
in full at any time on or after the Distribution Date without premium or
penalty; provided further, however, that no holder of an Allowed Priority Tax
Claim shall be entitled to any payments on account of any pre-Effective Date
interest accrued on or penalty arising after the Petition Date with respect to
or in connection with such Allowed Priority Tax Claim.

                                 ARTICLE III.

          CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS

A.  Introduction

   This Plan places all Claims and Equity Interests, except unclassified Claims
provided for in Article II, in the classes listed below. A Claim or Equity
Interest is placed in a particular Class only to the extent that it falls
within the description of that Class, and is classified in any other Class to
the extent that any portion thereof falls within the description of such other
Class.

                                      9

<PAGE>

B.  Summary of Classes

<TABLE>
<CAPTION>
                    Class                       Impaired/Unimpaired, Entitlement to Vote
--------------------------------------------- ---------------------------------------------
<S>                                           <C>
Class 1 -- Other Priority Claims              Unimpaired -- Deemed to have accepted this
                                              Plan and not entitled to vote
Class 2 -- Intercompany Claims                Unimpaired -- Deemed to have accepted this
                                              Plan and not entitled to vote
Class 3 -- Subsidiary Interests               Unimpaired -- Deemed to have accepted this
                                              Plan and not entitled to vote
Class 4 -- Secured Tax Claims                 Unimpaired -- Deemed to have accepted this
                                              Plan and not entitled to vote
Class 5 -- Other Secured Claims               Unimpaired -- Deemed to have accepted this
                                              Plan and not entitled to vote
Class 6 -- Existing Credit Agreement Claims   Impaired -- Entitled to vote

Class 7 -- Senior Subordinated Note Claims    Impaired -- Entitled to vote

Class 8 -- Junior Subordinated Note Claims    Impaired -- Deemed to have rejected this Plan
                                              and not entitled to vote
Class 9 -- General Unsecured Claims           Unimpaired -- Deemed to have accepted this
                                              Plan and not entitled to vote
Class 10 -- Litigation Claims                 Impaired -- Deemed to have rejected this Plan
                                              and not entitled to vote
Class 11 -- Existing Preferred Stock          Impaired -- Deemed to have rejected this Plan
                                              and not entitled to vote
Class 12 -- Existing Common Stock and Section Impaired -- Deemed to have rejected this Plan
  510(b) Claims                               and not entitled to vote
Class 13 -- Existing Other Equity Interests   Impaired -- Deemed to have rejected this Plan
                                              and not entitled to vote
</TABLE>

C.  Treatment of Classified Claims and Equity Interests

   1.  Class 1 -- Other Priority Claims

       a.  Claims in Class: Class 1 consists of all Other Priority Claims.

       b.  Treatment: On the later of (i) the Distribution Date or (ii) the
date on which its Other Priority Claim becomes an Allowed Other Priority Claim,
or, in each case, as soon as practicable thereafter, each holder of an Allowed
Other Priority Claim shall receive, in full satisfaction, settlement, release,
and discharge of and in exchange for such Allowed Other Priority Claim, Cash
equal to the full amount of its Allowed Other Priority Claim.

   2.  Class 2 -- Intercompany Claims

       a.  Claims in Class: Class 2 consists of all Intercompany Claims.

       b.  Treatment: The legal, equitable, and contractual rights of the
holders of Allowed Intercompany Claims are unaltered by this Plan, or such
Allowed Intercompany Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.

   3.  Class 3 -- Subsidiary Interests

       a.  Claims in Class: Class 3 consists of all Subsidiary Interests.

       b.  Treatment: The legal, equitable, and contractual rights of the
holders of Allowed Subsidiary Interests are unaltered by this Plan, or such
Allowed Subsidiary Interests shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.

                                      10

<PAGE>

   4.  Class 4 -- Secured Tax Claims

       a   Claims in Class 4 consists of all Secured Tax Claims.

      b.  Treatment: Except to the extent that a holder of an Allowed Secured
   Tax Claim has been paid by the Debtors prior to the Effective Date or agrees
   to a different treatment, each holder of an Allowed Secured Tax Claim shall
   receive, at the sole option of the Reorganized Debtors, (i) Cash in the
   amount of such Allowed Secured Tax Claim, including any interest required by
   section 506(b) of the Bankruptcy Code, on the later of the Effective Date or
   the date on which such Allowed Secured Tax Claim becomes an Allowed Secured
   Tax Claim, or as soon thereafter as is practicable, or (ii) equal annual
   Cash payments in an aggregate amount equal to such Allowed Secured Tax
   Claim, together with interest at a fixed annual rate equal to 7.0% over a
   period through the sixth anniversary of the date of assessment of such
   Allowed Secured Tax Claim, or upon such other terms determined by the
   Bankruptcy Court to provide the holder of such Allowed Secured Tax Claim
   deferred Cash payments having a value, as of the Effective Date, equal to
   such Allowed Secured Tax Claim.

   5.   Class 5 -- Other Secured Claims

      a.  Claims in Class:  Class 5 consists of all Other Secured Claims.

      b.  Treatment:  The legal, equitable, and contractual rights of the
   holders of Other Secured Claims are unaltered by this Plan, or such Other
   Secured Claims shall otherwise be rendered unimpaired pursuant to section
   1124 of the Bankruptcy Code.

   6.  Class 6 -- Existing Credit Agreement Claims

      a.  Claims in Class:  Class 6 consists of all Existing Credit Agreement
   Claims.

      b.  Treatment:  On the later of (i) the Effective Date or (ii) the date
   on which its Existing Credit Agreement Claim becomes an Allowed Existing
   Credit Agreement Claim, or, in each case, as soon as practicable thereafter,
   each holder of an Allowed Existing Credit Agreement Claim shall receive, in
   full satisfaction, settlement, release, and discharge of and in exchange for
   such Allowed Existing Credit Agreement Claim, (i) a Pro Rata amount of
   indebtedness under the New Term Loan and all rights related to such
   indebtedness under the New Term Loan, and (ii) a Pro Rata distribution of
   34,000,000 shares of New Common Stock.

   7.  Class 7 -- Senior Subordinated Note Claims

      a.  Claims in Class:  Class 7 consists of all Senior Subordinated Note
   Claims.

      b.  Treatment:  On the later of (i) the Effective Date or (ii) the date
   on which its Senior Subordinated Note Claim becomes an Allowed Senior
   Subordinated Note Claim, or, in each case, as soon as practicable
   thereafter, each holder of an Allowed Senior Subordinated Note Claim shall
   transfer to Encompass such Allowed Senior Subordinated Note Claim for
   cancellation and shall receive from Encompass in exchange therefor, and in
   full satisfaction, settlement, release, and discharge of such Claim, a Pro
   Rata distribution of 8,500,000 of the shares of New Common Stock.

   8.  Class 8 -- Junior Subordinated Note Claims

      a.  Claims in Class:  Class 8 consists of all Junior Subordinated Note
   Claims.

      b.  Treatment:  On the Effective Date, all Junior Subordinated Note
   Claims shall be cancelled, and the holders of all Junior Subordinated Note
   Claims shall not receive any distribution under the Plan.

   9.  Class 9 -- General Unsecured Claims

      a.  Claims in Class:  Class 9 consists of all General Unsecured Claims.

                                      11

<PAGE>

      b.  Treatment:  Except to the extent that a holder of an Allowed General
   Unsecured Claim has been paid on or before the Effective Date pursuant to
   the Critical Vendor Order or otherwise, the legal, equitable and contractual
   rights of the holders of Allowed General Unsecured Claims shall be unaltered
   by this Plan, or such Allowed General Unsecured Claims shall otherwise be
   rendered unimpaired pursuant to section 1124 of the Bankruptcy Code.

   10.  Class 10 -- Litigation Claims

      a.  Claims in Class:  Class 10 consists of all Litigation Claims.

      b.  Treatment:  Except to the extent that a holder of an Allowed
   Litigation Claim has been paid by the Debtors prior to the Effective Date or
   agrees to a different treatment, the holders of Litigation Claims shall not
   receive any distribution under the Plan.

   11.  Class 11 -- Existing Preferred Stock

      a.  Equity Interests in Class:  Class 11 consists of the Existing
   Preferred Stock.

      b.  Treatment:  On the Effective Date, all Existing Preferred Stock and
   the accrued and unpaid dividends thereon shall be cancelled, and the holders
   of Existing Preferred Stock shall not receive or retain any property on
   account of their Existing Preferred Stock.

   12.  Class 12 -- Existing Common Stock and Section 510(b) Claims

      a.  Equity Interests in Class:  Class 12 consists of all Existing Common
   Stock and Section 510(b) Claims.

      b.  Treatment:  On the Effective Date, all Existing Common Stock shall be
   cancelled, and the holders of Existing Common Stock and Section 510(b)
   Claims shall not receive or retain any property on account of their Existing
   Common Stock and/or Section 510(b) Claims.

   13.  Class 13 -- Existing Other Equity Interests

      a.  Equity Interests in Class:  Class 13 consists of all Existing Other
   Equity Interests.

      b.  Treatment:  On the Effective Date, all Existing Other Equity
   Interests shall be cancelled, and the holders of Existing Other Equity
   Interests shall not receive or retain any property on account of their
   Existing Other Equity Interests.

D.  Allowed Claims

   Notwithstanding any provision herein to the contrary, the Debtors or
Reorganized Debtors shall only make distributions to holders of Allowed Claims.
No holder of a Disputed Claim shall receive any distribution on account thereof
until and to the extent that its Disputed Claim becomes an Allowed Claim or
Allowed Equity Interest.

E.  Postpetition Interest

   In accordance with section 502(b)(2) of the Bankruptcy Code, the amount of
all unsecured Claims against the Debtors shall be calculated as of the Petition
Date. Except as otherwise explicitly provided herein, in section 506(b) of the
Bankruptcy Code or by order of the Bankruptcy Court, no holder of a Claim shall
be entitled to or shall receive Postpetition Interest.

F.  Alternative Treatment

   Notwithstanding any provision herein to the contrary, any holder of an
Allowed Claim may receive, instead of the distribution or treatment to which it
is entitled hereunder, any other distribution or treatment to which it and the
Debtors may agree to in writing.

                                      12

<PAGE>

G.  Tax Allocation

   For tax purposes, the value of any New Securities received by holders of
Claims in satisfaction of interest bearing obligations shall be allocated first
to the full satisfaction of principal of such interest bearing obligations and
second in satisfaction of any accrued unpaid interest.

                                  ARTICLE IV.

                     MEANS FOR IMPLEMENTATION OF THIS PLAN

A.  Continued Corporate Existence; Authorized Capital Stock

   Except for any Subsidiaries that may be sold as part of the expected asset
disposition program, each of the Reorganized Debtors shall continue to exist
after the Effective Date as separate entities in accordance with the applicable
law in the applicable jurisdiction in which they are incorporated, formed or
organized under their respective certificates of incorporation and bylaws,
partnership agreement, membership agreement or other organizational documents
in effect before the Effective Date except as their organizational documents
may be amended pursuant to this Plan. On the Effective Date, the organizational
documents of each Reorganized Debtor shall be amended as necessary to satisfy
the provisions of this Plan and the Bankruptcy Code and shall include, pursuant
to section 1123(a)(6) of the Bankruptcy Code, a provision prohibiting the
issuance of non-voting equity securities. In addition, the Reorganized
Encompass Certificate of Incorporation shall include a provision
(i) authorizing 50 million shares of New Preferred Stock, and (ii) authorizing
150 million shares of New Common Stock.

B.  Restructuring Transactions

   Notwithstanding the foregoing, and in accordance with the provisions of
section 1123 of the Bankruptcy Code, the Debtors may enter into any
transactions or take any actions appropriate or necessary to effect a corporate
restructuring of their respective businesses, including, without limitation,
any action necessary to effect a change in the organizational form of a Debtor.
Any such proposed corporate restructuring shall be described in the documents
and papers contained in the Plan Supplement. In addition to such
pre-Confirmation Date transactions, the applicable Reorganized Debtors may
enter into such transactions, on and after the Confirmation Date, which are
necessary or appropriate to effect a corporate restructuring of their
respective businesses, including, without limitation, simplifying the overall
corporate structure of the Reorganized Debtors, or reincorporating certain of
the Debtors under the laws of jurisdictions other than the laws under which the
applicable Debtor is presently incorporated or reforming some or all of the
Subsidiary Debtors as limited liability companies or limited partnerships in
such jurisdictions. Such restructuring may include one or more mergers,
consolidations, dispositions, liquidations, or dissolutions, as may be
determined by the Reorganized Debtors to be necessary or appropriate. In each
case in which the surviving, resulting, or acquiring corporation in any such
transaction is a successor to a Reorganized Debtor, such surviving, resulting,
or acquiring corporation will perform the obligations of the applicable
Reorganized Debtor pursuant to the Plan to pay or otherwise satisfy the Allowed
Claims against such Reorganized Debtor, except as provided in any contract,
instrument or other agreement or document effecting a disposition to such
surviving, resulting, or acquiring corporation, which may provide that another
Reorganized Debtor will perform such obligations.

C.  Substantive Consolidation for Purposes of Treating Impaired Claims

   For voting and confirmation purposes, the Plan is premised upon the
administrative and procedural consolidation of all of the Debtors. For
distribution purposes, the Plan is premised on the substantive consolidation of
the holders of Impaired Claims to whom distributions are proposed to be made.
The Plan does not contemplate substantive consolidation of the Debtors with
respect to any Class of Claims or Equity Interests to whom no distribution is
proposed to be made, nor does it contemplate the merger of any Debtor entity
into another nor the transfer or commingling of any assets of any Debtor,
except as such assets are to be pooled for

                                      13

<PAGE>

purposes of distributions to holders of Impaired Claims to whom distributions
are proposed to be made. On the Effective Date, (a) Impaired Claims against any
Debtor and all guaranties by any Debtor of such Impaired Claims shall be
treated as a single Claim against all of the Debtors and any holders of
Impaired Claims against two or more Debtors, and any Impaired Claims for joint
and several liability against two or more Debtors shall be treated and Allowed
as a single Impaired Claim against the consolidated Debtors, and (b) each
holder of a Claim in an Impaired Class of Claims that files a Claim in the
Chapter 11 Case of any Debtor shall be treated as one such Claim for
distribution purposes; provided, however, that the holders of the Impaired
Claims specified in subsections (a) and (b) of this paragraph are the holders
of Impaired Claims to whom distributions are proposed to be made under the
Plan. Substantive consolidation shall not (other than for purposes related to
the Plan as set forth in this paragraph): (w) affect the legal and corporate
structures of the Reorganized Debtors or affect or modify ownership of any
asset of any Debtor, (x) cause any Debtor to be liable for any Claim or
Unimpaired Claim in any way under the Plan for which it is otherwise not liable
and the liability of any Debtor for any such Claim shall not be affected by
such substantive consolidation, (y) affect Intercompany Claims, and/or
(z) affect Subsidiary Interests.

D.  Corporate Action; Cancellation of Securities

   As of the Effective Date, the Certificates evidencing the Extinguished
Securities shall evidence solely the right to receive from Encompass the
distribution of the consideration, if any, set forth in Article III.C. On the
Effective Date, except as otherwise provided for herein, (i) the Extinguished
Securities, to the extent not already cancelled, shall be deemed cancelled and
of no further force or effect without any further action on the part of the
Bankruptcy Court or any other Person and (ii) the obligations of the Debtors
under the Extinguished Securities and under the Debtors' certificate of
incorporation, any agreements, indentures, or certificates of designations or
other organizational documents governing the Extinguished Securities shall be
terminated and discharged; provided, however, that each indenture or other
agreement that governs the rights of the holder of a Claim based on the
Extinguished Securities and that is administered by an indenture trustee,
agent, or servicer shall continue in effect solely for the purposes of
(a) allowing such indenture trustee, agent, or servicer to make the
distributions to be made on account of such Claims hereunder and (b) permitting
such indenture trustee, agent, or servicer to maintain any rights it may have
for fees, costs, and expenses under such indenture or other agreement.
Additionally, the cancellation of any indenture shall not impair the rights and
duties under such indenture as between the indenture trustee thereunder and the
beneficiaries of the trust created thereby. Additionally, as of the Effective
Date, all Equity Interests, to the extent not already cancelled, shall be
cancelled; provided, however, that the Subsidiary Interests shall be treated in
accordance with the terms of the Plan.

   Any actions taken by an indenture trustee, agent or servicer that are not
for the purposes authorized hereunder shall not be binding upon the Debtors.
Except with respect to the making of distributions as provided in the preceding
paragraph, the Reorganized Debtors may, with or without cause, terminate any
indenture or other governing agreement and the authority of any indenture
trustee, agent or servicer to act thereunder at any time by giving five
Business Days' written notice of termination to the indenture trustee, agent,
or servicer. If distributions hereunder on account of Senior Subordinated Note
Claims have not been completed at the time of termination of the indenture or
other governing agreement, the Reorganized Debtors shall designate a
distribution agent to act in place of the indenture trustee, agent, or
servicer, and the provisions of this Plan shall be deemed to apply to the new
distribution agent.

E.  Directors and Executive Officers

   On the Effective Date, the term of each member of the current Board of
Directors of Encompass will automatically expire. The initial Board of
Directors of Reorganized Encompass on and after the Effective Date will consist
of seven members, one of which will be the Chief Executive Officer of
Reorganized Encompass, four of which will be designated by the holders of
Allowed Existing Credit Agreement Claims and two of which will be designated by
the holders of Allowed Senior Subordinated Note Claims. The Debtors will
consult with representatives of the holders of Existing Credit Agreement Claims
to determine the four appointees to be

                                      14

<PAGE>

designated by the holders of the Allowed Existing Credit Agreement Claims to
the Reorganized Encompass' Board of Directors and will consult with the
indenture trustee for the Senior Subordinated Notes to determine the two
appointees to be designated by the holders of the Senior Subordinated Notes to
the Reorganized Encompass' Board of Directors. The Reorganized Encompass' Board
of Directors will have the responsibility for the management, control, and
operation of Reorganized Encompass on and after the Effective Date. The members
of the Management Group will maintain their current positions as executive
officers of Reorganized Encompass on and after the Effective Date. Certain
officers of Reorganized Encompass on and after the Effective Date will also
serve as the officers and directors of its Reorganized Subsidiaries in
accordance with past practice, unless otherwise provided in the Plan Supplement.

   Certain officers of Reorganized Encompass on and after the Effective Date
will also serve as the officers and directors of the Reorganized Subsidiaries
in accordance with past practice, unless otherwise provided in the Plan
Supplement. In accordance with section 1129(a)(5) of the Bankruptcy Code, the
Debtors will identify those individuals proposed to serve as officers and
directors of the Reorganized Subsidiaries in the Plan Supplement.

F.  New Securities

   As of the Effective Date, the issuance by Reorganized Encompass of an
aggregate of 42,500,000 shares of New Common Stock to holders of Existing
Credit Agreement Claims and Senior Subordinated Note Claims shall be authorized.

   As of the Effective Date, the grant by Reorganized Encompass of the New
Options to purchase an aggregate of 3,500,000 shares of New Common Stock in
accordance with the Stock Option Plan shall be authorized.

   As of the Effective Date, the reservation by Reorganized Encompass of up to
7,500,000 shares of New Common Stock for issuance pursuant to any exercise of
New Options shall be authorized.

   The issuance, grant, and reservation of New Securities authorized in this
Article IV.F shall not require any further act or action by or among other
Persons, any shareholders or creditors of Encompass, under applicable law,
regulation, order or rule.

   On or before the Distribution Date, Reorganized Encompass shall issue for
distribution in accordance with the provisions hereof the New Securities
required for distribution pursuant to the provisions hereof. All securities to
be issued shall be deemed issued as of the Effective Date regardless of the
date on which they are actually distributed. Descriptions of the terms of the
New Common Stock are set forth in Exhibit B annexed hereto.

G.  New Senior Credit Agreement

   The Debtors expect that the indebtedness under the Existing Credit Agreement
shall be restructured in the New Senior Credit Agreement to provide for a New
Term Loan in the amount of $200 million, subject to increase as a result of any
drawing upon letters of credit issued and outstanding under the Existing Credit
Agreement as of the Petition Date, in which case such drawings will increase
the principal amount of the New Term Loan in an amount equal to such drawing
and will be allocated to the reimbursing Senior Lenders. In addition, the
Debtors anticipate that the New Senior Credit Agreement will include the Exit
Facility, which the Debtors anticipate will provide for revolving loans of up
to $100 million, the full amount of which will be available for the issuance of
letters of credit. All letters of credit issued and outstanding under the DIP
Facility will be deemed to be issued and outstanding under the Exit Facility as
of the Effective Date. Indebtedness under the New Term Loan will be junior to
indebtedness under the Exit Facility. The Exit Facility will provide liquidity
for working capital and other general corporate purposes to the Reorganized
Debtors following the conclusion of the Chapter 11 Cases. On the Effective
Date, the Reorganized Debtors will enter into the New Senior Credit Agreement.

H.  Stock Option Plan

   In connection with the Plan, Reorganized Encompass will adopt a new Stock
Option Plan that is intended to provide incentives to employees to continue
their efforts to foster and promote the long-term growth and

                                      15

<PAGE>

performance of the Reorganized Debtors. The Stock Option Plan will authorize
the issuance of New Options to purchase shares of New Common Stock up to an
aggregate amount of 15% of the New Common Stock on a fully diluted basis as of
the Effective Date. On the Effective Date, Reorganized Encompass shall issue
New Options to purchase up to 7% of the outstanding New Common Stock on a fully
diluted basis. Such New Options will be issued to employees of the Reorganized
Debtors as determined by the Reorganized Encompass' Board of Directors in
consultation with the Chief Executive Officer of Reorganized Encompass
regarding such allocation. The remaining New Options will be available for
future grants at the discretion of the Reorganized Encompass' Board of
Directors, subject to such terms and conditions as the Reorganized Encompass'
Board of Directors may determine at the time of grant. The terms of the New
Options, including, without limitation, vesting provisions and exercise price,
will be established by Reorganized Encompass' Board of Directors.

I.  Revesting of Assets

   The property of each Debtor's Estate, together with any property of each
Debtor that is not property of its Estate and that is not specifically disposed
of pursuant to this Plan, shall revest in the applicable Reorganized Debtor on
the Effective Date. Thereafter, the Reorganized Debtors may operate their
businesses and may use, acquire, and dispose of property free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules, and the Bankruptcy
Court. As of the Effective Date, all property of the Reorganized Debtors shall
be free and clear of all Claims, encumbrances, Equity Interests, charges and
liens except as specifically provided or contemplated herein or the
Confirmation Order. Without limiting the generality of the foregoing, the
Reorganized Debtors may, without application to or approval by the Bankruptcy
Court, pay professional fees and expenses incurred after the Effective Date.

J.  Preservation of Rights of Action; Settlement of Litigation Claims

   Except as otherwise provided herein or in the Confirmation Order, or in any
contract, instrument, release, indenture or other agreement entered into in
connection with this Plan, in accordance with section 1123(b) of the Bankruptcy
Code, the Reorganized Debtors shall retain and may enforce, sue on, settle, or
compromise (or decline to do any of the foregoing) all claims, rights or causes
of action, suits, and proceedings, whether in law or in equity, whether known
or unknown, that the Debtors or their Estates may hold against any Person or
entity without the approval of the Bankruptcy Court. The Reorganized Debtors or
their successor(s) may pursue such retained claims, rights or causes of action,
suits, or proceedings as appropriate, in accordance with the best interests of
the Reorganized Debtors or their successor(s) who hold such rights.

K.  Effectuating Documents; Further Transactions

   The chairman of the board of directors, president, chief financial officer,
any executive vice-president or senior vice-president, or any other appropriate
officer of each Debtor shall be authorized to execute, deliver, file, or record
such contracts, instruments, releases, indentures, and other agreements or
documents, and take such other actions, as may be necessary or appropriate, to
effectuate and further evidence the terms and conditions of this Plan. The
secretary or assistant secretary of the appropriate Debtor shall be authorized
to certify or attest to any of the foregoing actions.

L.  Exemption from Certain Transfer Taxes

   Pursuant to section 1146(c) of the Bankruptcy Code, any transfers from a
Debtor to a Reorganized Debtor or any other Person or entity pursuant to this
Plan shall not be subject to any document recording tax, stamp tax, conveyance
fee, intangibles or similar tax, mortgage tax, real estate transfer tax,
mortgage recording tax, or other similar tax or governmental assessment, and
the Confirmation Order shall direct the appropriate state or local governmental
officials or agents to forego the collection of any such tax or governmental
assessment and to accept for filing and recordation any of the foregoing
instruments or other documents without the payment of any such tax or
governmental assessment.

                                      16

<PAGE>

                                  ARTICLE V.

                      PROVISIONS GOVERNING DISTRIBUTIONS

A.  Distributions for Claims and Equity Interests Allowed as of the Effective
Date

   Except as otherwise provided herein or as ordered by the Bankruptcy Court,
distributions and issuances of New Securities to be made in exchange for or on
account of Claims that are Allowed Claims as of the Effective Date shall be
made on the Distribution Date, or as soon thereafter as reasonably practicable.
All Cash distributions shall be made by the Disbursing Agent from available
Cash of the Reorganized Debtors. Any distribution hereunder of property other
than Cash (including any issuance of New Securities and the distribution of
such New Securities in exchange for Allowed Claims as of the Effective Date)
shall be made by the Disbursing Agent, the indenture trustee or the transfer
agent in accordance with the terms of this Plan.

B.  Disbursing Agent

   The Disbursing Agent shall make all distributions required hereunder, except
with respect to a holder of a Claim whose distribution is governed by an
indenture or other agreement and is administered by an indenture trustee,
agent, or servicer, which distributions shall be deposited with the appropriate
indenture trustee, agent, or servicer, who shall deliver such distributions to
the holders of Claims in accordance with the provisions hereof and the terms of
the relevant indenture or other governing agreement.

   If the Disbursing Agent is an independent third party designated by the
Reorganized Debtors to serve in such capacity (or, in the case of an indenture
or other agreement that governs distributions and is administered by an
indenture trustee, agent, or servicer), such Disbursing Agent, indenture
trustee, agent, or servicer shall receive, without further Bankruptcy Court
approval, reasonable compensation for distribution services rendered pursuant
to this Plan and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services from the Reorganized Debtors on terms acceptable
to the Reorganized Debtors. No Disbursing Agent shall be required to give any
bond or surety or other security for the performance of its duties unless
otherwise ordered by the Bankruptcy Court. If otherwise so ordered, all costs
and expenses of procuring any such bond shall be paid by the Reorganized
Debtors.

C.  Surrender of Securities or Instruments

   On or before the Distribution Date, or as soon as reasonably practicable
thereafter, each holder of a Certificate shall surrender such Certificate to
the Disbursing Agent, or, with respect to the Senior Subordinated Notes, the
indenture trustee with respect thereto, and such Certificate shall be
cancelled. No distribution of property hereunder shall be made to or on behalf
of any such holder unless and until such Certificate is received by the
Disbursing Agent or the indenture trustee, as the case may be, or the
unavailability of such Certificate is reasonably established to the
satisfaction of the Disbursing Agent or indenture trustee, as the case may be.
Any such holder who fails to surrender or cause to be surrendered such
Certificate or fails to execute and deliver an affidavit of loss and indemnity
reasonably satisfactory to the Disbursing Agent or indenture trustee, as the
case may be, prior to the second anniversary of the Effective Date shall be
deemed to have forfeited all rights and Claims or Equity Interests in respect
of such Certificate, shall not participate in any distribution hereunder and
(i) all Cash in respect of such forfeited distribution, including interest
accrued thereon, shall revert to Reorganized Encompass and (ii) all New
Securities in respect of such forfeited distribution shall be cancelled
notwithstanding any federal or escheat laws to the contrary.

D.  Instructions to Disbursing Agent

   Prior to any distribution on account of a Senior Subordinated Note Claim,
the indenture trustee shall (i) inform the Disbursing Agent as to the amount of
properly surrendered Senior Subordinated Notes, and (ii) inform the Disbursing
Agent in a properly completed letter of transmittal, accompanied by properly
remitted

                                      17

<PAGE>

securities, of the names of holders of Allowed Senior Subordinated Note Claims,
and the number of shares of New Common Stock to be issued and distributed to or
on behalf of such holders of Allowed Senior Subordinated Note Claims in
exchange for properly surrendered Senior Subordinated Notes.

E.  Services of Indenture Trustee

   Any indenture trustee's services with respect to consummation of this Plan
shall be as set forth herein and as authorized by the indenture.

F.  Notification Date for Distributions

   At the close of business on the Distribution Notification Date, the transfer
ledgers for the Existing Bank Debt (maintained by Bank of America, N.A., as
Administrative Agent under the Existing Credit Agreement) and Senior
Subordinated Notes shall be closed, and there shall be no further changes in
the record holders of such debt. The Reorganized Debtors and the Disbursing
Agent, if any, shall have no obligation to recognize any transfer of any such
debt occurring after the Distribution Notification Date and shall be entitled
instead to recognize and deal for all purposes hereunder with only those record
holders listed on the transfer ledgers as of the close of business on the
Distribution Notification Date.

G.  Means of Cash Payment

   Cash payments hereunder shall be in U.S. funds by check, wire transfer, or
such other commercially reasonable manner as the payor shall determine in its
sole discretion.

H.  Calculation of Distribution Amounts of New Common Stock

   No fractional shares of New Common Stock shall be issued or distributed
hereunder or by Reorganized Encompass or any Disbursing Agent, indenture
trustee, agent, or servicer. Each Person entitled to receive New Common Stock
shall receive the total number of whole shares of New Common Stock to which
such Person is entitled. Whenever any distribution to a particular Person would
otherwise call for distribution of a fraction of a share of New Common Stock,
such number of shares shall be rounded down to the nearest whole number.

I.  Delivery of Distributions; Undeliverable or Unclaimed Distributions

   Distributions to holders of Allowed Claims shall be made by the Disbursing
Agent or the indenture trustee, as the case may be, (a) at the holder's last
known address, (b) at the address in any written notice of address change
delivered to the Disbursing Agent, (c) in the case of the holder of a Senior
Subordinated Note Claim, at the address in the indenture trustee's official
records, or (d) at the address set forth in a properly completed letter of
transmittal accompanying a Certificate properly remitted in accordance with the
terms hereof. If any holder's distribution is returned as undeliverable, no
further distributions to such holder shall be made, unless and until the
Disbursing Agent or indenture trustee is notified of such holder's then current
address, at which time all missed distributions shall be made to such holder
without interest. Amounts in respect of undeliverable distributions made
through the Disbursing Agent or the indenture trustee shall be returned to the
Reorganized Debtors or the indenture trustee, as the case may be, until such
distributions are claimed. All claims for undeliverable distributions must be
made on or before the second anniversary of the Effective Date, after which
date (i) all Cash in respect of such forfeited distribution including interest
accrued thereon shall revert to Reorganized Encompass and (ii) all New
Securities in respect of such forfeited distribution shall be cancelled, in
each case, notwithstanding any federal or escheat laws to the contrary.

J.  Withholding and Reporting Requirements

   In connection with this Plan and all distributions hereunder, the Disbursing
Agent shall, to the extent applicable as determined in its sole discretion,
comply with all tax withholding and reporting requirements

                                      18

<PAGE>

imposed by any federal, state, local, or foreign taxing authority, and all
distributions hereunder shall be subject to any such withholding and reporting
requirements. The Disbursing Agent shall be authorized to take all actions
necessary or appropriate to comply with such withholding and reporting
requirements.

K.  Setoffs

   Other than in respect of any Existing Credit Agreement Claim, a Reorganized
Debtor may, but shall not be required to, setoff against any Claim, and the
payments or other distributions to be made pursuant to this Plan in respect of
such Claim, claims of any nature whatsoever that the Debtor or Reorganized
Debtor may have against the Claim's holder; provided, however, that neither the
failure to do so nor the allowance of any Claim hereunder shall constitute a
waiver or release by the Reorganized Debtor of any claim that the Debtor or
Reorganized Debtor may have against such holder. Nothing in this Plan shall be
deemed to expand rights to setoff under applicable non-bankruptcy law.
Notwithstanding the foregoing, the Reorganized Debtors shall be deemed to waive
and shall have no right of setoff or recoupment against any Existing Credit
Agreement Claim or against any amounts at any time due or outstanding under the
DIP Facility.

                                  ARTICLE VI.

                      PROCEDURES FOR RESOLVING DISPUTED,
                      CONTINGENT, AND UNLIQUIDATED CLAIMS

A.  Objections to Claims; Disputed Claims

   The Debtors intend to make distributions, as required by this Plan, in
accordance with the books and records of the Debtors (or in the case of the
Existing Bank Debt, in accordance with the books and records of Bank of
America, N.A., as Administrative Agent under the Existing Credit Agreement).
Unless disputed by the holder of a Claim, the amount set forth in the books and
records of the Debtors shall constitute the amount of the Allowed Claim of such
holder. If any holder of a Claim disagrees with the Debtors, such holders must
so advise the Debtors in writing, in which event, the Claim shall be a Disputed
Claim. The Debtors intend to attempt to resolve any such disputes consensually.

   Notwithstanding the foregoing, the Debtors may, in their discretion, file
with the Bankruptcy Court (or any other court of competent jurisdiction) an
objection to the allowance of any Claim, or any other appropriate motion or
adversary proceeding with respect thereto. All such objections shall be
litigated to Final Order; provided, however, that the Debtors may compromise
and settle, withdraw or resolve by any other method any objections to Claims or
Equity Interests. In addition, any Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code or other applicable law regardless of
whether such Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court
shall retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event the Bankruptcy Court
estimates any contingent or unliquidated Claim, that estimated amount shall
constitute either the Allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtors may elect to pursue
any supplemental proceedings to object to any ultimate distribution on such
Claim. All of the aforementioned Claims objection, estimation, and resolution
procedures are cumulative and are not necessarily exclusive of one another.
Claims may be estimated and thereafter resolved by any permitted mechanism.

B.  No Distribution Pending Allowance

   Notwithstanding any other provision herein, if any portion of a Claim is a
Disputed Claim, no payment or distribution provided hereunder shall be made on
account of or in exchange for such Claim unless and until such Disputed Claim
becomes an Allowed Claim.

                                      19

<PAGE>

C.  Distributions After Allowance

   To the extent that a Disputed Claim ultimately becomes an Allowed Claim, a
distribution shall be made to the holder of such Allowed Claim in accordance
with the provisions of this Plan. As soon as reasonably practicable after the
date that the order or judgment of the Bankruptcy Court or other applicable
court of competent jurisdiction allowing any Disputed Claim becomes a Final
Order, the Disbursing Agent shall provide to the holder of such Claim the
distribution to which such holder is entitled hereunder on account of or in
exchange for such Allowed Claim.

                                 ARTICLE VII.

             TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES

A.  Assumed Contracts and Leases

   Except as otherwise provided herein, or in any contract, instrument,
release, indenture, or other agreement or document entered into in connection
with this Plan, as of the Effective Date each Reorganized Debtor shall be
deemed to have assumed each executory contract and unexpired lease to which it
is a party, unless such contract or lease (i) was previously assumed or
rejected by the Debtors, (ii) previously expired or terminated pursuant to its
own terms, (iii) is the subject of a motion to reject filed on or before the
Confirmation Date or (iv) is set forth in a schedule, as an executory contract
or unexpired lease to be rejected, filed as part of the Plan Supplement. The
Confirmation Order shall constitute an order of the Bankruptcy Court under
section 365 of the Bankruptcy Code approving the contract and lease assumptions
or rejections described above, as of the Effective Date.

   Each executory contract and unexpired lease that is assumed and relates to
the use, ability to acquire, or occupancy of real property shall include (a)
all modifications, amendments, supplements, restatements, or other agreements
made directly or indirectly by any agreement, instrument, or other document
that in any manner affect such executory contract or unexpired lease, and (b)
all executory contracts or unexpired leases appurtenant to the premises,
including all easements, licenses, permits, rights, privileges, immunities,
options, rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vaults, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights in rem related to such premises, unless any
of the foregoing agreements has been rejected pursuant to an order of the
Bankruptcy Court.

B.  Payments Related to Assumption of Contracts and Leases

   Any monetary amounts by which any executory contract and unexpired lease to
be assumed hereunder is in default shall be satisfied, under section 365(b)(1)
of the Bankruptcy Code, by the applicable Debtor. If there is a dispute
regarding (i) the nature or amount of any Cure, (ii) the ability of a
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (iii) any other matter pertaining to
assumption, Cure shall occur following the entry of a Final Order of the
Bankruptcy Court resolving the dispute and approving the assumption or
assumption and assignment, as the case may be.

C.  Rejected Contracts and Leases

   Except as otherwise provided herein or in any contract, instrument, release,
indenture or other agreement or document entered into in connection with this
Plan, none of the executory contracts and unexpired leases to which a Debtor is
a party shall be rejected hereunder; provided, however, that the Debtors
reserve the right, at any time prior to the Confirmation Date, to seek to
reject any executory contract or unexpired lease to which any Debtor is a party.

D.  Claims Based on Rejection of Executory Contracts or Unexpired Leases

   All Claims arising out of the rejection of executory contracts and unexpired
leases must be served upon the appropriate Debtor and its counsel within 60
days after the earlier of (i) the date of entry of an order of the

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Bankruptcy Court approving such rejection or (ii) the Confirmation Date. Any
Claims not filed within such times shall be forever barred from assertion
against the respective Debtor, its Estate, and its property.

E.  Compensation and Benefit Plans and Treatment of Retirement Plans

   Except and to the extent previously assumed by an order of the Bankruptcy
Court, on or before the Confirmation Date, all employee compensation and
benefit plans of the Debtors, including benefit plans and programs subject to
sections 1114 and 1129(a)(13) of the Bankruptcy Code, entered into before or
after the Petition Date and not since terminated, shall be deemed to be, and
shall be treated as if they were, executory contracts that are to be assumed
hereunder. The Debtors' obligations under such plans and programs shall survive
Confirmation of this Plan, except for (i) executory contracts or employee
benefit plans specifically rejected pursuant to this Plan (to the extent such
rejection does not violate sections 1114 and 1129(a)(13) of the Bankruptcy
Code) and (ii) such executory contracts or employee benefit plans as have
previously been rejected, are the subject of a motion to reject as of the
Confirmation Date, or have been specifically waived by the beneficiaries of any
employee benefit plan or contract; provided, however, that the Debtors'
obligations, if any, to pay all "retiree benefits," as defined in section
1114(a) of the Bankruptcy Code, shall continue unimpaired and in full force and
effect.

                                 ARTICLE VIII.

                     ACCEPTANCE OR REJECTION OF THIS PLAN

A.  Classes Entitled To Vote

   Each Impaired Class of Claims or Equity Interests that shall (or may)
receive or retain property or any interest in property hereunder is entitled to
vote to accept or reject this Plan. By operation of law, each unimpaired Class
of Claims or Equity Interests is deemed to have accepted this Plan and,
therefore, is not entitled to vote. Because holders of Claims and Equity
Interests in Classes that are not entitled to receive or retain any property
hereunder are presumed to have rejected this Plan, they are not entitled to
vote.

B.  Acceptance by Impaired Classes

   An Impaired Class of Claims shall have accepted this Plan if the holders of
at least two-thirds in amount and more than one-half in number of the Allowed
Claims in the Class actually voting have voted to accept this Plan, in each
case not counting the vote of any holder designated under section 1126(e) of
the Bankruptcy Code.

C.  Elimination of Classes

   Any Class that does not contain any Allowed Claims or Equity Interests or
any Claims or Equity Interests temporarily allowed for voting purposes under
Federal Rule of Bankruptcy Procedure 3018, as of the date of the commencement
of the Confirmation Hearing, shall be deemed not included in this Plan for
purposes of (i) voting to accept or reject this Plan and (ii) determining
whether such Class has accepted or rejected this Plan under section 1129(a)(8)
of the Bankruptcy Code.

D.  Nonconsensual Confirmation

   The Bankruptcy Court may confirm this Plan over the dissent of any Impaired
Class if all of the requirements for consensual confirmation under subsection
1129(a), other than subsection 1129(a)(8), of the Bankruptcy Code and for
nonconsensual confirmation under of subsection 1129(b) of the Bankruptcy Code
have been satisfied.

   To obtain confirmation notwithstanding the nonacceptance of a Class, the
Debtors must demonstrate to the Court that this Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to any dissenting Impaired
Classes. A plan does not discriminate unfairly if the legal rights of a
dissenting Class are treated in a manner consistent with the treatment of other
Classes whose legal rights are substantially similar to those of the dissenting
Class and if no Class receives more than it is entitled to for its Claims or
Equity Interests. If required, the Debtors shall show at the Confirmation
Hearing that this Plan does not discriminate unfairly.

   To the extent necessary, the Debtors shall request confirmation of this
Plan, as this Plan may be modified from time to time, under section 1129(b) of
the Bankruptcy Code.

                                      21

<PAGE>

                                  ARTICLE IX.

                      CONDITIONS PRECEDENT TO THIS PLAN'S
                         CONFIRMATION AND CONSUMMATION

A.  Conditions to Confirmation

   The Confirmation hereof is subject to the satisfaction or due waiver of the
following conditions precedent:

   1.  The proposed Confirmation Order shall be in form and substance
reasonably acceptable to the Debtors.

   2.  The DIP Facility shall have been obtained.

   3.  The Exit Facility shall have been obtained and shall be in full force
and effect and shall not have expired or otherwise terminated.

B.  Conditions to Effective Date

   The following are conditions precedent to the occurrence of the Effective
Date, each of which must be satisfied or waived in accordance with Article IX.C
below:

   1.  The Confirmation Order shall have been entered by the Bankruptcy Court
and that order must provide, among other things, that:

      a. the Debtors and Reorganized Debtors are authorized and directed to
   take all actions necessary or appropriate to enter into, implement, and
   consummate the contracts, instruments, releases, leases, indentures, and
   other agreements or documents created in connection with this Plan;

      b. the provisions of the Confirmation Order are non-severable and
   mutually dependent;

      c. all executory contracts or unexpired leases assumed or assumed and
   assigned by the Debtors during the Chapter 11 Cases or hereunder shall
   remain in full force and effect for the benefit of the Reorganized Debtors
   or their assignees notwithstanding any provision in such contract or lease
   (including those described in sections 365(b)(2) and (f) of the Bankruptcy
   Code) that prohibits such assignment or transfer or that enables, permits,
   or requires termination of such contract or lease;

      d. the transfers of property by the Debtors (i) to the Reorganized
   Debtors (A) are or shall be legal, valid, and effective transfers of
   property, (B) vest or shall vest the Reorganized Debtors with good title to
   such property free and clear of all liens, charges, Claims, encumbrances, or
   Equity Interests, except as expressly provided herein or in the Confirmation
   Order, (C) do not and shall not constitute avoidable transfers under the
   Bankruptcy Code or under applicable bankruptcy or nonbankruptcy law, and (D)
   do not and shall not subject the Reorganized Debtors to any liability by
   reason of such transfer under the Bankruptcy Code or under applicable
   nonbankruptcy law, including any laws affecting successor, transferee or
   stamp or recording tax liability and (ii) to holders of Claims or Equity
   Interests hereunder are for good consideration and value;

      e. except as expressly provided herein (or in any order of the Bankruptcy
   Court), upon the effectiveness of all transactions incident to and part
   hereof, the Debtors are discharged effective upon the Confirmation Date from
   any "debt" (as that term is defined in section 101(12) of the Bankruptcy
   Code), and the Debtors' liability in respect thereof is extinguished
   completely, whether reduced to judgment or not, liquidated or unliquidated,
   contingent or noncontingent, asserted or unasserted, fixed or unfixed,
   matured or unmatured, disputed or undisputed, legal or equitable, or known
   or unknown, or that arose from any agreement of the Debtors that has either
   been assumed or rejected in the Chapter 11 Cases or pursuant hereto, or
   obligation of the Debtors incurred before the Confirmation Date, or from any
   conduct of the Debtors prior to the Confirmation Date, or that otherwise
   arose before the Confirmation Date, including all interest, if any, on any
   such debts, whether such interest accrued before or after the Petition Date;

                                      22

<PAGE>

      f. all Existing Preferred Stock, Existing Common Stock, and Existing
   Other Equity Interests in Encompass shall be cancelled effective upon the
   Effective Date;

      g. the New Securities issued hereunder are exempt from registration under
   the Securities Act pursuant to section 1145 of the Bankruptcy Code, except
   to the extent that any holders of New Securities are "underwriters," as that
   term is defined in section 1145 of the Bankruptcy Code; and

      h. the Debtors have acted in good faith with respect to the formulation,
   solicitation, and Confirmation of the Plan, pursuant to section 1125(e) of
   the Bankruptcy Code.

   2.  All authorizations, consents, and regulatory approvals required, if any,
in connection with the consummation of this Plan shall have been obtained.

   3.  The New Senior Credit Agreement shall have been executed by all
necessary parties thereto and prior to, or simultaneously with, the
effectiveness of this Plan, all conditions precedent thereto shall have been
satisfied or waived such that it shall have become effective.

   4.  The Debtors shall have executed and delivered all documents necessary to
effectuate the issuance of the New Securities.

   5.  All other actions, documents, and agreements necessary to implement this
Plan shall have been effected or executed.

   6.  No stay of the Confirmation Order and/or consummation of this Plan is in
effect.

   7.  All definitive documentation relating to the Plan and the transactions
contemplated thereby shall be consistent in all material respects with the
terms of this Plan and the definitive documentation relating to the New Common
Stock, the Stock Option Plan, the New Senior Credit Agreement, the DIP
Facility, the Reorganized Encompass Certificate of Incorporation and all other
documents material to the consummation of the transactions contemplated under
the Plan shall be in form and substance reasonably acceptable to each of the
Senior Lenders.

C.  Waiver of Conditions

   Each of the conditions set forth in Article IX.B above, other than as set
forth in Article IX.B, 3, and 6, may be waived in whole or in part by the
Debtors, without any notice to other parties in interest or the Bankruptcy
Court and without a hearing. The failure to satisfy or waive any condition to
Confirmation or the Effective Date may be asserted by the Debtors regardless of
the circumstances giving rise to the failure of such condition to be satisfied
(including any action or inaction by the Debtors). The failure of the Debtors
to exercise any of the foregoing rights shall not be deemed a waiver of any
other rights, and each such right shall be deemed an ongoing right that may be
asserted at any time.

                                  ARTICLE X.

                   MODIFICATIONS AND AMENDMENTS; WITHDRAWAL

   The Debtors may alter, amend, or modify this Plan or any exhibits thereto
under section 1127(a) of the Bankruptcy Code at any time prior to the
Confirmation Date. The Debtors reserve the right to include any amended
exhibits in the Plan Supplement, whereupon each such amended exhibit shall be
deemed substituted for the original of such exhibit. After the Confirmation
Date the Debtors or Reorganized Debtors may, under section 1127(b) of the

                                      23

<PAGE>

Bankruptcy Code, institute proceedings in the Bankruptcy Court to remedy any
defect or omission or reconcile any inconsistencies in the Plan, the Disclosure
Statement, and the Confirmation Order, and to accomplish such matters as may be
necessary to carry out the purposes and extent hereof so long as such
proceedings do not materially and adversely affect the treatment of holders of
Claims or Equity Interests hereunder.

                                  ARTICLE XI.

                           RETENTION OF JURISDICTION

   Under sections 105(a) and 1142 of the Bankruptcy Code, and notwithstanding
this Plan's Confirmation and the occurrence of the Effective Date, the
Bankruptcy Court shall retain exclusive jurisdiction (except with respect to
the purposes described under clauses (A) and (N) below, with respect to which
jurisdiction shall not be exclusive) over all matters arising out of or related
to the Chapter 11 Cases and this Plan, to the fullest extent permitted by law,
including jurisdiction to:

   A.  determine any and all objections to the allowance of Claims or Equity
Interests;

   B.  determine any and all motions to estimate Claims at any time, regardless
of whether the Claim to be estimated is the subject of a pending objection, a
pending appeal, or otherwise;

   C.  determine any and all motions to subordinate Claims or Equity Interests
at any time and on any basis permitted by applicable law;

   D.  hear and determine all Professional Fee Claims and other Administrative
Expense Claims;

   E.  hear and determine all matters with respect to the assumption or
rejection of any executory contract or unexpired lease to which a Debtor is a
party or with respect to which a Debtor may be liable, including, if necessary,
the nature or amount of any required Cure or the liquidation of any Claims
arising therefrom;

   F.  hear and determine any and all adversary proceedings, motions,
applications, and contested or litigated matters arising out of, under, or
related to, the Chapter 11 Cases;

   G.  enter such orders as may be necessary or appropriate in aid of the
consummation hereof and to execute, implement, or consummate the provisions
hereof and all contracts, instruments, releases, and other agreements or
documents created in connection with this Plan, the Disclosure Statement and/or
the Confirmation Order;

   H.  hear and determine disputes arising in connection with the
interpretation, implementation, consummation, or enforcement hereof and all
contracts, instruments, and other agreements executed in connection with this
Plan;

   I.  hear and determine any request to modify this Plan or to cure any defect
or omission or reconcile any inconsistency herein or any order of the
Bankruptcy Court;

   J.  issue and enforce injunctions or other orders, or take any other action
that may be necessary or appropriate to restrain any interference with or
compel action for the implementation, consummation, or enforcement hereof or
the Confirmation Order;

   K.  enter and implement such orders as may be necessary or appropriate if
the Confirmation Order is for any reason reversed, stayed, revoked, modified,
or vacated;

   L.  hear and determine any matters arising in connection with or relating
hereto, the Confirmation Order or any contract, instrument, release, or other
agreement or document created in connection with this Plan, the Disclosure
Statement or the Confirmation Order;

                                      24

<PAGE>

   M.  enforce all orders, judgments, injunctions, releases, exculpations,
indemnifications and rulings entered in connection with the Chapter 11 Cases;

   N.  recover all assets of the Debtors and property of the Debtors' Estates,
wherever located;

   O.  hear and determine matters concerning state, local, and federal taxes in
accordance with sections 346, 505, and 1146 of the Bankruptcy Code;

   P.  hear and determine all disputes involving the existence, nature, or
scope of the Debtors' discharge;

   Q.  hear and determine such other matters as may be provided in the
Confirmation Order or as may be authorized under, or not inconsistent with,
provisions of the Bankruptcy Code; and

   R.  enter a final decree closing the Chapter 11 Cases.

                                 ARTICLE XII.

                          COMPROMISES AND SETTLEMENTS

   Pursuant to Federal Rule of Bankruptcy Procedure 9019(a), the Debtors may
compromise and settle various Claims against them and/or claims they may have
against other Persons. Each of the Debtors expressly reserves the right (with
Bankruptcy Court approval, following appropriate notice and opportunity for a
hearing) to compromise and settle Claims against it and claims that it may have
against other Persons up to and including the Effective Date. After the
Effective Date, such right shall transfer to the Reorganized Debtors pursuant
hereto and Bankruptcy Court approval of such action shall not be required.

                                 ARTICLE XIII.

                           MISCELLANEOUS PROVISIONS

A.  Bar Dates for Certain Claims

   1.  Administrative Expense Claims

   The Confirmation Order shall establish an Administrative Expense Claims Bar
Date for the filing of all Administrative Expense Claims (other than
Professional Fee Claims or Claims for the expenses of the members of any
Committee (if appointed)), which date shall be 60 days after the Confirmation
Date. Holders of asserted Administrative Expense Claims, other than
Professional Fee Claims or Claims for United States Trustee fees or the
expenses of the members of any Committee (if appointed), not paid and not
arising out of transactions in the ordinary course of business prior to the
Confirmation Date must submit proofs of Administrative Expense Claim on or
before such Administrative Expense Claims Bar Date or forever be barred from
doing so. The notice of Confirmation to be delivered pursuant to Bankruptcy
Rules 3020(c) and 2002(f) shall set forth such date and constitute notice of
this Administrative Expense Claims Bar Date. The Debtors or the Reorganized
Debtors, as the case may be, shall have 60 days (or such longer period as may
be allowed by order of the Bankruptcy Court) following the Administrative
Expense Claims Bar Date to review and object to such Administrative Expense
Claims before a hearing for determination of allowance of such Administrative
Expense Claim.

   2.  Professional Fee Claims

   All final requests for compensation or reimbursement of Professional Fee
Claims pursuant to sections 327, 328, 330, 331, 503(b), or 1103 of the
Bankruptcy Code for services rendered to the Debtors or any Committee (if
appointed) prior to the Effective Date must be filed and served on the
Reorganized Debtors and their counsel no

                                      25

<PAGE>

later than 60 days after the Effective Date, unless otherwise ordered by the
Bankruptcy Court. Objections to applications of such Professionals or other
entities for compensation or reimbursement of expenses must be filed and served
on the Reorganized Debtors and their counsel and the requesting Professional or
other entity no later than 60 days (or such longer period as may be allowed by
order of the Bankruptcy Court) after the date on which the applicable
application for compensation or reimbursement was served. If the Debtors or the
Reorganized Debtors and any such professional cannot agree on the amount of
fees and expenses to be paid to such party, the amount of fees and expenses
shall be determined by the Bankruptcy Court.

B.  Payment of Statutory Fees

   All fees payable under section 1930 of title 28 of the United States Code,
as determined by the Bankruptcy Court at the Confirmation Hearing, shall be
paid on or before the Effective Date. All such fees that arise after the
Effective Date but before the closing of the Chapter 11 Cases shall be paid by
the Reorganized Debtors.

C.  Severability of Plan Provisions

   If, prior to Confirmation, any term or provision hereof is held by the
Bankruptcy Court to be invalid, void, or unenforceable, the Bankruptcy Court,
at the request of the Debtors, shall have the power to alter and interpret such
term or provision, to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void, or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. If, in particular, any term or provision
of the Plan is found to be violative of the requirements of section 1129(b)(2)
of the Bankruptcy Code based on the proposed receipt and/or retention of
property by the holders of Claims in any Class, the consideration to be
distributed to the holders of such Claims shall be reallocated, eliminated or
otherwise adjusted to conform the Plan to the requirements of the Bankruptcy
Code. Notwithstanding any such adjustment, elimination, alteration,
interpretation, or holding with respect to the terms and provisions of this
Plan, the terms hereof shall remain in full force and effect and shall in no
way be affected, impaired, or invalidated by such holding, alteration, or
interpretation. The Confirmation Order shall constitute a judicial
determination and shall provide that each term and provision hereof, as it may
have been altered, interpreted or adjusted in accordance with the foregoing, is
valid and enforceable pursuant to its terms.

D.  Successors and Assigns

   The rights, benefits and obligations of all Persons named or referred to
herein shall be binding on, and shall inure to the benefit of, their respective
heirs, executors, administrators, personal representatives, successors or
assigns.

E.  Discharge of the Debtors and Injunction

   All consideration distributed hereunder shall be in exchange for, and in
complete satisfaction, settlement, discharge, and release of, all Claims
against and Equity Interests in the Debtors of any nature whatsoever or against
any of the Debtors' assets or properties. Except as otherwise expressly
provided herein, entry of the Confirmation Order (subject to the occurrence of
the Effective Date) shall act as a discharge of all Claims against and debts
of, liens on, and Equity Interests in each of the Debtors (save and except for
the Subsidiary Interests), the Debtors' assets, and their properties, arising
at any time before the entry of the Confirmation Order, regardless of whether a
proof of Claim or proof of Equity Interest therefor was filed, whether the
Claim or Equity Interest is Allowed, or whether the holder thereof votes to
accept this Plan or is entitled to receive a distribution thereunder, subject
to the occurrence of the Effective Date. Upon entry of the Confirmation Order,
and subject to the occurrence of the Effective Date, any holder of such
discharged Claim or Equity Interest shall be precluded from asserting against
the Debtors or any of their assets or properties any other or further Claim or
Equity Interest based upon any document, instrument, act, omission,
transaction, or other activity of any kind or nature that occurred before the
date of entry of the Confirmation Order, except as otherwise expressly provided
in this Plan. The Confirmation Order shall be a judicial determination of
discharge of all liabilities of the Debtors, subject to the occurrence of the
Effective Date.

                                      26

<PAGE>

   In accordance with section 524 of the Bankruptcy Code, the discharge
provided in this section and section 1141 of the Bankruptcy Code shall act as
an injunction against the commencement or continuation of any action,
employment of process, or act to collect, offset, or recover the Claims and
Equity Interests discharged hereby. Except as otherwise expressly provided in
this Plan and/or the Confirmation Order, all Persons who have held, hold, or
may hold Claims against, or Equity Interests in, the Debtors shall be
permanently enjoined, on and after the Effective Date, from (i) commencing or
continuing in any manner any action or other proceeding of any kind with
respect to any such Claim or Equity Interest, (ii) the enforcement, attachment,
collection, or recovery by any manner or means of any judgment, award, decree,
or order against the Debtors on account of any such Claim or Equity Interest,
(iii) creating, perfecting, or enforcing any encumbrance of any kind against
the Debtors or against the property or interests in property of the Debtors on
account of any such Claim or Equity Interest, and (iv) asserting any right of
setoff, subrogation, or recoupment of any kind against any obligation due from
the Debtors or against the property or interests in property of the Debtors on
account of any such Claim or Equity Interest. The foregoing injunction shall
extend to successors of the Debtors (including, without limitation, the
Reorganized Debtors) and their respective properties and interests in property.

F.  Releases By the Debtors

   On the Effective Date, effective as of the Confirmation Date, the Debtors
and the Reorganized Debtors shall waive and release and be permanently enjoined
from any prosecution or attempted prosecution of any and all claims,
obligations, rights, causes of action or liabilities, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, which the Debtors or the
Reorganized Debtors have or may have against any present or former director,
officer, or employee of the Debtors and their respective attorneys, agents, and
property; provided, however, that the foregoing shall not operate as a waiver
of, or release from, any causes of action arising out of (i) any express
contractual obligation owing by any such director, officer, or employee to the
Debtors or (ii) the willful misconduct of such director, officer, or employee
in connection with, related to, or arising out of the administration of the
Chapter 11 Cases, the pursuit of Confirmation hereof, the consummation hereof,
the administration hereof, or the property to be distributed hereunder.

   On the Effective Date, effective as of the Confirmation Date, the Debtors
shall release and be permanently enjoined from any prosecution or attempted
prosecution of any and all claims and causes of action, including any claims or
causes of action under chapter 5 of the Bankruptcy Code, which they have or may
have against any Senior Lender and its members, officers, directors, agents,
financial advisors, attorneys, employees, equity holders, partners, affiliates
and representatives and their respective property in connection with (i)
actions taken as or in its capacity of being a Senior Lender and (ii) the
Chapter 11 Cases.

G.  Other Releases

   On the Effective Date, effective as of the Confirmation Date, and except as
otherwise provided herein or in the Confirmation Order, the Debtors, the
Reorganized Debtors, each Senior Lender, and the indenture trustee, and each of
their respective present or former members, officers, directors, agents,
financial advisors, attorneys, employees, partners, and representatives and
their respective property shall be released from any and all claims,
obligations, rights, causes of action, and liabilities which the Debtors, the
Reorganized Debtors, or any holder of a Claim against any Debtor may be
entitled to assert, whether for tort, fraud, contract, violations of federal or
state securities laws, or otherwise, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, based in whole or in part upon any
act or omission, transaction, or other occurrence taking place on or before the
Confirmation Date, in any way relating to the Chapter 11 Cases or this Plan, or
otherwise; provided, however, that nothing shall release any Person from any
claims, obligations, rights, causes of action, or liabilities based upon any
act or omission in connection with, relating to, or arising out of, the
administration of the Chapter 11 Cases, the solicitation of acceptances hereof,
the pursuit of Confirmation hereof, the consummation hereof, the administration
hereof, or the property to be distributed hereunder arising out of such
Person's willful misconduct.

                                      27

<PAGE>

H.  Exculpation and Limitation of Liability

   The Reorganized Debtors, the Senior Lenders, and any and all of their
respective present or former members, officers, directors, employees, Equity
Interest holders, partners, advisors, affiliates, attorneys, or agents, or any
of their successors or assigns, shall not have or incur any liability to any
holder of a Claim or an Equity Interest, or any other party-in-interest, or any
of their respective agents, employees, equity holders, partners, members,
representatives, financial advisors, attorneys, or affiliates, or any of their
successors or assigns, for any act or omission in connection with, relating to,
or arising out of the administration of the Chapter 11 Cases, the solicitation
of acceptances hereof, the pursuit of Confirmation hereof, the consummation
hereof, or the administration hereof or the property to be distributed
hereunder, except for their willful misconduct and in all respects shall be
entitled to reasonably rely upon the advice of counsel with respect to their
duties and responsibilities hereunder.

   Notwithstanding any other provision hereof, no holder of a Claim or Equity
Interest, no other party-in-interest, none of their respective agents,
employees, equity holders, partners, members, representatives, financial
advisors, attorneys, or affiliates, and no successors or assigns of the
foregoing, shall have any right of action against the Debtors, the Reorganized
Debtors, the Estates, any Committee, the Senior Lenders, or any of their
respective present or former members, officers, directors, employees, Equity
Interest holders, partners, or affiliates or any of their successors or
assigns, for any act or omission in connection with, relating to, or arising
out of, the administration of the Chapter 11 Cases, the solicitation of
acceptances hereof, the pursuit of Confirmation hereof, the consummation
hereof, or the administration hereof or the property to be distributed
hereunder, except for their willful misconduct.

I.  Term of Injunctions or Stays

   Unless otherwise provided herein or in the Confirmation Order, all
injunctions or stays in effect in the Chapter 11 Cases under sections 105 or
362 of the Bankruptcy Code or any order of the Bankruptcy Court, and extant on
the Confirmation Date (excluding any injunctions or stays contained herein or
in the Confirmation Order), shall remain in full force and effect until the
Effective Date. All injunctions or stays contained herein or the Confirmation
Order shall remain in full force and effect in accordance with their terms.

J.  Binding Effect

   This Plan shall be binding upon and inure to the benefit of the Debtors, all
present and former holders of Claims against and Equity Interests in the
Debtors, their respective successors and assigns, including the Reorganized
Debtors, and all other parties-in-interest in the Chapter 11 Cases.

K.  Revocation, Withdrawal, or Non-Consummation

   The Debtors reserve the right to revoke or withdraw this Plan at any time
prior to the Confirmation Date and to file other plans of reorganization. If
the Debtors revoke or withdraw this Plan, or if Confirmation or consummation
hereof does not occur, then (i) this Plan shall be null and void in all
respects, (ii) any settlement or compromise embodied herein (including the
fixing or limiting to an amount any Claim or Class of Claims), assumption or
rejection of executory contracts or leases effected by this Plan, and any
document or agreement executed pursuant to this Plan shall be deemed null and
void, and (iii) nothing contained herein, and no acts taken in preparation for
consummation hereof, shall (a) constitute or be deemed to constitute a waiver
or release of any Claims by or against, or any Equity Interests in, the Debtors
or any other Person, (b) prejudice in any manner the rights of the Debtors or
any Person in any further proceedings involving the Debtors, or (c) constitute
an admission of any sort by the Debtors or any other Person.

L.  Committees

   On the Effective Date, the duties of any Committee shall terminate.


                                      28

<PAGE>

M.  Plan Supplement

   Any and all exhibits, lists, or schedules referred to herein but not filed
with this Plan shall be contained in the Plan Supplement and filed with the
Clerk of the Bankruptcy Court at least five Business Days prior to the date of
the commencement of the Confirmation Hearing. Thereafter, any Person may
examine the Plan Supplement in the office of the Clerk of the Bankruptcy Court
during normal court hours. Holders of Claims against or Equity Interests in the
Debtors may obtain a copy of the Plan Supplement upon written request to the
Debtors in accordance with Article XIII.N.

N.  Notices to Debtors

   Any notice, request, or demand required or permitted to be made or provided
to or upon a Debtor or a Reorganized Debtor hereunder shall be (i) in writing,
(ii) served by (a) certified mail, return receipt requested, (b) hand delivery,
(c) overnight delivery service, (d) first class mail, or (e) facsimile
transmission, and (iii) deemed to have been duly given or made when actually
delivered or, in the case of notice by facsimile transmission, when received
and telephonically confirmed, addressed to such Debtor as follows:

      ENCOMPASS SERVICES CORPORATION
      3 Greenway Plaza, Suite 2000
      Houston, Texas 77046
       Attn: Gray H. Muzzy, Senior Vice President,
            Secretary and General Counsel
      Telephone: (713) 860-0100
      Facsimile: (713) 960-0126

   with a copy to:

      WEIL, GOTSHAL & MANGES LLP
      700 Louisiana, Suite 1600
      Houston, Texas 77002
      Attn: Alfredo R. Perez, Esq.
      Telephone: (713) 546-5000
      Facsimile: (713) 224-9511

O.  Indemnification Obligations

   Any and all obligations, liabilities or rights of the Debtors or Reorganized
Debtors to defend, indemnify, reimburse, or limit the liability of the Debtors'
present or former directors, officers or employees (the "Covered Persons")
pursuant to applicable state law or the Debtors' or Reorganized Debtors'
certificates of incorporation, bylaws, policy of providing employee
indemnification, or specific agreement in respect of any claims, demands,
suits, causes of action, or proceedings, whether existing or hereafter arising,
against any such Covered Persons, based upon any act or omission related to any
such Covered Persons' service with, for, or on behalf of the Debtors prior to
the Effective Date shall be deemed executory contracts assumed by the
Reorganized Debtors hereunder and shall, in any event, survive Confirmation
hereof and remain unaffected thereby, and shall not be discharged or rejected,
irrespective of whether such defense, indemnification, reimbursement, or
limitation of liability accrued or is owed in connection with a transaction,
occurrence or omission before or after the Petition Date.

P.  Governing Law

   Unless a rule of law or procedure is supplied by federal law (including the
Bankruptcy Code and Bankruptcy Rules), the laws of (i) the State of Texas shall
govern the construction and implementation hereof and any agreements,
documents, and instruments executed in connection with this Plan and (ii) the
laws of the state of incorporation, formation or organization, as applicable,
of each Debtor shall govern corporate governance matters with respect to each
such Debtor, in either case without giving effect to the principles of
conflicts of law thereof.

                                      29

<PAGE>

Q.  Prepayment

   Except as otherwise provided herein or the Confirmation Order, the Debtors
shall have the right to prepay, without penalty, all or any portion of an
Allowed Claim at any time; provided, however, that any such prepayment shall
not be violative of, or otherwise prejudice, the relative priorities and
parities among the Classes of Claims.

R.  Section 1125(e) of the Bankruptcy Code

   As of the Confirmation Date, the Debtors shall be deemed to have solicited
acceptances hereof in good faith and in compliance with the applicable
provisions of the Bankruptcy Code. As of the Confirmation Date, the Debtors,
and their respective affiliates, agents, directors, officers, employees,
investment bankers, financial advisors, attorneys, and other professionals
shall be deemed to have participated in good faith and in compliance with the
applicable provisions of the Bankruptcy Code in the offer and issuance of the
New Securities hereunder, and therefore are not, and on account of such offer,
issuance and solicitation shall not be, liable at any time for the violation of
any applicable law, rule or regulation governing the solicitation of
acceptances or rejections hereof or the offer and issuance of New Securities
hereunder.

Dated: Houston, Texas
October 18, 2002

                                           ENCOMPASS SERVICES CORPORATION
                                           ONBEHALF OF ITSELF AND THE
                                           SUBSIDIARIESSET FORTH ON EXHIBIT C

                                           By:    /s/ GRAY H. MUZZY
                                                  -----------------------------
                                           Name:  Gray H. Muzzy
                                           Title: Senior Vice President,
                                                    Secretary and General
                                                    Counsel

                                              WEIL, GOTSHAL & MANGES LLP
                                              Attorneys for Encompass Services
                                              Corporation, etal.

                                              By: /s/ ALFREDO R. PEREZ
                                                  -----------------------------
                                                  Alfredo R. Perez
                                                  700 Louisiana, Suite 1600
                                                  Houston, Texas 77002
                                                  (713) 546-5000

                                      30

<PAGE>

                                                                      EXHIBIT A

                 PROPOSED TERMS OF NEW SENIOR CREDIT AGREEMENT

A.   New Term Loan

   1. Structure

   The New Senior Credit Facility will provide for an aggregate term loan
facility (the "New Term Loan Facility") in the amount of $200 million, subject
to increase as described below. Only those lenders having Existing Credit
Agreement Claims are eligible to participate in the New Term Loan Facility.

   As of the Effective Date, letters of credit issued and outstanding under the
Existing Credit Agreement as of the Petition Date may remain outstanding. The
New Senior Credit Facility will permit the Reorganized Debtors to issue new
letters of credit under the Exit Facility. If there is any drawing under any
letters of credit issued and outstanding under the Existing Credit Agreement as
of the Petition Date, Senior Lenders that had reimbursement obligations in
respect of such letter of credit must reimburse the issuing bank for its pro
rata share of such drawing and such Senior Lender will be deemed to have made
an additional term loan (the "Additional Term Loan") to Reorganized Encompass.
The New Term Loan Facility will be increased by the amount of any such
Additional Term Loan and will be allocated to the reimbursing Senior Lenders,
and the final amortization payment due on the New Term Loan maturity date will
be increased by such amount. Such letters of credit shall not reduce
availability under the Exit Facility.

   The New Term Loan Facility, and the liens and guarantees in respect thereof,
will be junior to the Exit Facility, and the liens and guarantees in respect
thereof.

   2. Interest Rates and Fees

   Reorganized Encompass may choose to pay interest on the New Term Loan at
either the Eurodollar Rate or the Alternate Base Rate, plus, the margin
applicable from time to time to the Tranche A Term Loan under the Existing
Credit Agreement.

   The default rate is 2.00% above the rate otherwise applicable. In addition,
any interest, fees and other amounts that are overdue under the New Senior
Credit Agreement bear interest at 2.00% above the rate applicable to Alternate
Base Rate loans.

   On the Effective Date, Encompass anticipates that it must pay to the
administrative agent under the New Term Loan, for the benefit of each Senior
Lender who consents to the provisions of the Plan and has commitments under the
Exit Facility, a customary restructuring fee. In addition, Encompass expects it
will be required to pay a customary per annum commitment fee on the Exit
Facility.

   3. Security and Guarantees

   The Reorganized Subsidiaries will jointly and severally guarantee
Reorganized Encompass' obligations under the New Senior Credit Agreement. The
collateral for the New Term Loan Facility will be the same collateral as under
the Existing Credit Agreement: all or substantially all of the assets of
Reorganized Encompass and each guarantor. The New Term Loan Facility and the
liens and guarantees in respect thereof, will be junior to the Exit Facility,
and the liens and guarantees in respect thereof.

   4. Conditions to New Senior Credit Facility

   The New Senior Credit Facility will be conditioned upon satisfaction of
customary conditions for facilities of this type, including the following
conditions precedent on or prior to the Effective Date:

  .   conversion of the Senior Subordinated Notes into New Common Stock;

                                      A-1

<PAGE>

  .   cancellation of all Existing Stock;

  .   cancellation of all Junior Subordinated Notes; and

  .   payment by the Reorganized Debtors of all fees and expenses due and
      payable by it in connection with the entry into the New Senior Credit
      Agreement.

   5. Covenants

   Encompass anticipates that the New Senior Credit Agreement will require
Reorganized Encompass to observe certain customary conditions, affirmative
covenants and negative covenants which generally are similar in type to those
found in the Existing Credit Agreement.

   6. Maturity and Amortization

   The New Term Loan Facility will be repayable in equal consecutive quarterly
installments, each in an amount equal to 0.25% of the aggregate outstanding
principal amount under the New Term Loan Facility on the Effective Date, on the
first Business Day of each of January, April, July and October of each year,
commencing on the first such date following the Effective Date and ending with
the payment in full of the outstanding balance of the New Term Loan Facility on
or after the fifth anniversary of the Effective Date.

   In the event that amortization payments are made pursuant to the Existing
Credit Agreement subsequent to the date hereof and prior to the Petition Date,
the full amount of any such payments shall reduce the respective amortization
payments dollar-for-dollar on a pro rata basis. In addition, the amount of any
draws on letters of credit issued under the Existing Credit Agreement and
assumed under the New Senior Credit Agreement that are reimbursed by Senior
Lenders having reimbursement obligations with respect to such letters of credit
under the Existing Credit Agreement shall be added to the final amortization
payment.

   7. Prepayments

   Optional Prepayments.  Reorganized Encompass may prepay loans made under the
New Senior Credit Agreement, including the right to prepay the loans under the
Exit Facility, and may reduce the commitments under the Exit Facility, in a
minimum amount of $5,000,000 and additional integral amounts in multiples of
$1,000,000.

   Mandatory Prepayments.  Reorganized Encompass will be subject to certain
mandatory prepayment provisions and must prepay the New Term Loan Facility
(subject to certain exceptions to be negotiated) under the New Senior Credit
Agreement by an amount equal to cash proceeds up to $50 million, from any sale
or other disposition by Reorganized Encompass or any of its Reorganized
Subsidiaries after the Effective Date of any material assets, except for (i)
the sale of inventory or obsolete or worn-out property in the ordinary course
of business, (ii) transfers resulting from casualty or condemnation and (iii)
other customary exceptions.

B.   Exit Facility

   1. Structure

   The Exit Facility will provide Reorganized Encompass, as borrower, a
revolving credit facility in an amount of up to $100 million, with the total
amount of such committed credit available for the issuance of letters of
credit. In the event there are any issued and outstanding letters of credit
under the DIP Facility as of the Effective Date, the commitments for those
letters of credit will be deemed to be issued and outstanding under the Exit
Facility as of the Effective Date. The Exit Facility, and the liens and
guarantees in respect thereof, will be senior to the New Term Loan Facility and
the liens and guarantees in respect thereof.

                                      A-2

<PAGE>

   2. Interest Rates and Fees

   Encompass anticipates that the interest and fee obligations under the Exit
Facility will generally be similar to those for revolving loans under its
Existing Credit Agreement. Reorganized Encompass may choose to pay interest on
advances under the Exit Facility at either the Eurodollar Rate or the Alternate
Base Rate, plus the margin applicable from time to time to revolving loans
under the Existing Credit Agreement. The default rate is 2.00% above the rate
otherwise applicable. In addition, any interest, fees and other amounts that
are overdue under the Exit Facility will bear interest at 2.00% above the
Alternate Base Rate plus the applicable margin.

   Reorganized Encompass will pay a customary commitment fee on the average
daily unused portion of the Exit Facility and a customary fee for the aggregate
initial commitments for the Exit Facility.

   3. Security and Guarantees

   The Reorganized Subsidiaries will jointly and severally guarantee
Reorganized Encompass' obligations under the Exit Facility. The collateral for
the Exit Facility will be the same collateral as under the Existing Credit
Agreement: all or substantially all of the assets of Reorganized Encompass and
each guarantor. The Exit Facility, and the liens and guarantees in respect
thereof, will be senior to the New Term Loan Facility, and the liens and
guarantees in respect thereof.

   4. Covenants

   The Exit Facility will require Reorganized Encompass to observe customary
affirmative and negative covenants (including financial covenants).

   5. Maturity and Amortization

   The Exit Facility will cease to be available on the fourth anniversary of
the Effective Date.

   6. Prepayments

   The Exit Facility will provide for customary prepayments.

                                      A-3

<PAGE>

                                                                      EXHIBIT B

                              TERMS OF NEW STOCK

A.  New Common Stock

   The Reorganized Encompass Certificate of Incorporation will authorize the
issuance of 150 million shares of New Common Stock having a par value of $0.001
per share. Holders of New Common Stock will be entitled to vote upon all
matters submitted to a vote of the stockholders of Reorganized Encompass and
will be entitled to one vote for each share of New Common Stock held. Holders
of New Common Stock will not have preemptive rights. Holders of New Common
Stock will be entitled to receive dividends as may be declared by the Board of
Directors of Reorganized Encompass from time to time.

B.  New Preferred Stock

   The Reorganized Encompass Certificate of Incorporation will authorize the
issuance of 50 million shares of New Preferred Stock having a par value of
$0.001 per share in one or more classes or series, and will reserve to the
Board of Directors of Reorganized Encompass the power to designate for each
class or series the following: (i) the terms and conditions of any voting,
dividend and conversion or exchange rights; (ii) the amount payable on the
class or series upon redemption and upon dissolution or distribution of the
assets of Reorganized Encompass, and (iii) the rights, qualifications,
limitations, or restrictions pertaining to the class or series; provided,
however, that Reorganized Encompass shall comply with section 1123(a)(6) of the
Bankruptcy Code, which prohibits the issuance of non-voting equity securities,
requires an appropriate distribution of voting power among the classes of
securities possessing voting power, and, in the case of any class of equity
securities having a preference over another class with respect to the payment
of dividends, providing adequate provisions for the election of directors
representing such preferred class in the event of a default.

                                      B-1

<PAGE>

                                   EXHIBIT C
A-1 Mechanical of Lansing, Inc.
AA Advance Air, Inc.
AA Jarl, Inc.
A-ABC Appliance, Inc.
A-ABC Services, Inc.
Air Conditioning, Plumbing & Heating Service Co., Inc.
Air Systems, Inc.
Aircon Energy Incorporated
Airtron, Inc.
Airtron of Central Florida, Inc.
American Air Company, Inc.
AMS Arkansas, Inc.
B&R Electrical Services, Inc.
Building One Commercial, Inc.
Building One Service Solutions, Inc.
BUYR, Inc.
Callahan Roach Products & Publications, Inc.
Cardinal Contracting Corporation
Central Carolina Air Conditioning Company
Chapel Electric Co.
Charlie Crawford, Inc.
ChiP Corp.
Colonial Air Conditioning Company
Commercial Air Holding Company
CONCH Republic Corp.
Costner Brothers, Inc.
Delta Innovations, Ltd.
Divco, Inc.
Dynalink Corporation
EET Holdings, Inc.
Electrical Contracting, Inc.
Encompass Capital, Inc. (fka Commercial Air, Power & Cable, Inc.)
Encompass Capital, L.P.
Encompass Central Plains, Inc.(fka The Lewis Companies, Inc.)
Encompass Constructors, Inc. (fka Atlantic Industrial Constructors, Inc.)
Encompass Design Group, Inc. (fka Engineering Design Group, Inc.)
Encompass Electrical Technologies, Inc. (fka Oil Capital Electric, Inc.) (OK
  Corp.)
Encompass Electrical Technologies, Inc. (fka Continental Electrical
  Construction Co.) (DE Corp.)
Encompass Electrical Technologies Central Tennessee, Inc.
Encompass Electrical Technologies Eastern Tennessee, Inc.
Encompass Electrical Technologies - Florida, LLC
Encompass Electrical Technologies Georgia, Inc.
Encompass Electrical Technologies - Midwest, Inc. (fka Town & Country Electric,
  Inc.)
Encompass Electrical Technologies of Nevada, Inc.
Encompass Electrical Technologies of New England, Inc.
Encompass Electrical Technologies North Carolina, Inc.
Encompass Electrical Technologies North Florida, Inc.
Encompass Electrical Technologies Projects Group, Inc.
Encompass Electrical Technologies - Rocky Mountains, Inc.
Encompass Electrical Technologies Southeast, Inc. (fka Regency Electric
  Company, Inc.)
Encompass Electrical Technologies South Carolina, Inc.
Encompass Electrical Technologies of Texas, Inc.
Encompass Electrical Technologies Western Tennessee, Inc.
Encompass Facility Services, Inc.
Encompass Global Technologies, Inc.
Encompass Ind./Mech. of Texas, Inc.
Encompass Industrial Services Southwest, Inc. (fka Gulf States, Inc.)
Encompass Management Co.
Encompass Mechanical Services of Elko, Inc. (fka Snyder Mechanical)
Encompass Mechanical Services Northeast, Inc. (fka Vermont Mechanical, Inc.)
Encompass Mechanical Services - Rocky Mountains, Inc. (fka Robinson Mechanical
  Company)
Encompass Mechanical Services Southeast, Inc.
Encompass Power Services, Inc. (fka EDG Power Services, Inc.)
Encompass Residential Services of Houston, Inc. (fka Sterling Air Conditioning)
Encompass Services Holding Corp.
Encompass Services Indiana, L.L.C.
ESR PC, L.P.
Evans Services, Inc.
EWG Holdings, Inc.
FacilityDirect.com, LLC
Ferguson Electric Corporation
Fred Clark Electrical Contractor, Inc.
Gamewell Mechanical, Inc.
Garfield-Indecon Electrical Services, Inc.
Gilbert Mechanical Contractors, Inc.
GroupMAC Texas L.P.
Hallmark Air Conditioning, Inc.

                                      C-1

<PAGE>

HPS Plumbing Services, Inc.
HVAC Services, Inc.
Interstate Building Services, L.L.C.
Isla Morada, LLC
Ivey Mechanical Services, L.L.C.
K&N Plumbing, Heating and Air Conditioning, Inc.
Laney's, Inc.
L.T. Mechanical, Inc.
MacDonald-Miller Industries, Inc.
MacDonald-Miller Co., Inc.
MacDonald-Miller Service, Inc.
MacDonald-Miller of Oregon, Inc.
Masters, Inc.
Mechanical Services of Orlando, Inc.
Merritt Island Air & Heat, Inc.
National Network Services, Inc.
National Network Services Northwest, LLC
Omni Mechanical Company
Omni Mechanical Services
Pacific Rim Mechanical Contractors, Inc.
Paul E. Smith Co., Inc.
Phoenix Electric Company
Ray's Plumbing Contractors, Inc.
Regency Electric Company, LLC
Regency Electric Company South Florida Office, Inc.
Riviera Electric of California, Inc.
Romanoff Electric Corp.
Roth Companies Incorporated
Sanders Bros., Inc.
Sequoyah Corporation
S. L. Page Corporation
Southeast Mechanical Service, Inc.
Stephen C. Pomeroy, Inc.
Sun Plumbing, Inc.
Taylor-Hunt Electric, Inc.
Team Mechanical, Inc.
The Farfield Company
Tri-City Electrical Contractors, Inc.
Tri-M Corporation
Tri-State Acquisition Corp.
United Acquisition Corp.
United Service Alliance, Inc.
Van's Comfortemp Air Conditioning, Inc.
Vantage Mechanical Contractors, Inc.
Wade's Heating & Cooling, Inc.
Watson Electrical Construction Co.
Wayzata, Inc.
Weigold & Sons, Inc. Willis Refrigeration, Air Conditioning & Heating, Inc.
Wilson Electric Company, Inc.
Yale Incorporated

                                      C-2

<PAGE>

                                  EXHIBIT B-1

Encompass Service Corporation's Form 10-K for the year ended December 31, 2001

                                 Exhibit B-1-1

<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 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, 2001
                                      or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
                 For the transition period from       to
                          Commission File No. 1-13565
                        Encompass Services Corporation
            (Exact name of registrant as specified in its charter)
                Texas                                  76-0535259
   (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                Identification Number)
                         3 Greenway Plaza, Suite 2000
                             Houston, Texas 77046
                    (Address of principal executive office)
                                (713) 860-0100
             (Registrant's telephone number, including area code)
          Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
                                    Name of each exchange
        Title of each class          on which registered
        -------------------        -----------------------
   <S>                             <C>
   Common stock, par value $0.001  New York Stock Exchange
</TABLE>
       Securities registered pursuant to Section 12(g) of the Act: None
   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
   As of March 1, 2002, (i) there were 64,020,898 shares of common stock, par
value $0.001 per share, of the registrant issued and outstanding and (ii) the
aggregate market value of the common stock held by non-affiliates of the
registrant (based on the closing price per share of the registrant's common
stock reported on the New York Stock Exchange on that date) was $144,404,942.
For purposes of the above statement only, all directors and executive officers
of the registrant are assumed to be affiliates.
                      DOCUMENTS INCORPORATED BY REFERENCE
   Portions of the Proxy Statement relating to the registrant's 2002 Annual
Meeting of Shareholders (to be filed within 120 days after the end of the
fiscal year) are incorporated by reference into Part III of this report.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
                                     PART I
<S>                                                                       <C>
Item 1.    Description of Business.......................................   1
Item 2.    Properties....................................................   9
Item 3.    Legal Proceedings.............................................   9
Item 4.    Submission of Matters to a Vote of Security Holders...........   9
Item 4A.   Executive Officers of the Registrant..........................  10
                                    PART II
Item 5.    Market for Registrant's Common Equity and Related Stockholder
           Matters.......................................................  12
Item 6.    Selected Financial Data.......................................  13
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.....................................  14
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk....  27
Item 8.    Financial Statements and Supplementary Data...................  28
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure......................................  57
                                    PART III
Item 10.   Directors and Executive Officers of the Registrant............  57
Item 11.   Executive Compensation........................................  57
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management....................................................  57
Item 13.   Certain Relationships and Related Transactions................  57
                                    PART IV
Item 14.   Exhibits, Financial Statement Schedules and Reports on Form
           8-K...........................................................  58
</TABLE>
                                       i
          CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
   This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs and
assumptions of management, based on information currently available to
management. Forward-looking statements can be identified by the use of the
future tense or other forward-looking words such as "believe," "expect,"
"anticipate," "intend," "plan," "estimate," "should," "may," "will,"
"objective," "projection," "forecast," "management believes," "continue,"
"strategy," "position" or the negative of those terms or other variations of
them or by comparable terminology. In particular, statements, express or
implied, concerning future operating results or the ability to generate sales,
income or cash flow are forward-looking statements. Forward-looking statements
include the information concerning possible or assumed future results of
operations of the Company set forth under:
  .  Item 1. Description of Business;
  .  Item 7. Management's Discussion and Analysis of Financial Condition and
     Results of Operations;
  .  Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
   Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder value
of the Company may differ materially from those expressed in these forward-
looking statements. Many of the factors that will determine these results and
values are beyond management's ability to control or predict. These statements
are necessarily based upon various assumptions involving judgments with
respect to the future including, among others:
  .  the ability to achieve synergies and revenue growth;
  .  national, regional and local economic, competitive and regulatory
     conditions and developments;
  .  technological developments;
  .  capital market conditions;
  .  surety bonding capacity;
  .  inflation rates;
  .  interest rates;
  .  weather conditions;
  .  the timing and success of integration and business development efforts;
     and
  .  other uncertainties,
all of which are difficult to predict and many of which are beyond
management's control. Shareholders are cautioned not to put undue reliance on
any forward-looking statements.
   Shareholders should understand that the foregoing important factors, in
addition to those discussed elsewhere in this document, could affect the
future results of the Company and could cause results to differ materially
from those expressed in such forward-looking statements.
                                      ii
                                    PART I
Item 1. Description of Business.
   Encompass Services Corporation ("Encompass" or the "Company"), a Texas
corporation formed in 1997, is one of the largest providers of facilities
systems and solutions in the United States. With annual revenues of
approximately $4 billion, Encompass provides electrical, mechanical and
cleaning systems services to commercial, industrial and residential customers
nationwide, including construction, installation and maintenance. Through its
network of subsidiary business units, the Company has over 31,000 employees,
with operations in over 200 locations, serving customers in all 50 states and
in each of the 100 largest cities in the United States.
Company History
   On February 22, 2000, Building One Services Corporation ("Building One")
was merged with and into Group Maintenance America Corp. ("GroupMAC") (the
"Merger"). In connection with the Merger, GroupMAC changed its name to
Encompass Services Corporation. As a result of the Merger, the Company has the
capability of providing mechanical, electrical and cleaning systems services,
either alone or in combination with another service, in more locations than
either constituent company could perform on its own. For additional
information concerning the Merger, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Note 3 to the
Consolidated Financial Statements included under Item 8 of this Annual Report.
   The Merger was accounted for as a "reverse acquisition" under generally
accepted accounting principles. Accordingly, the financial statements and
(except where otherwise noted) other information included herein for periods
prior to the Merger reflect the historical results of Building One rather than
GroupMAC.
Industry Overview
   The facilities services industry in which the Company operates is highly
fragmented with a small number of multi-location regional or national
providers and a large number of relatively small, independent businesses
serving discrete, local markets with limited service offerings. The Company
competes in the electrical, mechanical, industrial, residential and cleaning
systems sectors of the facilities services industry.
   The electrical, mechanical, industrial and residential services provided by
the Company are a vital part of new construction, renovation and repair
projects. Virtually all domestic construction, remodeling and repair projects
generate demand for these contracting services. According to the 2000-2001
U.S. Markets Overview published by FMI Corporation, total construction put in
place, which includes improvements, in the United States was estimated to be
approximately $800 billion in 2000 and grew at a compounded annual growth rate
of 5.4% from 1990 to 2000. According to Marketdata Enterprises, Inc., the
commercial building cleaning and maintenance services industry generated
approximately $73 billion in revenues in 1999 and is highly fragmented with
the top six providers accounting for approximately 5% of the total. Marketdata
expects this industry to grow at a compounded annual growth rate of 6.7%
between 1999 and 2004, reaching $101 billion in 2004.
Opportunities for Growth
   The Company believes it has strategically positioned itself in markets that
are poised for strong growth, including:
  .   Service solutions and after-market services. Opportunities for higher-
      margin maintenance, replacement and repair are being driven by
      increased outsourcing, higher systems complexity and an aging installed
      base;
  .   Energy and power. Opportunities for power plant, distributed generation
      and energy management systems and programs are being introduced and
      driven by utility deregulation, demand for reliable power and more
      energy-efficient solutions; and
                                       1
  .   Network services. Opportunities for local and wide area network
      computer systems and data centers are being driven by growing demand
      for bandwidth and connectivity.
   The Company further intends to utilize its national network to increase
sales to regional and national multi-site customers. The Company continues to
believe that there is a strong desire among large multi-site customers to
consolidate and simplify their vendor relationships by contracting with a
single provider to service multiple locations and for one company to provide
multiple services.
   The Company believes it can further achieve internal growth at its
operating unit level by (1) emphasizing profit margins and working capital
management, (2) sharing best practices to improve operating efficiency, and
(3) leveraging central technology, sales and purchasing functions.
                                       2
                         SEGMENT FINANCIAL INFORMATION
   The Company modified its internal organizational structure during fiscal
2001 and re-aligned its principal business segments to the segments presented
below. The corresponding segment information for 2000 and 1999 has been
restated to conform to the new business segment presentation. Consistent with
the required accounting treatment, the segment financial information for
periods prior to the Merger reflect the historical results of Building One
rather than GroupMAC.
   Information concerning the Company's principal business segments is set
forth in Note 13 to the Consolidated Financial Statements. The following table
summarizes revenues, operating income and allocable assets of the business
segments of the Company for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
                                                 Year ended         Year ended
                             Year ended         December 31,       December 31,
                          December 31, 2001         2000               1999
                          ------------------  -----------------  -----------------
<S>                       <C>          <C>    <C>         <C>    <C>         <C>
Revenues
Commercial/Industrial
 Services...............  $ 3,297,819   84.5% $3,442,026   86.4% $1,532,729   86.4%
Residential Services....      331,184    8.5     287,628    7.2          --     --
Cleaning Systems........      293,156    7.5     265,212    6.7     245,790   13.9
Eliminations............      (17,424)  (0.5)    (12,600)  (0.3)     (5,935)  (0.3)
                          -----------  -----  ----------  -----  ----------  -----
  Total Revenues........  $ 3,904,735  100.0% $3,982,266  100.0% $1,772,584  100.0%
                          ===========  =====  ==========  =====  ==========  =====
Operating Income
Commercial/Industrial
 Services...............  $    88,056   70.6% $  220,916   85.5% $  135,299   91.0%
Residential Services....       30,271   24.3      30,320   11.7          --     --
Cleaning Systems........       17,710   14.2      16,597    6.4      18,674   12.5
Corporate/Eliminations..      (11,282)  (9.1)     (9,382)  (3.6)     (5,234)  (3.5)
                          -----------  -----  ----------  -----  ----------  -----
Segment Operating
 Earnings...............      124,755  100.0%    258,451  100.0%    148,739  100.0%
                                       =====              =====              =====
Amortization of goodwill
 and other intangible
 assets.................       36,919             33,339             16,004
Merger and related
 charges and costs to
 exit certain activities
 and related costs (a)..           --             20,000                 --
Restructuring and
 recapitalization
 charges (b)............           --                 --              8,020
                          -----------         ----------         ----------
  Operating Income......  $    87,836         $  205,112         $  124,715
                          ===========         ==========         ==========
Total Assets
Commercial/Industrial
 Services...............  $ 1,980,868   82.5% $2,255,065   83.6% $1,111,341   84.6%
Residential Services....      148,394    6.2     153,813    5.7          --     --
Cleaning Systems........      148,740    6.2     146,092    5.4     152,614   11.6
Corporate/Eliminations..      123,324    5.1     142,912    5.3      49,799    3.8
                          -----------  -----  ----------  -----  ----------  -----
  Total Assets..........  $ 2,401,326  100.0% $2,697,882  100.0% $1,313,754  100.0%
                          ===========  =====  ==========  =====  ==========  =====
</TABLE>
--------
(a) Represents non-recurring, non-deductible merger and related charges
    associated with the Merger. See Note 3 in the Notes to Consolidated
    Financial Statements included elsewhere herein.
(b) Represents non-recurring restructuring and recapitalization charges
    associated with Building One's tender offer for its shares and relocation
    of Building One's corporate headquarters. See Note 12 in the Notes to
    Consolidated Financial Statements included elsewhere herein.
                                       3
                     COMMERCIAL/INDUSTRIAL SERVICES GROUP
   The core capabilities of the Commercial/Industrial Services Group include
the technical design, installation, maintenance, repair, replacement and
upgrade of the electrical, heating, ventilating and air conditioning ("HVAC"),
plumbing, network infrastructure, building and equipment controls and
monitoring, sheet metal and process piping systems of commercial and
industrial facilities. Electrical systems services include process controls,
lighting, power, lifesafety systems, industrial machine wiring, electrical
switchgear and cable tray systems, energy management systems and low energy
systems known as "LES," including voice and data cabling, high speed data
network infrastructure systems, fiber optics, video, security and sound. Other
Commercial/Industrial Services Group services provided include both
maintenance, repair and replacement services, or "MRR" services, and new
installation services for products such as compressor-bearing HVAC equipment,
boilers, chillers, central plants, process and high-purity piping, fire
suppression systems and control systems. The Commercial/Industrial Services
Group also provides complete millwright services installations, circuit
breaker maintenance, instrumentation calibration, commissioning, generator
start-up and testing, and piping and structural steel fabrication and
erection.
   Facilities typically served by the Commercial/Industrial Services Group
include manufacturing and processing facilities, industrial facilities
(including refineries, petrochemical plants and water treatment plants), power
generation facilities, chemical plants, data centers and server rooms,
mission-critical facilities, detention and correctional facilities, hospitals
and other critical care facilities, colleges and universities, hotels,
commercial office buildings, automotive assembly plants, public and commercial
transportation facilities, governmental complexes, sports and entertainment
facilities, retail stores, restaurants, supermarkets, and convenience stores.
   Customers of the Commercial/Industrial Services Group include general
contractors, property owners, managers and developers, governmental agencies,
educational and medical institutions, engineering consultants, architectural
firms and commercial and industrial companies in a variety of industries. The
Commercial/Industrial Services Group is seeking to expand the services it
provides to these customers through a national sales and marketing effort
focusing on entities that are responsible for installing, operating or
maintaining the electrical and mechanical systems in facilities located
throughout the United States.
                          RESIDENTIAL SERVICES GROUP
   The Residential Services Group provides mechanical and other contracting
services to homebuilders and homeowners from 35 locations. Although most of
the Residential Services Group's business units perform MRR services, new
construction work represented approximately 70% of the Residential Services
Group's revenues in fiscal 2001.
   The Residential Services Group installs HVAC and plumbing systems in homes,
apartment and condominium complexes and small commercial buildings. It also
provides maintenance services for these systems, such as inspections,
cleaning, repair and replacement of HVAC systems and associated parts; repair
and replacement of bathroom fixtures, water filters and water heaters; and
cleaning, repair and replacement of pipes, sewer lines and residential
sanitary systems. In connection with its MRR services, the Residential
Services Group sells a wide range of HVAC, plumbing and other equipment,
including complete HVAC systems and a variety of parts and components.
   The Residential Services Group markets its residential new installation
contracting services to local, regional and national homebuilders. The
Residential Services Group targets its growth in the residential new
installation market in those areas of the United States that have growth rates
above the national average. Through strong existing relationships with major
national homebuilders, the Residential Services Group is marketing its
capabilities to provide consistent, reliable installation services on a
regional basis.
                                       4
   The Residential Services Group's customers for residential MRR services
consist primarily of homeowners and small commercial business owners. The
Residential Services Group advertises its maintenance and repair services in
the yellow pages, on billboards, on television and radio, and through direct
mail. It also relies upon customized service offerings to attract and retain
customers.
                            CLEANING SYSTEMS GROUP
   The Cleaning Systems Group offers cleaning and maintenance management
services to over 8,000 locations nationwide, serving retail, commercial and
industrial customers. Encompass believes that the Cleaning Systems Group is
the largest provider of cleaning and maintenance management services to the
retail sector in the United States based on revenues. Among other services,
the Cleaning Systems Group (1) cleans and maintains floors, carpets, windows,
walls, structures, sidewalks and parking lots, (2) strips and refinishes
floors, (3) manages chemical supplies and equipment and (4) sanitizes
restrooms and other areas. If requested by a customer, the Cleaning Systems
Group selects, manages and integrates services provided by its business units
and third party subcontractors to customers and monitors third party services
to ensure the quality of the service performed.
   The customers of the Cleaning Systems Group include retail chain stores,
supermarket chains, office buildings, industrial plants, banks, department
stores, warehouses, educational and health facilities, restaurants and airport
and transit terminals throughout the United States. The Cleaning Systems Group
often provides services to a customer under a contractual arrangement on a
regional or national basis.
                                  OPERATIONS
   Commercial construction projects begin with a proposal or design request
from the owner or general contractor. Initial meetings with the parties allow
the contractor to prepare preliminary and then more detailed design
specifications, engineering drawings and cost estimates. Once a project is
awarded, it is conducted in pre-agreed phases and progress billings are
rendered to the owner for payment, less a retainage. Actual field work
(ordering of equipment and materials, fabrication or assembly of certain
components, delivery of materials to the job sites, scheduling of work crews
with the necessary skills, and inspection and quality control) is coordinated
in these same phases. The Company will generally perform new installation work
using its own work force. However, the Company may subcontract with other
contractors to perform work in locations where the Company does not have a
facility or in instances where the Company's backlog requires additional
resources.
   The Company also performs in-plant services and capital construction
projects to selected industrial customers. This work typically includes
management, labor, material and equipment for supplemental maintenance,
turnarounds and capital construction projects. The work is scheduled and
executed in accordance with the site-specific requirements. Contract pricing
terms are either lump sum or rates negotiated annually. Payment is on work
completed against milestones. The Company may self-perform the work or
subcontract with other contractors depending on the scope of services
required, as well as availability of an existing trained workforce.
   In providing maintenance, repair and replacement services, the Company uses
specialized systems to log service orders, schedule service calls, identify
and ready the necessary parts and equipment, track the work order, provide
information for communication with the service technicians and customers, and
prepare accurate invoices. Service histories and specific product information
are generally accessible to the dispatcher in a database that may be searched
by customer name or address. Maintenance, repair and replacement calls are
initiated when a customer requests emergency repair service or the Company
calls the client to schedule periodic service agreement maintenance. Service
technicians are scheduled for the call or routed to the customer's business or
residence by the dispatcher via a scheduling board or daily work sheet (for
non-emergency service)
                                       5
or through cellular telephone, pager or radio. Service personnel work out of
the Company's service vehicles, which carry an inventory of equipment, tools,
parts and supplies needed to complete the typical variety of jobs. The
technician assigned to a service call travels to the business or residence,
interviews the customer, diagnoses the problem, presents the solution, obtains
agreement from the customer and performs the work. The Company offers service
contracts whereby the customer pays an annual or semiannual fee for periodic
diagnostic and preventive services. The customers under service contracts
receive priority service and specific discounts from standard prices for
repair and replacement services. A portion of the Company's service work is
done to satisfy manufacturers' equipment warranties. For such services, the
Company is generally compensated by the manufacturer responsible for the
defective equipment under warranty.
   Residential service technicians may carry a Customer Assurance Pricing
manual developed by the Company which specifies the labor, equipment and parts
required to fulfill certain tasks and the associated flat rate prices for
those tasks. This manual is custom generated for each business unit from a
database containing over 15,000 different repair operations and is regularly
updated for price changes. This "flat rate pricing" strategy allows the
Company to monitor margins and labor productivity at the point of sale, while
increasing the level of customer satisfaction by demonstrating fairness and
objectivity in pricing. Payment for maintenance, repair and replacement
services not covered by a warranty or service contract is generally requested
in cash, check or credit card at the point of sale.
   The Cleaning Systems Group assigns regional contract managers to each
customer. The contract managers determine whether to perform the work
internally or to utilize the Group's existing network of over 1,000 cleaning
companies to subcontract duties. The Cleaning Systems Group typically utilizes
the subcontractor network whenever practicable because of the proven benefits
(reliability, quality, consistency and customer preference) of using the local
workforce. The Cleaning Systems Group's Quality Measurement System measures
the quality of cleaning and customer support efforts. In addition, the group
runs a "24/7" call center to handle any emergency cleaning requests and has a
national computer network to respond quickly and appropriately to customer
requests.
Sources of Supply
   The raw materials, commodities and components used in electrical service
applications include switchgear, panels, lighting packages, wire/cable, fiber-
optic cable, generators, conduit, wiring devices and related power
distribution and management components. Major components for mechanical
service applications are pipe, valves, fittings, plumbing fixtures, and
related plumbing and process piping components. The Company also utilizes
condensing units, air handling units, chillers, ductwork, sheet steel, and
other related materials for HVAC and refrigeration applications.
   Lead times for supplies are typically very short for standard products.
These supplies are widely available through a variety of sources. The longest
delivery times typically apply to chillers for large applications, which have
lead times of up to four months.
   Encompass has entered into national strategic supply agreements with major
distributors of electrical, mechanical, voice/data commodities, components and
equipment. These relationships are designed to achieve economies of scale for
delivered price, product availability and selection. These relationships also
assist in realizing material handling and logistical synergies at the
operational level. While these agreements are significant, Encompass is not
materially dependent on any outside supplier.
Employees
   Through the Company's various business units, the Company currently has
over 31,000 full and part-time employees. In the course of performing
installation work, the Company may utilize the services of subcontractors. As
of December 31, 2001, approximately 4,300 employees (in 20 of the Company's
business units) were members of unions and work under collective bargaining
agreements. The collective bargaining
                                       6
agreements have expiration dates between April 2002 and June 2007. The Company
believes that its relationships with its employees and the employees of its
business units are generally satisfactory.
Backlog
   The Company defines backlog as the amount of revenue expected to be
realized from work to be performed on uncompleted contracts, including
executed contracts on which work has not yet begun. After-market service work,
smaller short-term MRR Projects and cleaning systems service work are
generally not included in backlog. At December 31, 2001 and 2000, the
Company's backlog of work was approximately $1.6 billion and $1.7 billion,
respectively. Of the December 31, 2001 backlog, approximately $1.56 billion
related to the operations of the Commercial/Industrial Services Group and $42
million to the operations of the Residential Services Group. The Company
expects that it will complete a substantial portion of the existing backlog at
December 31, 2001 by December 31, 2002.
Competition
   The facilities services industry is highly competitive with few barriers to
entry. The Company believes that the principal competitive factors in the
facilities services industry are (1) timeliness, reliability and quality of
services provided, (2) range of services offered, (3) market share and
visibility and (4) price. The Company believes that its strategy of creating a
leading national provider of comprehensive services directly addresses these
factors. The Company's ability to employ, train and retain highly motivated
field personnel and service technicians to provide quality services is
enhanced by the Company's ability to utilize professionally managed recruiting
and training programs. In addition, the Company offers compensation, health
and savings benefits that are more comprehensive than most offered in the
industry. Competitive pricing is possible through purchasing economies and
other cost saving opportunities that exist across each of the service lines
offered and from labor productivity improvements.
   Most of the Company's competitors are small, owner-operated companies that
typically operate in a single market. Certain of these smaller competitors may
have lower overhead cost structures and may be able to provide their services
at lower rates. Moreover, many homeowners have traditionally relied on
individual persons or small repair service firms with whom they have long-
established relationships for a variety of home repairs. There are currently a
limited number of public companies focused on providing services in some of
the same service lines provided by the Company.
   In addition, there are a number of national retail chains that sell a
variety of plumbing fixtures and equipment and HVAC equipment for residential
use and offer, either directly or through various subcontractors,
installation, warranty and repair services. Other companies or trade groups
engage in franchising their names and marketing programs in some service
lines. In addition, HVAC equipment manufacturers, deregulated utilities and
the unregulated business segments of regulated gas and electric utilities, and
certain property management companies and real estate investment trusts are
engaged in various commercial/industrial or residential service areas in which
the Company operates. Certain of the Company's competitors and potential
competitors have greater financial resources, name recognition or other
competitive advantages over the Company.
Governmental Regulation
   Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (1) permitting
and licensing requirements applicable to contractors in their respective
trades, (2) building, mechanical and electrical codes and zoning ordinances,
(3) laws and regulations relating to consumer protection, including laws and
regulations governing service contracts for residential services, and (4) laws
and regulations relating to worker safety and protection of human health. In
Florida, warranties provided for in the Company's service agreements subject
the Company and such agreements to some aspects of that state's insurance laws
and regulations. Specifically, the Company is required to maintain funds on
                                       7
deposit with the Florida Office of Insurance Commissioner and Treasurer, the
amount of which is not material to the Company's business. The Company is in
compliance with these deposit requirements.
   The Company believes it has all required permits and licenses to conduct
its operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
   A large number of state and local regulations governing the facilities
services trades require various permits and licenses to be held by
individuals. In some cases, a required permit or license held by a single
individual may be sufficient to authorize specified activities for all the
Company's service technicians who work in the geographic area covered by the
permit or license.
Environmental Regulation
   The Company's operations are subject to numerous federal, state and local
environmental laws and regulations, including those governing the remediation
of contaminated soil and groundwater, vehicle emissions and the use and
handling of refrigerants. These laws and regulations are administered by the
United States Environmental Protection Agency, the Coast Guard, the Department
of Transportation and various state and local governmental agencies. The
technical requirements of these laws and regulations are becoming increasingly
complex and stringent, and meeting these requirements can be expensive. The
nature of the Company's operations and its ownership or operation of property
expose it to the risk of claims with respect to such matters, and there can be
no assurance that material costs or liabilities will not be incurred in
connection with such claims. Federal and state environmental laws include
statutes intended to allocate the cost of remedying contamination among
specifically identified parties. For example, the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or
"Superfund") can impose strict, joint and several liability on past and
present owners or operators of facilities at, from or to which a release of
hazardous substances has occurred, on parties who generated hazardous
substances that were released at such facilities and on parties who arranged
for the transportation of hazardous substances to such facilities. A majority
of states have adopted "Superfund" statutes comparable to, and in some cases
more stringent than, CERCLA. If the Company were to be found to be a
responsible party under CERCLA or a similar state statute, the Company could
be held liable for all investigative and remedial costs associated with
addressing such contamination, even though the releases were caused by a prior
owner or operator or third party. In addition, claims alleging personal injury
or property damage may be brought against the Company as a result of alleged
exposure to hazardous substances resulting from the Company's operations.
   Prior to entering into the agreements relating to the acquisition of
businesses, the Company evaluated the properties owned or leased by those
businesses and in some cases engaged an independent environmental consulting
firm to conduct or review assessments of environmental conditions at certain
of those properties. No material environmental problems were discovered in
these reviews, and the Company is not otherwise aware of any actual or
potential environmental liabilities that would be material to the Company.
There can be no assurance that all such liabilities have been identified, that
such liabilities will not occur in the future, that a party could not assert a
material claim against the Company with respect to such liabilities, or that
the Company would be required or able to answer for such claim.
   The Company's operations are subject to the Clean Air Act, Title VI of
which governs air emissions and imposes specific requirements on the use and
handling of substances known or suspected to cause or contribute significantly
to harmful effects on the stratospherical ozone layer, such as
chlorofluorocarbons and certain other refrigerants ("CFCs"). Clean Air Act
regulations require the certification of service technicians involved in the
service or repair of systems, equipment and appliances containing these
refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased the Company's training
expenses and expenditures for containment and recycling equipment. The Clean
Air Act is intended ultimately to eliminate the use of CFCs in the United
States and require alternative refrigerants to be used in replacement HVAC
systems.
                                       8
   The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles
in large vehicle fleets to use "alternative" fuels, such as compressed natural
gas or propane, and meet reduced emissions standards. The Company does not
anticipate that the cost of fleet conversion that may be required under
current laws will be material. Future costs of compliance with these laws will
be dependent upon the number of vehicles purchased in the future for use in
the covered geographic regions, as well as the number and size of future
business acquisitions by the Company in these regions. The Company cannot
determine to what extent its future operations and earnings may be affected by
new regulations or changes in existing regulations relating to vehicle
emissions.
   Capital expenditures related to environmental matters during the fiscal
years ended December 31, 2001, 2000 or 1999 were not material. The Company
does not currently anticipate any material adverse effect on its business or
consolidated financial position as a result of future compliance with existing
environmental laws and regulations controlling the discharge of materials into
the environment. Future events, however, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws
and regulations may require additional expenditures by the Company which may
be material.
Item 2. Properties.
   Encompass's executive offices are located in leased office space at 3
Greenway Plaza, Suite 2000, Houston, Texas 77046.
   The Company conducts its business from over 200 facilities, substantially
all of which are leased under agreements with remaining terms up to 14 years
from the date hereof on terms the Company believes to be commercially
reasonable. A majority of the Company's facilities are leased from certain
former shareholders (or entities controlled by certain former shareholders) of
its subsidiaries. The provisions of the leases are on terms the Company
believes to be at least as favorable to the Company as could have been
negotiated by the Company with unaffiliated third parties. The Company
believes the owned and leased facilities are adequate to serve its current
level of operations.
   The Company's vehicle fleet consists of approximately 10,500 owned or
leased service trucks, vans and support vehicles, representing the fifteenth-
largest commercial fleet in the United States. The Company believes these
vehicles are well-maintained, ordinary wear and tear excepted, and are
adequate for the Company's current operations.
   The Company believes that it has generally satisfactory title to the
property owned by it, subject to the liens for current taxes, liens incident
to minor encumbrances and easements and restrictions that do not materially
detract from the value of such property or the interests therein or the use of
such property in its business. Additionally, substantially all assets of the
Company and the capital stock of its subsidiaries are subject to a lien under
its credit facility.
Item 3. Legal Proceedings.
   The Company is a party to various legal proceedings. It is not possible to
predict the outcome of these matters. However, in the opinion of management,
the resolution of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
   Encompass did not submit any matter to a vote of its security holders
during the fourth quarter of 2001.
                                       9
Item 4A. Executive Officers of the Registrant.
   The following table sets forth certain information concerning the executive
officers of Encompass as of March 1, 2002:
<TABLE>
<CAPTION>
          Name           Age                              Position
          ----           ---                              --------
<S>                      <C> <C>
J. Patrick Millinor,
 Jr. ...................  56 Chairman of the Board; Director
Joseph M. Ivey..........  43 President and Chief Executive Officer; Director
Henry P. Holland........  53 Executive Vice President and Chief Operating Officer
Darren B. Miller........  42 Senior Vice President, Chief Financial Officer
Daniel W. Kipp..........  42 Senior Vice President, Chief Information and Administrative Officer
Gray H. Muzzy...........  48 Senior Vice President, General Counsel and Secretary
L. Scott Biar...........  39 Vice President, Chief Accounting Officer
Todd Matherne...........  47 Vice President, Treasurer
James Cocca.............  46 Senior Vice President--Operations
Patrick L. McMahon......  53 Senior Vice President--Operations
Ray Naizer..............  49 Senior Vice President--Operations
James L. Phillips.......  40 Senior Vice President--Operations
Steven A. Bate..........  39 Vice President--Operations
William Hill............  49 Vice President--Operations
</TABLE>
   J. Patrick Millinor, Jr. became Chairman of the Board of Encompass in
February 2000. In October, 2000, Mr. Millinor assumed the status of a non-
executive Chairman. He previously served as Chief Executive Officer of
Encompass from April 1997 to February 2000 and as President from October 1996
to August 1997. He has also been a director of Encompass since October 1996.
From September 1994 to October 1996, Mr. Millinor worked directly for Gordon
Cain, a significant stockholder in Encompass, assisting in the formation and
management of Agennix Incorporated and Lexicon Genetics, two biotechnology
companies. He currently serves as a director of Agennix Incorporated, Applied
Veterinary Systems, Inc. and Haelan Health(R) Corporation.
   Joseph M. Ivey became President and Chief Executive Officer and a director
of Encompass in February 2000. Prior to the Merger, he served as President and
Chief Executive Officer of Building One from February 1999 to February 2000.
He also served as a Director of Building One from October 1998 to February
2000. From September 1998 to February 1999, Mr. Ivey served as the President
of the Building One mechanical group. Prior to joining Building One, Mr. Ivey
served as the Chairman and Chief Executive Officer of Encompass Mechanical
Services Southeast, Inc. (formerly known as Ivey Mechanical Company, Inc.), a
mechanical services company and wholly-owned subsidiary of Encompass acquired
by Building One in 1998. Mr. Ivey also serves as a Trustee of Freed-Hardeman
University.
   Henry P. Holland became Executive Vice President and Chief Operating
Officer of Encompass in October 2000. Previously, he served as President and
Chief Operating Officer of Metamor Worldwide (now PSINet Consulting Solutions)
from June 1999 to June 2000 when the company was sold to PSI Net. Prior to
joining Metamor, Mr. Holland served as Executive Vice President of Landmark
Graphics, a leading supplier of decision-making software and services for the
oil and gas industry, from 1994 to 1999.
   Darren B. Miller became Senior Vice President of Encompass in February
2000. From July 1998 to February 2000, he served as Executive Vice President
of Encompass and from October 1996 until July 1998 as Senior Vice President.
He has also served as Chief Financial Officer of Encompass since October 1996.
From 1989 to 1996, Mr. Miller served in several capacities at Allwaste, Inc.,
an industrial service company, including Vice President, Treasurer and
Controller from 1995 to 1996.
   Daniel W. Kipp became Senior Vice President, Chief Information and
Administrative Officer of Encompass in January 2001. From February 2000 to
January 2001, he served as Senior Vice President, Treasurer and Chief
Information Officer of Encompass. From July 1998 to February 2000, he served
as Senior Vice President and Chief Accounting Officer of Encompass and as Vice
President and Corporate Controller from February 1997 to July 1998. From
February 1994 until February 1997, Mr. Kipp was a sales executive with
American Sterling, a provider of hazard insurance outsourcing services to the
mortgage banking industry.
                                      10
   Gray H. Muzzy became Senior Vice President, General Counsel and Secretary
of Encompass in April 2000. From January 1989 to April 2000, Mr. Muzzy was a
partner with the Houston-based law firm of Bracewell & Patterson, L.L.P. Mr.
Muzzy provided legal representation to a variety of industries, including real
estate, oil and gas, software, chemical, banking and insurance.
   L. Scott Biar became Vice President and Chief Accounting Officer of
Encompass in August 2000. From June 1998 to June 2000, Mr. Biar was Vice
President and Corporate Controller of Corporate Brand Foods America. From May
1991 through June 1998, Mr. Biar served in various senior financial roles with
Weatherford International, Inc., most recently as Corporate Controller. Mr.
Biar is a Certified Public Accountant.
   Todd Matherne became Vice President and Treasurer of Encompass in January
2001. During 2000, he was co-founder and advisor to US Farm and Ranch Supply
Company, Inc. From April 1995 to December 1999, Mr. Matherne served in senior
financial and operations roles with Service Corporation International, most
recently as Senior Vice President, Treasurer and Interim Chief Financial
Officer.
   James L. Cocca became Senior Vice President--Operations of Encompass in
October 2001. Mr. Cocca was Chief Operating Officer of Encompass' Electrical
Technologies Group from November 2000 to October 2001. He held the position of
President of Schindler Elevator Corporation (formerly Westinghouse Elevator)
from January 1996 to November 2000 with responsibility for North American
Operations.
   Patrick L. McMahon became Senior Vice President--Operations of Encompass in
October 2001. Mr. McMahon was Chief Operating Officer--Mechanical Services
Group of Encompass from August 2001 to October 2001. He served as President--
Industrial Services Group of Encompass from February 2000 to August 2001. From
July 1999 to February 2000, he was Executive Vice President and Chief
Operating Officer of the Industrial Business Unit of Building One's Mechanical
and Electrical Group. From October 1998 to July 1999, Mr. McMahon was a
management consultant with respect to outsourcing maintenance operations and
served as President and Chief Operating Officer of Professional Services
Group, a subsidiary of Air & Water Technologies, between May 1995 and October
1998.
   Ray Naizer became Senior Vice President--Operations of Encompass in October
2001. He was President--Electrical Technologies Group of Encompass from April
2001 to October 2001. Previously, Mr. Naizer served as President of Encompass
Electrical Technologies of Texas, Inc. (formerly Walker Engineering, Inc.), a
wholly-owned subsidiary of Encompass acquired by Building One in 1998, from
December 2000 to March 2001. Mr. Nazier previously served as Executive Vice
President of Operations of Encompass Electrical Technologies of Texas, Inc.
for more than five years.
   James L. Phillips became Senior Vice President--Operations of Encompass in
October 2001. Previously, Mr. Phillips served as Vice President of Operations
of NetVersant Solutions from May 2000 to October 2001. From November 1998 to
May 2000, he was Co-Founder and Executive Vice President of East Coast
Concepts, a system integration alliance partner to GE Capital Corporation.
From 1996 to November 1998, he was Executive Vice President of GE Capital
Leverage Procurement Program.
   Steven A. Bate became Vice President--Operations in March 2002. Mr. Bate
was Vice President-Integration of Encompass from November 2000 to March 2002.
Previously, Mr. Bate served as an operations finance consultant to NetVersant
Solutions from July 2000 to October 2000. From October 1999 to April 2000, he
served as Vice President-Operations of Metamor Worldwide (now PSINet
Consulting Solutions). From September 1998 to October 1999, Mr. Bate served as
Chief Financial Officer of Insource Management Group, a private consulting
services firm. Previously, he served as Vice President-Independent Business
Units for Landmark Graphics.
   William Hill became Vice President--Operations in December, 2001.
Previously, Mr. Hill served as Vice President-Operations of Building One
Service Solutions, Inc., a wholly-owned subsidiary of Encompass acquired by
Building One in 1998, from January 2000 to December 2001. From October 1998 to
January 2000, Mr. Hill served in various capacities with Building One Service
Solutions, Inc., including Regional President and Director of Operations. Mr.
Hill previously served as Director of Operations for SPC Contract Management,
a janitorial services contract management company, for more than 22 years.
                                      11
                                    PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
   The Common Stock of Encompass is listed for trading on the New York Stock
Exchange (the "NYSE") under the symbol "ESR." The following table sets forth
the range of high and low sales prices for the Common Stock on the NYSE for
the periods indicated. For the period prior to the Merger in the first quarter
of 2000, the prices shown are those of GroupMAC shares:
<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ -----
<S>                                                                <C>    <C>
Year ended December 31, 2000
1st quarter....................................................... $10.63 $5.75
2nd quarter.......................................................   7.44  4.63
3rd quarter.......................................................   8.25  4.75
4th quarter.......................................................   8.00  3.25
</TABLE>
<TABLE>
<S>                                                                <C>    <C>
Year ended December 31, 2001
1st quarter....................................................... $ 6.69 $4.50
2nd quarter.......................................................   9.80  3.95
3rd quarter.......................................................   8.95  2.80
4th quarter.......................................................   3.75  1.23
</TABLE>
   As of February 28, 2002, the market price of the Company's Common Stock was
$2.23, and there were 704 shareholders of record. The number of record holders
does not necessarily bear any relationship to the number of beneficial owners
of the Common Stock.
Dividends
   Encompass has not paid a dividend on the Common Stock since its
incorporation and does not anticipate paying any dividends on the Common Stock
in the foreseeable future. The Company intends to retain any earnings to
finance the expansion of its business, to repay indebtedness and for general
corporate purposes. In addition, the Company's bank credit facility and the
indenture relating to the Company's 10 1/2% Senior Subordinated Notes restrict
the Company's ability to pay dividends on the Common Stock. In addition, the
holders of the Convertible Preferred Stock must approve payment of dividends
on the Common Stock in excess of five percent of the value of the Common Stock
during any twelve-month period.
   Under the terms of Encompass' 7.25% Convertible Preferred Stock, the
holders of the Convertible Preferred Stock are entitled to receive in the
aggregate dividends of approximately $21.8 million per year, payable
quarterly. However, Encompass has the option, until February 22, 2003, of
deferring the payment of dividends on the Convertible Preferred Stock without
any adverse consequences other than a compounding of the dividends payable in
the future. Encompass has elected to defer the payment of the dividends
payable to date and that would otherwise be payable on March 31, 2002. The
Company's amended bank credit facility prohibits the payment of such dividends
in cash until certain financial ratios are achieved.
   Any payment of future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's operating
results, financial condition, capital requirements, expansion plans, level of
indebtedness, contractual restrictions with respect to the payment of
dividends and such other factors as the Board of Directors deems relevant.
                                      12
Item 6. Selected Financial Data.
   Except as discussed below, the following selected financial data have been
derived from the audited consolidated financial statements of the Company and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and notes thereto, included elsewhere herein.
   As discussed in Notes 1 and 3 of Notes to Consolidated Financial
Statements, the financial results for periods prior to the Merger on February
22, 2000 reflect the historical results of Building One. Per share results for
such periods presented below have been adjusted to reflect the 1.25 exchange
ratio applied in the Merger. Since Building One was formed in late 1997, the
financial data for 1997 presented below reflect only the operating results of
three businesses acquired by Building One in 1998 under the pooling-of-
interests method of accounting.
<TABLE>
<CAPTION>
                                  For the Years Ended December 31,
                          ---------------------------------------------------
                             2001        2000        1999      1998    1997
                          ----------  ----------  ---------- -------- -------
                                (in thousands, except per share data)
<S>                       <C>         <C>         <C>        <C>      <C>
INCOME STATEMENT DATA:
Revenues................. $3,904,735  $3,982,266  $1,772,584 $809,601 $70,101
Gross profit.............    616,883     707,196     353,467  173,376  11,244
Selling, general and
 administrative
 expenses................    454,769     441,757     203,962   99,807  11,771
Provision for doubtful
 accounts................     37,359       6,988         766      732       5
Amortization of goodwill
 and other intangible
 assets..................     36,919      33,339      16,004    7,653      --
Other operating costs....         --      20,000       8,020       --      --
                          ----------  ----------  ---------- -------- -------
Operating income (loss)
 ........................     87,836     205,112     124,715   65,184    (532)
Income (loss) from
 continuing operations...    (13,692)     59,688      53,062   47,463   1,443
Income (loss) before
 extraordinary loss......    (51,126)     63,353      53,062   47,463   1,443
Net income (loss)........    (51,126)     55,296      53,062   47,463   1,443
Convertible preferred
 stock dividends.........    (20,612)    (16,568)         --       --      --
                          ----------  ----------  ---------- -------- -------
Net income (loss)
 available to common
 shareholders............ $  (71,738) $   38,728  $   53,062 $ 47,463 $ 1,443
                          ==========  ==========  ========== ======== =======
Income (loss) from continuing
 operations per share:
  Basic.................. $     (.54) $      .73  $     1.28 $    .95 $   .20
  Diluted................ $     (.54) $      .71  $     1.21 $    .93 $   .20
Net income (loss) per
 share:
  Basic.................. $    (1.12) $      .65  $     1.28 $    .95 $   .20
  Diluted................ $    (1.12) $      .63  $     1.21 $    .93 $   .20
Weighted average shares
 outstanding:
  Basic..................     63,845      59,234      41,538   49,885   7,104
  Diluted................     63,845      61,089      46,406   51,161   7,332
</TABLE>
<TABLE>
<S>                       <C>        <C>        <C>        <C>        <C>
<CAPTION>
                                           As of December 31,
                          ----------------------------------------------------
                             2001       2000       1999       1998      1997
                          ---------- ---------- ---------- ---------- --------
                                             (In thousands)
<S>                       <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash
 equivalents............. $   20,572 $   10,094 $   17,085 $  213,096 $528,972
Working capital..........    324,236    491,335    220,431    307,390  528,235
Total assets.............  2,401,326  2,697,882  1,313,754  1,043,922  539,159
Total debt...............    814,814    967,411    600,178      5,454    3,232
Mandatorily redeemable
 convertible preferred
 stock...................    289,621    269,009         --         --       --
Shareholders' Equity.....    676,112    763,875    428,757    837,537  529,480
</TABLE>
                                      13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
   The following discussion should be read in conjunction with the
consolidated financial statements of Encompass Services Corporation
("Encompass", or the "Company") and notes thereto, included elsewhere herein.
This discussion contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based
on the Company's current expectations and involve risks and uncertainties that
could cause the Company's actual results to differ materially from those set
forth in the forward-looking statements. See "Forward Looking Statements" and
"Risk Factors".
Introduction
   Encompass is one of the largest providers of facilities services in the
United States. The Company provides electrical and mechanical contracting
services and cleaning and maintenance management services to commercial,
industrial and residential customers nationwide, including construction,
installation and maintenance. On February 22, 2000, the shareholders of
GroupMAC and Building One approved the Merger of the two companies. In
connection with the Merger, GroupMAC changed its name to Encompass Services
Corporation.
   GroupMAC was the surviving legal entity in the Merger. However, for
accounting purposes, Building One was deemed to be the acquiror and,
accordingly, the Merger was accounted for as a "reverse acquisition". Under
this method of accounting, Encompass' historical results for periods prior to
the Merger are the same as Building One's historical results. See Note 3 of
Notes to Consolidated Financial Statements for further discussion of the
Merger.
   Encompass operates in three reportable segments: Commercial/Industrial
Services, Residential Services and Cleaning Systems. See Note 13 of Notes to
Consolidated Financial Statements for a description of each of these
reportable segments.
Critical Accounting Policies
   The Company's significant accounting policies are described in Note 2 of
Notes to Consolidated Financial Statements. Management believes that the
Company's most critical accounting policy is in accounting for long-term
construction contracts. Determining the points at which revenue should be
recognized as earned and costs should be recognized as expenses is a major
accounting issue common to all businesses engaged in the performance of long-
term construction contracts. The Company uses the percentage-of-completion
accounting method for construction contracts in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts". Each of the Company's business units calculates the percentage-of-
completion of each contract by dividing the costs incurred to date by the
estimated total contract costs at completion (the "cost-to-cost" method). This
percentage is then applied to the estimated total contract value (the total
amount of revenue expected to be realized from the contract) in order to
calculate the amount of revenue to be recognized to date on each contract.
Provisions are recognized in the statement of operations for the full amount
of estimated losses on uncompleted contracts whenever evidence indicates that
the estimated total cost of a contract exceeds its estimated total contract
value.
   Percentage-of-completion accounting requires considerable reliance on
estimates in determining revenues, costs, profit margins and the extent of
progress toward completion on a contract-by-contract basis. Uncertainties
inherent in the performance of contracts generally include labor availability
and productivity, job conditions, material cost, change order scope and
pricing, final contract settlements and other factors. These uncertainties are
evaluated continually for each contract, and the impact of changes in
estimates of total contract costs, total contract value, and other factors are
reflected in the consolidated financial statements in the period in which the
revisions are determined.
                                      14
   Company business units enter into contracts primarily through competitive
bids, with the final terms and prices often negotiated with the customer.
Although the pricing terms and conditions of contracts vary considerably, most
of these contracts are known as "fixed-price" (or "lump-sum") contracts, in
which the business unit essentially agrees to perform all acts under the
contract for a stated price. Company business units also enter into "cost-
plus" contracts (costs incurred plus a stated mark-up percentage or a stated
fee) and "time-and-materials" contracts (stated hourly labor rate plus the
cost of materials). Fixed-price contracts inherently contain higher risk of
loss than the other contract types, but management believes that the Company
is generally able to achieve higher gross profit margins on fixed-price
contracts as a result of the expertise and experience of its business units in
bidding and job performance. No assurance can be given, however, that the
Company will not incur significant job losses on contracts in the future.
   The Company recognizes maintenance, repair and replacement revenues,
including cleaning and maintenance management services, as services are
performed. Service contract revenue is recognized ratably over the life of the
service contract. The Company accounts for revenues from fixed price
installation and retrofit contracts on a percentage-of-completion basis using
the cost-to-cost method.
   Cost of services consists primarily of salaries, wages, benefits and
insurance of service and installation technicians, project managers and other
field support employees; materials, components, parts and supplies; engineered
equipment; subcontracted services; depreciation; fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for management,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
   Accounts receivable collectibility represents another significant
accounting policy. Company business units grant credit, generally without
collateral, to their customers, which primarily include general contractors,
property owners and developers, governmental agencies, educational and medical
institutions, and commercial and industrial companies in a variety of
industries. The Company is subject to potential credit risk related to changes
in business and economic factors throughout the United States. However, the
Company is entitled to payment for work performed and often has certain lien
rights that can be attached to the work performed. Additionally, management
continually monitors the financial condition of its customers to reduce risk
of loss. The Company provides an allowance for doubtful accounts when future
collection is considered doubtful. Historically, receivables collectibility
has not been a significant issue in the facilities service industry,
particularly with respect to new construction. However, the Company recorded
provisions for bad debts totaling $37.4 million from continuing operations
during 2001, compared to $7.0 million in 2000. The significant increase is
primarily attributable to the collapse of the telecommunications industry
discussed below and, to a lesser extent, the general economic downturn which
contributed to financial difficulties of certain customers outside the
technology sector.
   Included in the Company's customer base are a number of companies involved
in the telecommunications industry, including fiber-optic network companies,
wireless phone companies and high-speed Internet providers. During 2001, many
companies in the telecommunications sector, including some of the Company's
customers, experienced a dramatic reduction in the amount of new capital
available to them, upon which certain of them are reliant to successfully
achieve their business plans. Consequently, the Company has experienced slower
payment from certain customers, several of which have filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. The Company provided allowances
of $27.8 million in continuing operations and $17.7 million in the
discontinued Global Technologies operations to reserve certain accounts
receivable from customers in the telecommunications industry to management's
best estimates of their ultimate collectibility.
   On September 25, 2001, the Company announced its decision to cease
operations of its Global Technologies segment effective September 30, 2001.
With the exception of some minor job wrap-up and receivables collection,
substantially all of these operations have been terminated as of December 31,
2001. The shutdown of these operations represents the disposal of a business
segment under Accounting Principles Board Opinion No. 30. Accordingly, the
amounts disclosed herein have been restated to reflect the historical, after-
tax results of these operations as "Income (loss) from discontinued
operations, net of tax". In connection with the decision to
                                      15
discontinue these operations, a charge of $26.5 million, net of the related
income tax benefit of $7.8 million, was recorded in 2001 to provide for the
estimated costs of disposal of these operations. Such estimated costs of
disposal primarily consist of the write-off of non-deductible, unamortized
goodwill of $12.0 million, net facility and equipment lease obligations of
$12.4 million, net asset writedowns of $3.8 million and estimated net
operating losses and severance costs incurred subsequent to September 30, 2001
of $6.1 million. See Note 16 of Notes to Consolidated Financial Statements for
further discussion.
Results of Operations
Year ended December 31, 2001 compared to Year ended December 31, 2000
   Operating results for the years ended December 31, 2001 and 2000 are
summarized as follows (in millions):
<TABLE>
<CAPTION>
                                           Year ended          Year ended
                                       December 31, 2001   December 31, 2000
                                       ------------------- -------------------
                                                 Operating           Operating
                                       Revenues   Income   Revenues   Income
                                       --------  --------- --------  ---------
<S>                                    <C>       <C>       <C>       <C>
Commercial/Industrial Services........ $3,297.8    $88.0   $3,442.1   $220.9
Residential Services..................    331.2     30.3      287.6     30.3
Cleaning Systems......................    293.1     17.7      265.2     16.6
Corporate and other...................       --    (11.3)        --     (9.4)
Amortization of goodwill and other
 intangibles assets...................       --    (36.9)        --    (33.3)
Merger and related charges and costs
 to exit certain activities and
 related costs........................       --       --         --    (20.0)
Eliminations..........................    (17.4)      --      (12.6)      --
                                       --------    -----   --------   ------
  Total............................... $3,904.7    $87.8   $3,982.3   $205.1
                                       ========    =====   ========   ======
</TABLE>
   Segment Results. Commercial/Industrial Services Group revenues decreased 4%
to $3,297.8 million in 2001 compared to 2000, despite the inclusion for the
full year of the GroupMAC operations acquired in February 2000, primarily as a
result of the decline in revenues from the technology and telecommunications
sector and the general economic slowdown. Commercial/Industrial Services
operating income decreased 60% to $88.0 million in 2001 compared to 2000,
primarily as a result of increased pricing pressures on projects as a result
of deteriorating economic conditions, a greater than normal level of losses
recorded on certain fixed-price projects, reduced levels of work done for
customers in the higher margin technology and telecommunications sector, and
significant provisions for doubtful accounts largely attributable to
telecommunications customers. Residential Services Group revenues increased
15%, reflecting a full year of the GroupMAC operations acquired in the
February 2000 Merger. Residential Services operating income remained flat at
$30.3 million, reflecting increased price competition in certain new
construction markets. Cleaning Systems Group revenues increased 11% to $293.1
million and operating income increased 7% to $17.7 million, primarily as a
result of an increased volume of national service contracts.
   Revenues. Revenues decreased $77.5 million, or 2%, to $3,904.7 million for
the year ended December 31, 2001 from $3,982.3 million for the year ended
December 31, 2000. The decrease is primarily attributable to decreases in
revenues from technology and telecommunications customers in the West and
Southwest regions of the Company's Commercial/Industrial Services Group
partially offset by the inclusion of a full year of the GroupMAC businesses,
which were acquired in the February 22, 2000 Merger, and an 11% increase in
Cleaning Systems Group revenues.
   Gross profit. Gross profit decreased $90.3 million, or 13%, to $616.9
million for the year ended December 31, 2001 from $707.2 million for the year
ended December 31, 2000. This decrease in gross profit is primarily due to
increased pricing pressures on projects as a result of deteriorating economic
conditions, a greater than normal level of losses recorded on certain fixed-
price projects and reduced levels of work done for customers in the higher
margin technology and telecommunications sectors.
                                      16
   Gross profit margin decreased to 15.8% for the year ended December 31, 2001
compared to 17.8% for the year ended December 31, 2000. This decline is
primarily attributable to the lower volume of technology projects in 2001
which tend to be higher margin, increased price competition as a result of
general economic weakness, and the increased job losses on fixed-price
projects mentioned above.
   Selling, general and administrative expenses. Selling, general and
administrative expenses increased $13.0 million, or 3%, to $454.8 million for
the year ended December 31, 2001 from $441.8 million for the year ended
December 31, 2000. The increase in these expenses is primarily attributable to
the inclusion of the GroupMAC operations for a full year of activity,
partially offset by integration-related cost savings. As a percentage of
revenues, selling, general and administrative expenses increased to 11.6% for
the year ended December 31, 2001 from 11.1% for the year ended December 31,
2000. This increased percentage is primarily the result of increased costs to
support the Company's branding, cross selling, training and internal growth
initiatives, partially offset by integration-related cost savings.
   Provision for doubtful accounts. Provision for doubtful accounts increased
$30.4 million to $37.4 million for the year ended December 31, 2001 from $7.0
million for the year ended December 31, 2000. This increase is primarily
attributable to $27.8 million in charges recorded in 2001 to reserve certain
accounts receivable from customers in the telecommunications industry to
management's best estimates of their ultimate collectibility.
   Amortization of goodwill and other intangible assets. Amortization of
goodwill and other intangible assets for the year ended December 31, 2001
increased $3.6 million, or 11%, to $36.9 million from $33.3 million for the
year ended December 31, 2000. This increase primarily relates to the GroupMAC
businesses that were acquired in the Merger and the impact of payments under
contingent consideration agreements relating to previously acquired companies.
   Merger and related charges. In connection with the Merger, the Company
recorded $7.8 million of costs and expenses related to severance and office
closing costs in the first quarter of 2000. These costs relate to the closing
of Building One's corporate headquarters in Minneapolis, Minnesota and the
resulting consolidation with the GroupMAC corporate office in Houston, Texas.
These costs are more fully described in Note 3 in the Notes to Consolidated
Financial Statements included herein.
   Costs to exit certain activities and related costs. In the first quarter of
2000, the Company recorded $12.2 million of costs and expenses related to the
shutdown of certain operations, the reorganization of other operations and
other costs resulting from the Merger. These costs are more fully described in
Note 3 in the Notes to Consolidated Financial Statements included herein.
   Other income (expense). Other income (expense) primarily includes net
interest expense of $83.3 million for the year ended December 31, 2001,
reflecting a $3.9 million decrease from the year ended December 31, 2000.
Average debt balances outstanding were higher during 2001 as compared to 2000
due primarily to debt incurred in connection with the Merger in February 2000.
Despite the higher average debt balance, net interest expense was lower as a
result of lower prevailing interest rates during the year ended December 31,
2001 as compared to 2000.
   Income tax provision. As a result of lower earnings before taxes, the
income tax provision decreased $41.2 million to $16.5 million for the year
ended December 31, 2001 from $57.7 million for the year ended December 31,
2000. The effective tax rate exceeds the statutory rate due primarily to non-
deductible goodwill amortization. See Note 6 of Notes to Consolidated
Financial Statements included herein.
   Income (loss) from discontinued operations, net of tax. The Company
recorded a loss from the discontinued Global Technologies segment, net of tax,
of $10.9 million for the year ended December 31, 2001 compared to income from
discontinued operations, net of tax, of $3.7 million for the prior year
period. The loss in the year ended December 31, 2001 is due primarily to
charges totaling approximately $14.0 million to reserve certain accounts
receivable from customers in the telecommunications industry to management's
best estimates of their
                                      17
ultimate collectibility and to lower volumes of work with customers in the
technology and telecommunications sectors as projects were delayed or canceled
due to the inability of many customers to access capital required to fund such
projects.
   Loss on disposal of discontinued operations, net of tax. The loss on
disposal of the discontinued Global Technologies segment of $26.5 million, net
of related income tax benefit of $7.8 million, primarily consists of the
write-off of non-deductible, unamortized goodwill of $12.0 million, net
facility and equipment lease obligations of $12.4 million, net asset
writedowns of $3.8 million and estimated net operating losses and severance
costs incurred subsequent to September 30, 2001 of $6.1 million.
   Extraordinary loss, net. The net of tax extraordinary loss of $8.1 million
for the year ended December 31, 2000 relates to the write-off of deferred debt
issuance costs associated with Building One's revolving credit facility, term
credit facility and junior subordinated notes that were repaid in connection
with the Merger.
Year ended December 31, 2000 compared to Year ended December 31, 1999
   Operating results for the years ended December 31, 2000 and 1999 are
summarized as follows (in millions):
<TABLE>
<CAPTION>
                                           Year ended          Year ended
                                       December 31, 2000   December 31, 1999
                                       ------------------- -------------------
                                                 Operating           Operating
                                       Revenues   Income   Revenues   Income
                                       --------  --------- --------  ---------
<S>                                    <C>       <C>       <C>       <C>
Commercial/Industrial Services........ $3,442.1   $220.9   $1,532.7   $135.3
Residential Services..................    287.6     30.3         --       --
Cleaning Systems......................    265.2     16.6      245.8     18.6
Corporate and other...................       --     (9.4)        --     (5.2)
Amortization of goodwill and other
 intangible assets....................       --    (33.3)        --    (16.0)
Merger and related charges and costs
 to exit certain activities and
 related costs........................       --    (20.0)        --       --
Restructuring and recapitalization
 charges..............................       --       --         --     (8.0)
Eliminations..........................    (12.6)      --       (5.9)      --
                                       --------   ------   --------   ------
  Total............................... $3,982.3   $205.1   $1,772.6   $124.7
                                       ========   ======   ========   ======
</TABLE>
   Segment Results. Commercial/Industrial Services Group revenues increased
125% to $3,442.1 million in 2000 compared to 1999, primarily as a result of
the inclusion of the GroupMAC businesses that were acquired in the Merger. For
the same reason, Commercial/Industrial operating income increased 63% to
$220.9 million in 2000 compared to 1999. All of the Residential Services Group
was acquired from GroupMAC. Cleaning Systems Group revenues increased 8% to
$265.2 million as a result of increased volume of regional and national
service contracts. Operating income in the Cleaning Systems Group declined
$2.0 million to $16.6 million, primarily as a result of increased bad debts
and costs incurred to relocate the group headquarters in 2000.
   Revenues. Revenues increased $2,209.7 million, or 125%, to $3,982.3 million
for the year ended December 31, 2000 from $1,772.6 million for the year ended
December 31, 1999. This increase in revenues is attributable to the following:
  .   $1,748.4 million relates to the GroupMAC businesses that were acquired
      in the Merger.
  .   $140.6 million relates to the incremental revenues contributed in the
      year ended December 31, 2000 by Commercial/Industrial Services Group
      companies acquired during or subsequent to the year ended December 31,
      1999.
  .   $301.3 million relates to internal growth in the Commercial/Industrial
      Services Group. This increase primarily relates to volume increases in
      the Midwest, California, Arizona, Colorado and Texas markets.
  .   $19.4 million relates to internal growth in the Cleaning Systems Group.
                                      18
   Gross profit. Gross profit increased $353.7 million, or 100%, to $707.2
million for the year ended December 31, 2000 from $353.5 million for the year
ended December 31, 1999. This increase in gross profit is attributable to the
following:
  .   $330.5 million relates to the GroupMAC businesses that were acquired in
      the Merger.
  .   $29.3 million relates to the incremental gross profit contributed in
      the year ended December 31, 2000 by Commercial/Industrial Services
      Group companies acquired during or subsequent to the year ended
      December 31, 1999.
  .   Partially offsetting the above increases was a $6.1 million decrease in
      same store results related primarily to the negative impact of job
      contract losses in the California operations of the
      Commercial/Industrial Services Group and economic softness in the
      Southeastern United States.
   Gross profit margin decreased to 17.8% for the year ended December 31, 2000
compared to 19.9% for the year ended December 31, 1999. This decline primarily
resulted from the decreased profitability of 11 eliminated business units and
from a local management focus on achieving targeted growth levels that drove
significant revenue growth at the expense of margin preservation. In addition,
management believes that, during the first half of 2000, issues related to the
Merger caused a significant amount of distraction among the operating
leadership of the Company. In addition, the Merger resulted in a higher
proportion of revenues for the year ended December 31, 2000 from mechanical
and industrial business units, which traditionally have lower gross margins
than electrical business units.
   Selling, general and administrative expenses. Selling, general and
administrative expenses increased $237.8 million, or 117%, to $441.8 million
for the year ended December 31, 2000 from $204.0 million for the year ended
December 31, 1999. This increase in these expenses is attributable to the
following:
  .   $212.4 million relates to the GroupMAC businesses that were acquired in
      the Merger.
  .   $15.4 million relates to the incremental selling, general and
      administrative expense incurred in the year ended December 31, 2000 by
      Commercial/Industrial Services Group companies acquired during or
      subsequent to the year ended December 31, 1999.
  .   $10.0 million relates to internal growth in the Commercial/Industrial
      Services Group and Cleaning Systems Group. This increase primarily
      relates to supporting the revenue growth in the Texas, California,
      Arizona and Colorado markets.
   As a percentage of revenues, selling, general and administrative expenses
decreased to 11.1% for the year ended December 31, 2000 from 11.5% for the
year ended December 31, 1999. This decrease is a result of leveraging
corporate, regional and operating unit overhead over a larger revenue base.
   Provision for doubtful accounts. Provision for doubtful accounts increased
$6.2 million to $7.0 million for the year ended December 31, 2000 from $0.8
million for the year ended December 31, 1999. This increase is attributable to
an increase of $2.7 million related to GroupMAC companies that were acquired
in the Merger and same store increases due to higher revenues.
   Amortization of goodwill and other intangible assets. Amortization of
goodwill and other intangible assets for the year ended December 31, 2000
increased $17.3 million, or 108%, to $33.3 million from $16.0 million for the
year ended December 31, 1999. This increase primarily relates to (i) the
GroupMAC businesses that were acquired in the Merger and (ii) the companies
acquired during or subsequent to the year ended December 31, 1999.
   Merger and related charges. In connection with the Merger, the Company
recorded $7.8 million of costs and expenses related to severance and office
closing costs. These costs relate to the closing of Building One's corporate
headquarters in Minneapolis, Minnesota and the resulting consolidation with
the GroupMAC corporate office in Houston, Texas. These costs are more fully
described in Note 3 in the Notes to Consolidated Financial Statements included
herein.
                                      19
   Costs to exit certain activities and related costs. In the first quarter of
2000, the Company recorded $12.2 million of costs and expenses related to the
shutdown of certain operations, the reorganization of other operations and
other costs resulting from the Merger. These costs are more fully described in
Note 3 in the Notes to Consolidated Financial Statements included herein.
   Restructuring and recapitalization charges. Restructuring and
recapitalization charges were $8.0 million for the year ended December 31,
1999. These charges included $2.8 million relating to compensation expense for
stock options exercised and the underlying shares of common stock repurchased
in Building One's recapitalization plan during 1999, and $5.2 million of
restructuring charges pertaining to the relocation of Building One's then
existing corporate headquarters and integration of the cleaning systems
operations. These costs are more fully described in Note 12 in the Notes to
Consolidated Financial Statements included herein.
   Other income (expense). Other income (expense) primarily includes net
interest expense of $87.2 million for the year ended December 31, 2000,
compared to $29.9 million for the year ended December 31, 1999. This change is
primarily the result of increased borrowings related to the Merger and other
acquisitions.
   Income tax provision. The income tax provision increased $15.7 million to
$57.7 million for the year ended December 31, 2000 from $42.0 million for the
year ended December 31, 1999. This increase primarily relates to the increased
pretax earnings. The increase in the effective tax rate from 44.2% in 1999 to
49.1% in 2000 results primarily from higher non-deductible goodwill
amortization as a proportion of pre-tax income.
   Extraordinary loss, net. The net of tax extraordinary loss of $8.1 million
for the year ended December 31, 2000 relates to the write-off of deferred debt
issuance costs associated with Building One's revolving credit facility, term
credit facility and junior subordinated notes that were repaid in connection
with the Merger.
Liquidity and Capital Resources
   The Company finances its operations and growth from internally generated
funds and borrowings from commercial banks or other lenders. Management
anticipates that the Company's cash flow from operations and borrowing
capacity under the existing bank credit facilities will be adequate for the
Company to fund its normal working capital needs, debt service requirements
and planned capital expenditures for 2002. As further discussed below, the
Company's financial covenants under its Credit Facility, which are measured as
of the end of each fiscal quarter, are expected to remain tight during 2002,
particularly through the first half of the year. If the Company anticipates
that it will violate any of these financial covenants, it will be necessary to
negotiate new terms with its senior lenders or seek other financing
alternatives in order to prevent an event of default under the Credit
Facility. There can be no assurance that, if required, the Company will be
able to successfully negotiate satisfactory new terms with its bank lenders,
or that any necessary alternative financing can be secured when needed or on
terms deemed acceptable by the Company.
   The Company currently has a $700 million Credit Facility, consisting of
approximately $400 million in Term Loans and a $300 million Revolving Credit
Facility, increasing to $350 million once certain debt leverage ratios are
achieved. Under the Revolving Credit Facility, $106.4 million was outstanding
and, after letter of credit commitments, $192.4 million was available for
borrowing at February 28, 2002. The Company is currently in compliance with
all financial covenants under the Credit Facility. The Company's internal
budget indicates that the Company will remain in compliance throughout 2002.
However, depending on the Company's actual results of operations and borrowing
needs during 2002, the Company could violate one or more of its financial
covenants as early as at the end of the first quarter of 2002. To the extent
the Company's operational performance meets or exceeds its budget and its debt
balances at the end of each fiscal quarter are at or below budgeted levels,
the Company would not violate any of its financial covenants.
   Under the Credit Facility, Encompass is required to maintain compliance
with the following financial covenants, measured as of the end of each fiscal
quarter: (1) a minimum Fixed Charge Coverage Ratio (as defined); (2) a maximum
ratio of senior debt to pro forma EBITDA (as defined); (3) a maximum ratio of
Funded
                                      20
Debt (as defined) to pro forma EBITDA (as defined); (4) a minimum amount of
Consolidated Net Worth (as defined); and (5) a maximum amount of capital
expenditures. In addition, an amendment to the Credit Facility dated November
9, 2001 establishes certain restrictions on the Company's ability to make
acquisitions, capital expenditures and investments and requires debt
prepayment with future issuances of debt or equity. Such restrictions will
generally revert back to those under the original agreement once certain debt
leverage ratios are achieved.
   The components of the Company's most restrictive financial covenants under
the Credit Facility are summarized below, as such components are defined and
calculated pursuant to the Credit Facility (dollars in thousands):
<TABLE>
<CAPTION>
                         Three Months Three Months Three Months  Three Months Twelve Months
                            Ended        Ended         Ended        Ended         Ended
                          March 31,     June 30,   September 30, December 31, December 31,
                             2001         2001         2001          2001         2001
                         ------------ ------------ ------------- ------------ -------------
<S>                      <C>          <C>          <C>           <C>          <C>
Fixed Charge Coverage:
 EBITDA.................   $ 64,648     $78,084      $ 21,038      $24,099      $187,869
 Less: Capital
  Expenditures..........    (10,292)     (4,560)      (13,516)      (8,683)      (37,051)
                                                                                --------
  Net Earnings..........                                                        $150,818
                                                                                --------
 Cash Interest Expense..   $ 18,682     $24,560      $ 10,389      $25,399      $ 79,030
 Scheduled Debt
  Payments..............      1,000       1,000         1,000        1,000         4,000
 1/7 of Revolving Credit
  Balance...............                                                          22,753
                                                                                --------
  Total Fixed Charges...                                                        $105,783
                                                                                --------
 Fixed Charge Coverage
  Ratio.................                                                            1.43
                                                                                ========
 Covenant Minimum.......                                                            1.25
                                                                                ========
Senior Debt-to-EBITDA:
 Senior Debt............                                                        $482,801
 EBITDA.................                                                         187,869
                                                                                --------
 Senior Debt-to-EBITDA
  Ratio.................                                                            2.57
                                                                                ========
 Covenant Maximum.......                                                            3.00
                                                                                ========
Funded Debt-to-EBITDA:
 Funded Debt............                                                        $814,814
 EBITDA.................                                                         187,869
                                                                                --------
 Funded Debt-to-EBITDA
  Ratio.................                                                            4.34
                                                                                ========
 Covenant Maximum.......                                                            4.75
                                                                                ========
</TABLE>
   Pursuant to the terms of the amended Credit Facility, the applicable
covenants during 2002 are as follows:
<TABLE>
<CAPTION>
                                 March 31, June 30, September 30, December 31,
                                   2002      2002       2002          2002
                                 --------- -------- ------------- ------------
<S>                              <C>       <C>      <C>           <C>
Minimum Fixed Charge Coverage
 Ratio..........................   1.20      1.00       1.00          1.05
Maximum Senior Debt-to-EBITDA
 Ratio..........................   3.25      3.75       3.25          3.25
Maximum Funded Debt-to-EBITDA
 Ratio..........................   5.25      5.75       5.25          5.00
</TABLE>
   For the years ended December 31, 2001, 2000 and 1999, the Company generated
$241.5 million, generated $49.4 million and used $0.5 million of cash from
operating activities, respectively. Operating cash flow before changes in
working capital and other operating accounts for the year ended December 31,
2001 totaled $106.5 million compared to $141.9 million for the year ended
December 31, 2000 and $87.9 million for the year ended December 31, 1999. The
decrease in 2001 compared to 2000 is primarily the result of lower
profitability levels
                                      21
in 2001. Net changes in working capital and other operating accounts generated
$135.0 million in 2001, primarily as a result of management focus on working
capital management and a general business slowdown. Changes in operating
accounts utilized $92.5 million for the year ended December 31, 2000 and $88.4
million in 1999, primarily to support the growth in the Company's operations
in all its business segments.
   For the year ended December 31, 2001, the Company used $53.5 million of
cash in investing activities compared to $100.1 million for the year ended
December 31, 2000 and $189.1 million for the year ended December 31, 1999.
This decrease is primarily the result of a reduction in cash paid for
acquisitions, which primarily consisted of payments of earned contingent
consideration related to businesses acquired in prior years. Capital
expenditures in 2001 totaled $42.1 million, compared to $43.3 million in 2000
and $28.3 million in 1999. Capital expenditures in 2001 primarily consisted of
the expansion of facilities in certain markets and the investment in
information systems to support the Company's integration and growth
initiatives.
   The Company used $167.0 million of cash for financing activities in 2001,
primarily representing the repayment of amounts borrowed under the Company's
Revolving Credit Facility. In the aggregate, the Company repaid $153.3 million
of indebtedness during 2001. Financing activities provided cash of $34.6
million for the year ended December 31, 2000 and used cash of $6.4 million in
1999.
   Borrowings under the amended Credit Facility bear interest at variable
rates, ranging from 2.0% to 3.75% over the Eurodollar Rate (as defined in the
Credit Facility) and from 0.50% to 2.25% over the Alternate Base Rate (as
defined in the Credit Facility), depending, in each case, on the Company's
total debt-to-EBITDA ratio.
   The Company has entered into interest rate swap agreements in the aggregate
notional amount of $110 million to manage its mix of fixed and floating rate
debt to partially hedge its exposure to potential fluctuations in interest
rates. All such agreements are with large creditworthy financial institutions
and result in the Company paying a fixed rate of interest and receiving a
floating rate. At December 31, 2001, the Company's ratio of fixed rate debt to
total debt was 41% and the weighted average interest rate on its total debt
was 8.64%, before considering the aforementioned interest rate swap
agreements. After giving effect to the interest rate swap agreements in effect
at December 31, 2001, the ratio of fixed rate debt was 52% and the weighted
average interest rate on its total debt was 9.19%.
   In April 1999 and June 2001, the Company completed private offerings of
$200 million and $135 million, respectively, of 10 1/2% senior subordinated
notes (the "Senior Subordinated Notes"). The Senior Subordinated Notes are
unsecured and guaranteed by the Company's subsidiaries, require interest to be
paid semi-annually on May 1 and November 1 of each year and mature on May 1,
2009.
   The Company may redeem the Senior Subordinated Notes, in whole or in part,
at any time on or after May 1, 2004 at specified redemption prices, plus
accrued interest. At any time (which may be more than once) before May 1,
2002, the Company may redeem up to 35% of the outstanding Senior Subordinated
Notes with money raised in equity offerings under certain circumstances. Upon
a change of control of the Company (as defined in the indenture for the Senior
Subordinated Notes), the Company will be required to offer to purchase all of
the outstanding Senior Subordinated Notes at 101% of the face amount plus
accrued interest. Additionally, the indenture governing the Senior
Subordinated Notes contains certain covenants that restrict, among other
things, the Company's ability to incur indebtedness, pay dividends or
repurchase capital stock, incur liens, sell or otherwise dispose of a
substantial portion of assets or merge or consolidate with another entity.
   Concurrent with the closing of the Merger, affiliates of Apollo Management
IV, L.P. ("Apollo") exchanged approximately $106 million of Building One
convertible junior subordinated debentures and $150 million of cash for
256,191 shares of the Company's Convertible Preferred Stock. The Convertible
Preferred Stock, if not otherwise converted, is redeemable in 2012, and is
entitled to receive an annual dividend of 7.25% payable quarterly. Under the
terms of the Convertible Preferred Stock agreement, until February 22, 2003,
dividends on the Convertible Preferred Stock may be paid in cash on a current
basis or accumulated, at the option of the Company. However, the amended
Credit Facility prohibits the payment of cash dividends until certain
financial
                                      22
ratios are achieved. The Convertible Preferred Stock is convertible into
shares of the Company's common stock at any time by the holders at a
conversion price of $14 per common share, subject to adjustment under certain
circumstances.
   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has appointed three members of the Company's board
of directors. If the Company violates certain protective covenants, which
include a total debt leverage covenant under the Investors' Rights Agreement,
Apollo will have the right to appoint additional directors, such that the
Apollo-appointed directors would constitute a majority of the board of
directors. This debt leverage covenant differs from the similar covenant
included in the Credit Facility and is not as clearly defined. As such, the
Company believes it is not conclusive as to whether or not a violation of such
covenant has occurred. Regardless, the Company believes there is a substantial
probability that the Company will violate this total debt leverage covenant in
the first half of 2002. A violation of such total debt leverage covenant will
not trigger a right of acceleration of the Company's obligations under any of
its debt or preferred stock instruments.
   On May 11, 1999, Building One completed its recapitalization plan under a
tender offer, pursuant to which Building One repurchased approximately 30.8
million shares of its common stock and 1.1 million shares of common stock
underlying stock options for $564.4 million, including related expenses. This
tender offer was primarily funded with proceeds from long-term debt
borrowings.
Other Contractual Obligations and Commercial Commitments
   As is common in the facilities services industry, the Company enters into
certain off-balance sheet arrangements in the ordinary course of business,
including non-cancelable operating leases, letters of credit and surety
guarantees. The Company does not own any "special purpose" financing
subsidiaries.
   The Company enters into operating leases for many of its facility, vehicle
and equipment needs. Such lease arrangements enable the Company to conserve
cash by paying monthly lease rental fees for the applicable assets rather than
purchasing them. At the end of the lease period, the Company has no further
obligation to the lessor. If the Company decides to cancel or terminate a
lease prior to the end of its term, the Company is typically obligated to pay
the remaining lease payments over the term of the lease, and in certain cases
may be allowed to sublet the asset to another party.
   The Company is occasionally required to post letters of credit generally
issued by a bank as collateral under certain insurance programs or to ensure
performance under contracts. A letter of credit commits the issuer to remit
specified amounts to the holder, if the holder demonstrates that the Company
has failed to meet its obligations under the letter of credit. If this were to
occur, the Company would be obligated to reimburse the issuer for any payments
the issuer was required to remit to the holder of the letter of credit.
Generally, a letter of credit is released when the Company has performed its
obligations that the letter of credit is securing. To date, the Company has
not had a claim made against a letter of credit that resulted in a payment
made by an issuer or the Company to the holder. The Company believes that it
is unlikely that it will have to fund claims made under letters of credit in
the foreseeable future.
   Particularly in connection with larger construction contracts, the Company
is often required to post bid or performance bonds issued by a financial
institution known as a surety. Such bonds provide a guarantee to the customer
that the Company will perform under the terms of the contract and be able to
pay its subcontractors and vendors. If the Company was to fail to perform its
obligations under the contract, the customer would have the right to demand
payment or services from the surety under the bond. The Company would then be
obligated to reimburse the surety for any expenses or outlays that it incurred
in the matter. The Company believes that it is unlikely that it will be
required to fund any material surety claims in the foreseeable future.
                                      23
   At December 31, 2001, the Company's contractual obligations are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
                         Less than
                         one year   2003    2004     2005     2006   Thereafter   Total
                         --------- ------- ------- -------- -------- ---------- ----------
<S>                      <C>       <C>     <C>     <C>      <C>      <C>        <C>
Debt obligations........  $ 4,551  $ 5,613 $ 6,500 $ 94,000 $283,000  $428,250  $  821,914
Convertible Preferred
 Stock..................       --       --      --       --       --   292,799     292,799
Operating leases........   42,633   38,664  31,992   25,582   16,928    74,422     230,221
                          -------  ------- ------- -------- --------  --------  ----------
Total contractual cash
 obligations............  $47,184  $44,277 $38,492 $119,582 $299,928  $795,471  $1,344,934
                          =======  ======= ======= ======== ========  ========  ==========
   In addition, the Company's other commercial commitments expire as follows
(in thousands):
<CAPTION>
                         Less than
                         one year   2003    2004     2005     2006   Thereafter   Total
                         --------- ------- ------- -------- -------- ---------- ----------
<S>                      <C>       <C>     <C>     <C>      <C>      <C>        <C>
Letters of credit.......  $ 1,083  $   374 $    -- $     -- $     --  $     --  $    1,457
                          =======  ======= ======= ======== ========  ========  ==========
</TABLE>
Seasonality and Cyclicality
   A significant portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial, industrial
and residential facilities. The portion of the Company's business related to
new construction is subject to seasonal fluctuations. Specifically, the demand
for the Company's contracting services involving new construction is generally
lower during the winter months, when construction activities are reduced as a
result of inclement weather in many areas of the United States. In addition,
the demand for mechanical maintenance, repair and replacement services tends
to also be lower in the winter months due to lower air conditioning usage
during these months. Accordingly, the Company expects its revenues and
operating results generally will be lowest in the first fiscal quarter of the
year.
   Historically, the construction industry has also been highly cyclical. The
level of new construction in the commercial and industrial sectors is affected
by, among other things, local and national economic conditions, interest
rates, inflationary concerns, levels of corporate and government capital
spending, capital market activities and governmental activities at the
regional and national levels. Factors impacting the level of new residential
construction tend to be regional in nature, and include general employment and
personal income levels, the availability and cost of financing for new home
buyers and the general economic outlook for a given geographic region.
   The Company performs contracting services related to new construction in a
variety of industries including, among others, automotive, heavy industrial,
commercial real estate development, residential housing, retail, health care,
education, government/institutional, petrochemical refining, data and
telecommunications, and sports and entertainment. Consequently, management
believes that a temporary slowdown in new construction related to any one of
these industries would not likely have a material impact on the Company's
financial condition. However, concurrent downturns in new construction in
multiple industries or geographic regions, or prolonged slowdowns in specific
industries or geographic regions, could have a material adverse impact on the
Company's business, including its financial condition, results of operations
and liquidity.
Inflation
   Inflation did not have a significant effect on the results of operations
for the years ended December 31, 2001, 2000 and 1999.
New Accounting Pronouncements
   In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other
                                      24
Intangible Assets." SFAS 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001, and
specifies criteria for recording intangible assets other than goodwill in
business combinations, noting that values allocated to dedicated workforce may
not be reported separately from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives will no longer be amortized to
expense, but instead will be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized to
expense.
   The Company has adopted the provisions of SFAS 141 and is required to adopt
SFAS 142 effective January 1, 2002. As of January 1, 2002, the Company will
reclassify the unamortized value of its acquired dedicated workforce ($5.6
million) to goodwill. Beginning January 1, 2002, the Company will no longer
record goodwill amortization, which totaled $36.9 million in 2001. In
addition, the Company will assess whether there is an impairment charge to
goodwill as of January 1, 2002. Any impairment charge recognized at January 1,
2002 upon adoption of SFAS 142 will be shown as the cumulative effect of a
change in accounting principle in the Company's statement of operations. Any
such impairment charge will have no impact on the calculation of financial
covenants under the Company's debt agreements.
   The Company is currently evaluating the impact of adopting SFAS 142. Based
on a preliminary review of the new standard, management believes the Company
will record a non-cash goodwill impairment charge upon adoption, and that the
amount of such charge will be significant in relation to the Company's
unamortized goodwill balance of approximately $1.3 billion at December 31,
2001. Such charge, however, will not impact cash flow, operating income or
compliance with any financial debt covenant.
   In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No.
121 and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, for the disposal of a business. SFAS 144 provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of SFAS 121,
the new rules change the criteria to be met to classify an asset as held-for-
sale. The new rules also broaden the criteria regarding classification of a
discontinued operation. The Company is required to adopt the provisions of
SFAS 144 effective January 1, 2002. Management believes that the adoption of
SFAS 144 will not have a material impact on the Company's results of
operations, financial position or cash flows.
Risk Factors
   The Company is currently in compliance with all financial covenants under
its primary bank Credit Facility. If the Company anticipates that it will
violate any of its financial covenants, it will be necessary to negotiate new
terms with its senior lenders or seek other financing alternatives in order to
prevent an event of default under the Credit Facility. There can be no
assurance that, if required, the Company will be able to successfully
negotiate satisfactory new terms with its bank lenders, or that any necessary
alternative financing can be secured when needed or on terms deemed acceptable
by the Company.
   The Company has a significant amount of debt in relation to its current
level of operating income, which could limit the Company's flexibility with
respect to obtaining additional financing in the future to fund working
capital growth, debt service requirements or other purposes. This level of
debt also increases the Company's vulnerability to further adverse economic
and industry conditions and higher interest rates, and may place the Company
at a competitive disadvantage compared to competitors with less relative
indebtedness.
   The Company's ability to satisfy its debt obligations and other cash needs
will depend on, among other things, the Company's future operating performance
and its ability to refinance or exchange debt when necessary, including the
potential issuance of additional common or preferred stock. These factors are,
to a large extent, dependent on economic, capital market, competitive and
other factors beyond the Company's control. The Company's future operating
results are difficult to project and may be affected by a number of factors,
including general economic conditions, the level of new construction of
commercial and industrial facilities, commercial
                                      25
demand for replacement of electrical, HVAC and plumbing systems, new housing
starts, the availability of qualified labor and project management personnel
and other factors in areas in which the Company operates.
   Particularly in connection with larger construction contracts, the Company
is often required to post bid or performance bonds issued by a financial
institution known as a surety. The surety industry has become an unsettled and
volatile market in recent months, in the aftermath of certain notable
corporate bankruptcies with significant surety exposure, other recent loss
exposures and other factors. Collectively, these events have caused certain
reinsurers and sureties to reevaluate their committed levels of underwriting
and required returns. The ultimate impact of these developments, if any, on
the surety market in general, or the Company specifically, cannot be
determined at this time. Historically, as needed in the normal course of
operations, the Company has been able to secure bid and performance bonds from
its two current surety sources. The Company continues to seek opportunities to
expand its surety relationships. However, given the uncertainty in the current
surety market, there can be no assurance that the Company's available bonding
capacity will be sufficient to satisfy its future bonding requirements.
   The Company has grown substantially by acquiring other companies in its
industry. The Company's future success depends in part on its ability to
integrate the businesses it has acquired and any future businesses it might
acquire into one enterprise with a common operating plan. Most of these
acquired businesses have recently changed or, in certain cases, are in the
process of changing their past operating processes and systems, such as
accounting, employment, purchasing, sales, estimating and project management.
There can be no assurance that the Company will be able to successfully
complete the integration of these businesses.
   As the holder of the Company's Convertible Preferred Stock, Apollo is able
to exert significant influence over the election of the Company's directors
and matters submitted to shareholders, as well as over the Company's business
operations. So long as Apollo beneficially owns at least 25% of the Company's
common stock underlying the Convertible Preferred Stock, Apollo has the right
to purchase for cash any common stock equivalent that the Company offers in a
private placement and the right to preclude the Company from entering into
various types of transactions or making certain changes in capital structure
or management without Apollo's consent.
   Apollo currently has appointed three members of the Company's board of
directors. If the Company violates certain protective covenants, which include
a total debt leverage covenant under the Investors' Rights Agreement, Apollo
will have the right to appoint additional directors, such that the Apollo-
appointed directors would constitute a majority of the board of directors.
This debt leverage covenant differs from the similar covenant included in the
Credit Facility and is not as clearly defined. As such, the Company believes
it is not conclusive as to whether or not a violation of such covenant has
occurred. Regardless, the Company believes there is a substantial probability
that the Company will violate this total debt leverage covenant in the first
half of 2002. A violation of such total debt leverage covenant will not
trigger a right of acceleration of the Company's obligations under any of its
debt or preferred stock instruments.
   Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should
be aware that the trading price of the Company's common stock may be subject
to wide fluctuations in response to quarterly variations in operating results,
general conditions in the construction industry, analyst recommendations and
earnings estimates, or other events.
Forward Looking Statements
   This Annual Report may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on the Company's current expectations and involve risks
and uncertainties that could cause the Company's actual results to differ
materially from those set forth in the statements. The Company can give no
assurance that such expectations will prove to be correct. Factors that could
cause the Company's results to differ materially from current expectations
include: the level of demand for its services by customers; the availability
and cost of capital in certain markets; the level of interest rates which
affects demand for the Company's services and its interest expense; working
capital requirements; general economic conditions; as well as other factors
listed in this Annual Report.
                                      26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
   The table below provides scheduled principal payment and fair value
information about the Company's market-sensitive financial instruments as of
December 31, 2001. The Company's major market risk exposure is interest rate
volatility. The Company has entered into interest rate swap agreements in the
aggregate notional amount of $110 million to manage its mix of fixed and
floating rate debt to partially hedge its exposure to potential fluctuations
in interest rates. All items described below are stated in thousands of U.S.
dollars. This information constitutes a "forward looking statement."
<TABLE>
<CAPTION>
                                                                                             Fair Value at
   December 31, 2001:      2002     2003     2004     2005     2006   Thereafter  Total    December 31, 2001
   ------------------     -------  -------  -------  ------- -------- ---------- --------  -----------------
<S>                       <C>      <C>      <C>      <C>     <C>      <C>        <C>       <C>
Debt:
Revolving Credit
 Facility...............  $    --  $    --  $    --  $90,000 $     --  $     --  $ 90,000      $ 90,000
 Average rate...........                                                               (a)
Term Credit Facilities..  $ 4,000  $ 4,000  $ 4,000  $ 4,000 $283,000  $ 93,250  $392,250      $392,250
 Average rate...........                                                               (a)
Senior Subordinated
 Notes..................  $    --  $    --  $    --  $    -- $     --  $335,000  $335,000      $217,750
 Average rate...........                                                   10.5%     10.5%
Other Borrowings........  $   551  $ 1,613  $ 2,500  $    -- $     --  $     --  $  4,664      $  4,664
 Average rate...........      9.5%     6.0%     7.5%
Interest Rate Swaps:
Notional amounts--
 variable to fixed......  $20,000  $50,000  $40,000  $    -- $     --  $     --  $110,000      $(6,761)
Average pay rate........      5.5%     6.7%     6.7%      --       --        --       6.5%
Average receive rate
 (b)....................      2.4%     2.4%     2.4%      --       --        --       2.4%
</TABLE>
--------
(a) Borrowings under the Revolving Credit Facility and the Term Credit
    Facilities bear interest at a rate per annum, at the Company's option, of
    either (i) the Alternate Base Rate plus an applicable margin or (ii) the
    Eurodollar Rate plus an applicable margin. The Alternate Base Rate is
    equal to the greater of the Federal Funds Effective Rate or the Prime
    Rate. The Margin applicable to Alternate Base Rate borrowings ranges from
    0.5% to 2.25%, and the Margin applicable to Eurodollar Rate borrowings
    ranges from 2.0% to 3.75%, depending in each case, on the ratio of Funded
    Debt to pro forma EBITDA. Prior to November 9, 2001, the Margin applicable
    to Alternative Base Rate borrowings ranged from 0% to 1.75%, and the
    Margin applicable to Eurodollar Rate borrowings ranged from 1.0% to 3.25%,
    depending in each case, on the ratio of Funded Debt to pro forma EBITDA.
    All capitalized terms are as defined in the Credit Facility. At December
    31, 2001, the weighted average interest rates in effect for the Revolving
    Credit Facility and the Term Credit Facilities, including amortization of
    related debt issuance costs, were 7.4% and 6.3%, respectively.
(b) Represents weighted average rate at December 31, 2001.
                                      27
Item 8. Financial Statements and Supplementary Data.
                         INDEPENDENT AUDITORS' REPORT
The Board of Directors
Encompass Services Corporation:
   We have audited the accompanying consolidated balance sheets of Encompass
Services Corporation and Subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, shareholders' equity and other
comprehensive income and cash flows for each of the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Encompass
Services Corporation and Subsidiaries as of December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.
   As discussed in Note 5 to the consolidated financial statements, the
Company in 2001 changed its method of accounting for derivative instruments
and hedging activities.
KPMG LLP
Houston, Texas
February 19, 2002
                                      28
                       REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders of
Encompass Services Corporation
   In our opinion, the consolidated statements of operations, of shareholders'
equity and other comprehensive income and of cash flows for the year ended
December 31, 1999 present fairly, in all material respects, the results of
operations and cash flows of Encompass Services Corporation and its
subsidiaries for the year ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
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 audit. We conducted our audit of these statements in accordance
with auditing standards generally accepted in the United States of America,
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 12, 2000, except as to Note 13, which is as of March 5, 2002
                                      29
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                        (In thousands, except par value)
<TABLE>
<CAPTION>
                                                            December 31,
                                                        ----------------------
                                                           2001        2000
                                                        ----------  ----------
<S>                                                     <C>         <C>
                        ASSETS
                        ------
Current Assets:
  Cash and cash equivalents............................ $   20,572  $   10,094
  Accounts receivable, net of allowance of $45,344 and
   $17,270 respectively................................    728,203     969,469
  Inventories..........................................     26,128      32,172
  Costs and estimated earnings in excess of billings on
   uncompleted contracts...............................    101,719     119,997
  Deferred tax assets..................................     19,219      17,296
  Prepaid expenses and other current assets............     25,880      30,266
                                                        ----------  ----------
    Total current assets...............................    921,721   1,179,294
Property and equipment, net............................    124,548     123,945
Goodwill, net..........................................  1,285,625   1,328,884
Other intangible assets, net...........................     13,529      15,905
Deferred debt issuance costs, net......................     19,577      17,039
Other long-term assets.................................     36,326      32,815
                                                        ----------  ----------
    Total assets....................................... $2,401,326  $2,697,882
                                                        ==========  ==========
         LIABILITIES AND SHAREHOLDERS' EQUITY
         ------------------------------------
Current Liabilities:
  Short-term borrowings and current maturities of long-
   term debt........................................... $    4,551  $    5,805
  Accounts payable.....................................    269,226     280,630
  Billings in excess of costs and estimated earnings on
   uncompleted contracts...............................    159,226     208,302
  Accrued compensation.................................     88,578     105,343
  Other accrued liabilities............................     74,915      76,494
  Due to related parties...............................        989      11,385
                                                        ----------  ----------
    Total current liabilities..........................    597,485     687,959
Long-term debt, net of current portion.................    810,263     961,606
Deferred tax liabilities...............................      7,384      11,029
Other long-term liabilities............................     20,461       4,404
Commitments and contingencies
Mandatorily redeemable convertible preferred stock,
 $.001 par value; 50,000 shares authorized; 256 shares
 issued and outstanding................................    289,621     269,009
Shareholders' equity:
  Common stock, $.001 par value; 200,000 shares
   authorized; 63,793 and 63,501 shares outstanding,
   respectively........................................         65          64
  Additional paid-in capital...........................    622,783     624,926
  Retained earnings....................................     67,307     139,045
  Treasury stock, at cost..............................    (10,425)       (160)
  Accumulated other comprehensive loss.................     (3,618)         --
                                                        ----------  ----------
    Total shareholders' equity.........................    676,112     763,875
                                                        ----------  ----------
    Total liabilities and shareholders' equity......... $2,401,326  $2,697,882
                                                        ==========  ==========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       30
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                            ----------------------------------
                                               2001        2000        1999
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
Revenues..................................  $3,904,735  $3,982,266  $1,772,584
Cost of services..........................   3,287,852   3,275,070   1,419,117
                                            ----------  ----------  ----------
  Gross profit............................     616,883     707,196     353,467
Selling, general and administrative
 expenses.................................     454,769     441,757     203,962
Provision for doubtful accounts...........      37,359       6,988         766
Amortization of goodwill and other
 intangible assets........................      36,919      33,339      16,004
Merger and related charges................          --       7,800          --
Costs to exit certain activities and
 related costs............................          --      12,200          --
Restructuring and recapitalization
 charges..................................          --          --       8,020
                                            ----------  ----------  ----------
  Operating income........................      87,836     205,112     124,715
Other income (expense):
  Interest income.........................       1,002         859       5,743
  Interest expense........................     (84,311)    (88,101)    (35,618)
  Other, net..............................      (1,674)       (530)        249
                                            ----------  ----------  ----------
Income from continuing operations before
 income tax provision.....................       2,853     117,340      95,089
Income tax provision......................      16,545      57,652      42,027
                                            ----------  ----------  ----------
Income (loss) from continuing operations..     (13,692)     59,688      53,062
Income (loss) from discontinued
 operations, net of tax...................     (10,943)      3,665          --
Loss on disposal of discontinued
 operations, net of tax...................     (26,491)         --          --
                                            ----------  ----------  ----------
Income (loss) before extraordinary loss...     (51,126)     63,353      53,062
Extraordinary loss on debt settlement, net
 of tax...................................          --      (8,057)         --
                                            ----------  ----------  ----------
Net income (loss).........................     (51,126)     55,296      53,062
Less convertible preferred stock
 dividends................................     (20,612)    (16,568)         --
                                            ----------  ----------  ----------
Net income (loss) available to common
 shareholders.............................  $  (71,738) $   38,728  $   53,062
                                            ==========  ==========  ==========
Basic earnings (loss) per share:
  Income (loss) from continuing
   operations.............................  $     (.54) $      .73  $     1.28
  Income (loss) from discontinued
   operations, net of tax.................        (.17)        .06          --
  Loss on disposal of discontinued
   operations, net of tax.................        (.41)         --          --
                                            ----------  ----------  ----------
  Income (loss) before extraordinary
   loss...................................       (1.12)        .79        1.28
  Extraordinary loss on debt settlement,
   net of tax.............................          --        (.14)         --
                                            ----------  ----------  ----------
  Net income (loss).......................  $    (1.12) $      .65  $     1.28
                                            ==========  ==========  ==========
  Weighted average shares outstanding.....      63,845      59,234      41,538
                                            ==========  ==========  ==========
Diluted earnings (loss) per share:
  Income (loss) from continuing
   operations.............................  $     (.54) $      .71  $     1.21
  Income (loss) from discontinued
   operations, net of tax.................        (.17)        .06          --
  Loss on disposal of discontinued
   operations, net of tax.................        (.41)         --          --
                                            ----------  ----------  ----------
  Income (loss) before extraordinary
   loss...................................       (1.12)        .77        1.21
  Extraordinary loss on debt settlement,
   net of tax.............................          --        (.14)         --
                                            ----------  ----------  ----------
  Net income (loss).......................  $    (1.12) $      .63  $     1.21
                                            ==========  ==========  ==========
  Weighted average shares outstanding.....      63,845      61,089      46,406
                                            ==========  ==========  ==========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       31
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
                                (In thousands)
<TABLE>
<CAPTION>
                            Common Stock
                         ------------------
                                                                            Accumulated
                                            Additional                         Other         Total         Total
                           Shares            Paid-in   Retained  Treasury  Comprehensive Shareholders' Comprehensive
                         Outstanding Amount  Capital   Earnings   Stock        Loss         Equity     Income (Loss)
                         ----------- ------ ---------- --------  --------  ------------- ------------- -------------
<S>                      <C>         <C>    <C>        <C>       <C>       <C>           <C>           <C>
BALANCE, December 31,
1998....................    56,574    $56    $832,503  $47,255   $(41,832)    $  (445)     $837,537
 Shares purchased under
 stock purchase and
 option plans...........       233      1       1,811       --         --          --         1,812
 Common stock issued or
 to be issued in
 acquisitions...........     9,101      9      96,980       --         --          --        96,989
 Cancellation of
 treasury stock.........        --     --     (41,832)      --     41,832          --            --
 Repurchase of shares in
 Tender Offer...........   (30,773)   (31)   (562,973)      --         --          --      (563,004)
 Compensation expense
 related to options
 exercised in Tender
 Offer..................        --     --       2,629       --         --          --         2,629
 Unrealized loss on
 marketable securities,
 net of tax of $179.....        --     --          --       --         --        (268)         (268)     $   (268)
 Net income.............        --     --          --   53,062         --          --        53,062        53,062
                                                                                                         --------
 Total comprehensive
 income.................        --     --          --       --         --          --            --      $ 52,794
                           -------    ---    --------  -------   --------     -------      --------      ========
BALANCE, December 31,
1999....................    35,135     35     329,118  100,317         --        (713)      428,757
 Shares purchased under
 stock purchase and
 option plans...........       232     --       1,074       --         --          --         1,074
 Common stock issued in
 Merger.................    27,909     28     282,404       --         --          --       282,432
 Common stock issued or
 to be issued in other
 acquisitions...........       441      1      13,390       --         --          --        13,391
 Purchase of treasury
 stock..................       (32)    --          --       --       (160)         --          (160)
 Shares received in
 settlement of
 litigation.............      (184)    --      (1,060)      --         --          --        (1,060)
 Reclassification
 adjustment, net of tax
 of $476................        --     --          --       --         --         713           713      $    713
 Net income.............        --     --          --   55,296         --          --        55,296        55,296
 Convertible preferred
 stock dividends........        --     --          --  (16,568)        --          --       (16,568)
                                                                                                         --------
 Total comprehensive
 income.................        --     --          --       --         --          --            --      $ 56,009
                           -------    ---    --------  -------   --------     -------      --------      ========
BALANCE, December 31,
2000....................    63,501     64     624,926  139,045       (160)         --       763,875
 Shares purchased under
 stock purchase and
 option plans...........       774     --       3,020       --         --          --         3,020
 Common stock issued in
 acquisitions...........     1,129      1      (4,656)      --         --          --        (4,655)
 Purchase of treasury
 stock..................    (1,382)    --          --       --     (9,130)         --        (9,130)
 Treasury stock acquired
 in connection with
 sales of businesses....      (301)    --          --       --     (1,519)         --        (1,519)
 Treasury stock issued
 in acquisitions........        72     --        (507)      --        384          --          (123)
 Cumulative effect of an
 accounting change, net
 of tax of $912.........        --     --          --       --         --      (1,488)       (1,488)     $ (1,488)
 Net losses on interest
 rate swaps, net of tax
 of $2,759..............        --     --          --       --         --      (4,503)       (4,503)       (4,503)
 Reclassification
 adjustments related to
 interest rate swaps,
 net of tax of $1,454...        --     --          --       --         --       2,373         2,373         2,373
 Net loss...............        --     --          --  (51,126)        --          --       (51,126)      (51,126)
 Convertible preferred
 stock dividends........        --     --          --  (20,612)        --          --       (20,612)
                                                                                                         --------
 Total comprehensive
 loss...................        --     --          --       --         --          --            --      $(54,744)
                           -------    ---    --------  -------   --------     -------      --------      ========
BALANCE, December 31,
2001....................    63,793    $65    $622,783  $67,307   $(10,425)    $(3,618)     $676,112
                           =======    ===    ========  =======   ========     =======      ========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       32
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                 ------------------------------
                                                   2001       2000       1999
                                                 --------  ----------  --------
<S>                                              <C>       <C>         <C>
Cash flows from operating activities:
 Net income (loss).............................  $(51,126) $   55,296  $ 53,062
 Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating
  activities:
  Loss (income) from discontinued operations,
   net of tax..................................    10,943      (3,665)       --
  Loss on disposal of discontinued operations,
   net of tax..................................    26,491          --        --
  Extraordinary loss on debt settlement, net of
   tax.........................................        --       8,057        --
  Depreciation and amortization................    73,907      64,484    31,982
  Provision for doubtful accounts..............    37,359       6,988       766
  Provision (benefit) for deferred income
   taxes.......................................     2,579       4,453      (843)
  Other non-cash charges.......................     6,355       6,306     2,978
  Changes in operating assets and liabilities:
  Accounts receivable..........................   149,508    (204,424)  (88,072)
  Costs and estimated earnings in excess of
   billings on uncompleted contracts...........    13,857      (6,326)  (22,504)
  Prepaid expenses and other current assets....    12,712      11,054   (11,567)
  Billings in excess of costs and estimated
   earnings on uncompleted contracts...........   (47,756)     57,212    15,336
  Accounts payable and accrued liabilities.....    (5,952)     64,301    17,512
  Change in other assets and liabilities.......    12,651     (14,350)      809
                                                 --------  ----------  --------
   Net cash provided by (used in) operating
    activities.................................   241,528      49,386      (541)
                                                 --------  ----------  --------
Cash flows from investing activities:
 Cash paid for acquisitions, net of cash
  acquired.....................................   (16,872)    (59,617) (161,084)
 Purchases of property and equipment...........   (42,052)    (43,309)  (28,326)
 Proceeds from sales of businesses, property
  and equipment................................     5,447       4,886       584
 Other, net....................................        --      (2,098)     (258)
                                                 --------  ----------  --------
   Net cash used in investing activities.......   (53,477)   (100,138) (189,084)
                                                 --------  ----------  --------
Cash flows from financing activities:
 Net payments on short-term debt...............    (1,003)     (9,869)   (4,907)
 Payments on long-term debt....................  (918,100) (1,462,826)  (46,167)
 Proceeds from long-term debt issuance.........   765,800   1,522,078   630,592
 Payment of debt issuance costs................    (7,522)    (11,952)  (22,467)
 Issuance of preferred stock, net of issuance
  costs........................................        --     146,250        --
 Repurchase and retirement of GroupMAC common
  stock in the Merger..........................        --    (150,000)       --
 Repurchase of common stock in Tender Offer,
  including related expenses...................        --          --  (564,407)
 Purchase of treasury stock....................    (9,130)       (160)       --
 Distribution to minority shareholders.........        --          --      (842)
 Proceeds from issuance of stock under employee
  stock purchase and stock option plans........     2,950       1,074     1,812
                                                 --------  ----------  --------
   Net cash provided by (used in) financing
    activities.................................  (167,005)     34,595    (6,386)
                                                 --------  ----------  --------
Net cash flows provided by (used in)
 discontinued operations.......................   (10,568)      9,166        --
                                                 --------  ----------  --------
Net increase (decrease) in cash and cash
 equivalents...................................    10,478      (6,991) (196,011)
Cash and cash equivalents, beginning of
 period........................................    10,094      17,085   213,096
                                                 --------  ----------  --------
Cash and cash equivalents, end of period.......  $ 20,572  $   10,094  $ 17,085
                                                 ========  ==========  ========
Supplemental Disclosures of Cash Flow
 Information:
 Interest paid.................................  $ 80,032  $   85,146  $ 22,422
 Income taxes paid.............................    16,559      39,820    53,673
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       33
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (In thousands, except per share data)
1. BUSINESS AND ORGANIZATION
   Encompass Services Corporation ("Encompass", or the "Company"), a Texas
corporation, was formed to build a national company providing mechanical and
electrical services in the commercial, industrial and residential markets. On
February 22, 2000, the shareholders of Group Maintenance America Corp.
("GroupMAC") and Building One Services Corporation ("Building One") approved a
merger of the two companies (the "Merger"). In connection with the Merger,
GroupMAC changed its name to Encompass Services Corporation.
   GroupMAC was the surviving legal entity in the Merger. However, for
accounting purposes, Building One was deemed to be the acquiror and,
accordingly, the Merger was accounted for as a "reverse acquisition". Under
this method of accounting, Encompass' historical results for periods prior to
the Merger are the same as Building One's historical results. All share and
per share information has been restated to reflect the exchange ratio on a
retroactive basis. See Note 3 for discussion of the Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   The accompanying consolidated financial statements and related notes
include the accounts of Encompass and the companies acquired in business
combinations accounted for under the purchase method from their respective
acquisition dates.
 Principles of Consolidation
   The consolidated financial statements include the accounts of Encompass and
its majority owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation. The Company's Global Technologies
segment was discontinued in September 2001. See Note 16 for further
discussion. Certain prior year amounts have been reclassified to conform to
the current year presentation.
 Use of Estimates
   The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
 Revenue Recognition
   Revenues from construction contracts are recognized on the percentage-of-
completion accounting method, measured by the percentage of costs incurred to
date to the estimated total costs at completion for each contract (the "cost-
to-cost" method). Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability may result in
revisions to estimated costs and revenues and are recognized in the period in
which the revisions are determined. Revenues from work orders are recognized
as services are performed. Revenues from service and maintenance contracts are
recognized over the life of contracts.
   Receivable balances pursuant to retainage provisions in construction
contracts are due upon completion of the contracts and acceptance by the
customer. Based upon the Company's experience in recent years with similar
contracts, the retention balance at each balance sheet date is generally
billed and collected within the subsequent
                                      34
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
year. The unbilled retainage balance at December 31, 2001 and 2000 was
$122,872 and $151,477, respectively, and is included in accounts receivable in
the consolidated balance sheets.
 Concentration of Credit Risk
   Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company grants credit, generally without collateral, to its customers,
which primarily include general contractors, property owners and developers,
governmental agencies, educational and medical institutions, and commercial
and industrial companies in a variety of industries. The Company is subject to
potential credit risk related to changes in business and economic factors
throughout the United States. However, the Company is entitled to payment for
work performed and often has certain lien rights in that work. Additionally,
management continually monitors the financial condition of its customers to
reduce risk of loss. The Company provides an allowance for doubtful accounts
when future collection is considered doubtful.
 Financial Instruments
   The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, interest rate swaps and short- and
long-term debt. At December 31, 2001 and 2000, the Company's 10 1/2% Senior
Subordinated Notes had a carrying value, excluding unamortized discount, of
$335,000 and $200,000, respectively, and a fair value of $217,750 and
$130,000, respectively. The fair value of the Company's interest rate swaps at
December 31, 2001 was a liability of $6,761. The Company believes that, with
the exception of the 10 1/2% Senior Subordinated Notes, the carrying values of
financial instruments on the consolidated balance sheets approximate their
fair value. See Note 5.
 Cash and Cash Equivalents
   The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
 Inventories
   Inventories consist primarily of purchased materials, parts and supplies
held for use in the ordinary course of business. Inventories are valued at the
lower of cost or market, with cost determined on a first-in, first-out
("FIFO") basis.
 Property and Equipment
   Property and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the shorter of the
remaining lease term or the estimated useful life of the asset. As events or
circumstances dictate, the Company reviews the carrying amounts of property
and equipment for impairment. The amount of impairment, if any, is measured
based on comparing the estimated future undiscounted cash flows associated
with the asset to its carrying value.
   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. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized as other income (expense) in the consolidated statements
of operations.
                                      35
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
 Goodwill
   Goodwill represents the excess of the aggregate purchase price over the
fair value of net identifiable assets of businesses acquired under the
purchase method of accounting. Goodwill is amortized on a straight-line basis
over a period of 40 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows compared to the carrying value of goodwill. The Company reviews the
carrying value of goodwill for impairment whenever events or circumstances
indicate that the carrying amount may not be recoverable. At December 31, 2001
and 2000, accumulated amortization of goodwill was $89,306 and $55,010,
respectively.
 Other Intangible Assets
   Other intangible assets represent the portion of purchase price paid in the
Merger which has been allocated, based on independent appraisals, to the value
of acquired customer lists and the value of dedicated workforces. Costs
allocated to these assets are being amortized on a straight-line basis over
the remaining estimated useful lives of these assets, as determined
principally by the underlying characteristics of customer retention and
workforce turnover. The amounts allocated to the value of the customer lists
and dedicated workforce at the Merger date are being amortized over 15 years
and 5 years, respectively. The Company reviews the carrying value of these
intangibles for impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. At December 31, 2001 and 2000,
accumulated amortization related to other intangible assets was $4,356 and
$1,980, respectively.
 Deferred Debt Issuance Costs
   Deferred debt issuance costs relate to the Company's primary credit
facility and senior subordinated notes and are amortized to interest expense
over the scheduled maturity of the related debt.
 Stock-Based Compensation
   The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", as amended. Accordingly,
compensation expense for stock options is measured as the excess, if any, of
the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the common stock. The Company
has also provided the pro forma disclosures required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".
 Warranty Costs
   The Company generally warrants all of its work for a period of one year
from the date of installation. A provision for estimated warranty costs is
recorded at the time a product is sold or service is rendered based on the
historical level of warranty claims and management's estimate of future costs.
 Income Taxes
   The Company uses the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and
                                      36
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce net deferred tax
assets to the amount expected to be realized.
 Earnings Per Share
   Basic earnings per share have been calculated by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share are computed
considering the dilutive effect of stock options, warrants, the Convertible
Preferred Stock and, in 1999, the convertible junior subordinated debentures.
See Note 15.
 Other Comprehensive Income
   Other comprehensive income refers to revenues, 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 income is attributed to adjustments for unrealized losses,
net of tax, on marketable securities available for sale and changes in the
fair value of interest rate swap agreements. See Note 5 for further discussion
of accounting for interest rate swap agreements.
 New Accounting Pronouncements
   In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001, and
specifies criteria for recording intangible assets other than goodwill in
business combinations, noting that values allocated to dedicated workforce may
not be reported separately from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives will no longer be amortized to
expense, but instead will be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized to
expense.
   The Company has adopted the provisions of SFAS 141 and is required to adopt
SFAS 142 effective January 1, 2002. As of January 1, 2002, the Company will
reclassify the unamortized value of its acquired dedicated workforce ($5,622)
to goodwill. Beginning January 1, 2002, the Company will no longer record
goodwill amortization, which totaled $36,919 in 2001. In addition, the Company
will assess whether there is an impairment charge to goodwill as of January 1,
2002. Any impairment charge recognized at January 1, 2002 upon adoption of
SFAS 142 will be shown as the cumulative effect of a change in accounting
principle in the Company's statement of operations. Any such impairment charge
will have no impact on the calculation of financial covenants under the
Company's debt agreements.
   The Company is currently evaluating the impact of adopting SFAS 142. Based
on a preliminary review of the new standard, management believes the Company
will record a non-cash goodwill impairment charge upon adoption, and that the
amount of such charge will be significant in relation to the Company's
unamortized goodwill balance of $1,285,625 at December 31, 2001. Such charge,
however, will not impact cash flow, operating income or compliance with any
financial debt covenant.
   In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No.
121 and the accounting and reporting provisions of APB No. 30, for the
disposal of a business. SFAS 144 provides a single accounting model for long-
lived assets to be
                                      37
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS 121, the new rules change the criteria to be
met to classify an asset as held-for-sale. The new rules also broaden the
criteria regarding classification of a discontinued operation. The Company is
required to adopt the provisions of SFAS 144 effective January 1, 2002.
Management believes that the adoption of SFAS 144 will not have a material
impact on the Company's results of operations, financial position or cash
flows.
3. BUSINESS COMBINATIONS
   On February 22, 2000, the shareholders of GroupMAC and Building One
approved the Merger. Under the terms of the Merger, each outstanding share of
Building One common stock was converted into 1.25 shares of GroupMAC common
stock. As part of the Merger, GroupMAC shareholders could elect to receive
cash for up to 50% of their shares of Encompass common stock at $13.50 per
share, subject to proration. As a result of this election, 11,052 shares of
Encompass common stock were canceled in the Merger. The Merger was accounted
for as a purchase under generally accepted accounting principles. GroupMAC,
which changed its name to Encompass Services Corporation, was the surviving
legal entity in the Merger. However, for accounting purposes, Building One was
deemed to be the acquiror and, accordingly, the Merger was accounted for as a
"reverse acquisition".
   Concurrent with the closing of the Merger, affiliates of Apollo Management,
L.P. ("Apollo") exchanged approximately $106,191 of Building One convertible
junior subordinated debentures and $150,000 in cash for 256 shares of
Encompass Convertible Preferred Stock. See Note 7 for further discussion of
the Convertible Preferred Stock. The cash proceeds from the issuance of the
Convertible Preferred Stock were used to fund the cash election feature of the
Merger discussed above. In connection with the Merger, Apollo received a fee
of $2,500.
   Pursuant to the Merger, Encompass entered into a new credit agreement, the
proceeds of which were used to repay the existing revolving credit facilities
of GroupMAC and Building One, as well as GroupMAC's senior subordinated notes.
See Note 5 for further discussion of the credit agreement.
   The allocation of the total consideration to the assets and liabilities of
GroupMAC and the resultant goodwill are summarized as follows:
<TABLE>
      <S>                                                              <C>
      Estimated fair value of common stock consideration.............. $282,432
      Long-term debt assumed..........................................  407,904
      Other long-term liabilities assumed.............................    7,320
      Transaction costs...............................................    7,358
      Working capital.................................................  (47,807)
      Property and equipment, net and other long-term assets..........  (63,859)
      Intangible asset--value of dedicated workforce..................   (8,878)
      Intangible asset--value of customer list........................   (9,007)
                                                                       --------
      Goodwill........................................................ $575,463
                                                                       ========
</TABLE>
                                      38
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
   The following unaudited pro forma combined statement of operations data
utilize the financial information of GroupMAC and Building One for the periods
indicated, which give effect to the Merger and the acquisitions made by each
company during 1999 including amounts owed in connection with those
acquisitions, as if the Merger and all of the acquisitions were effective as
of the beginning of the period presented.
<TABLE>
<CAPTION>
                                                           Year Ended December
                                                                   31,
                                                          ---------------------
                                                             2000       1999
                                                          ---------- ----------
      <S>                                                 <C>        <C>
      Revenues........................................... $4,248,569 $3,641,643
      Net income.........................................     69,049     98,666
      Net income available to common shareholders........     49,652     79,269
      Net income per share:
        Basic............................................ $      .76 $     1.21
        Diluted.......................................... $      .75 $     1.16
</TABLE>
   Significant pro forma adjustments included in the above amounts consist of
(i) compensation differentials, (ii) goodwill amortization over a period of 40
years, (iii) interest expense as if borrowings outstanding as of March 31,
2000 had been outstanding for the first quarter of 2000 and throughout 1999 at
interest rates in effect on March 31, 2000, (iv) the issuance of the
Convertible Preferred Stock concurrent with the Merger and (v) federal and
state income tax provisions based on pro forma operating results. Net income
per share assumes all shares issued for the Merger and the acquisitions,
including subsequently earned contingent consideration, were outstanding from
the beginning of the periods presented. The pro forma results presented above
are not necessarily indicative of actual results that might have occurred had
the Merger and the acquisitions occurred at the beginning of the period
presented.
 Merger and Related Charges
   In connection with the Merger and related transactions, the Company
recorded the following costs and expenses related to severance, office closing
costs and other related costs:
<TABLE>
<CAPTION>
                                                        Office
                                              Severance Closing  Other   Total
                                              --------- -------  -----  -------
   <S>                                        <C>       <C>      <C>    <C>
   Total charges.............................  $ 6,100  $1,000   $ 700  $ 7,800
   Non-cash portion..........................       --      --    (400)    (400)
   Payments in 2000..........................   (6,100)   (329)     --   (6,429)
                                               -------  ------   -----  -------
   Accrual at December 31, 2000..............       --     671     300      971
   Payments in 2001..........................       --    (671)   (300)    (971)
                                               -------  ------   -----  -------
   Accrual at December 31, 2001..............  $    --  $   --   $  --  $    --
                                               =======  ======   =====  =======
</TABLE>
   The severance and office closing costs relate to the closing of Building
One's corporate headquarters in Minneapolis, Minnesota and the resulting
consolidation with the GroupMAC corporate office in Houston, Texas. As a
result of this plan, the Company incurred severance costs for substantially
all of the employees in the Building One corporate office, identified certain
assets which were no longer of service and incurred lease termination costs.
Severance costs covered 20 employees, all of whom were terminated in 2000.
   In addition, in connection with the Merger, the Company recorded costs of
$3,500 related to severance for twelve former GroupMAC employees, all of whom
were terminated in 2000. These costs were charged to goodwill, and
substantially all amounts were paid during 2000.
                                      39
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
 Costs to Exit Certain Activities and Related Costs
   In connection with the Merger and related transactions, the Company
recorded a charge for the shutdown of certain operations, the reorganization
of other operations and other costs resulting from the Merger. The following
table sets forth a summary of these costs:
<TABLE>
      <S>                                                               <C>
      Shutdown of demolition and site preparation operations........... $ 9,800
      Relocation of cleaning systems management offices................   1,600
      Other costs resulting from the Merger............................     800
                                                                        -------
        Total.......................................................... $12,200
                                                                        =======
</TABLE>
   The costs related to the shutdown of the demolition and site preparation
operations include (i) $5,200 related to obligations under existing jobs in
progress, (ii) $2,000 estimated for uncollectible accounts receivable, (iii)
$1,100 related to claims against the Company, (iv) $800 for impaired assets
and (v) $700 related to lease termination costs and other expenses. The
Company substantially completed the shutdown of these operations during 2001.
   The Company relocated the cleaning systems management offices from January
through May 2000. The related costs included (i) $600 for severance and
related costs, (ii) $500 for impaired assets, (iii) $300 related to lease
termination and related costs and (iv) $200 for other miscellaneous items.
Substantially all of these amounts were paid during 2000.
 Other Business Combinations
   The Company has not acquired any businesses since May 2000. In May 2000,
the Company acquired a business for cash paid of $10,207 and 296 shares of
common stock. The Company assumed approximately $1,518 of debt in this
transaction. The total purchase price was allocated to the fair value of the
net assets acquired, resulting in goodwill of $9,397.
   During the year ended December 31, 1999, the Company completed 23 business
combinations that were accounted for under the purchase method of accounting.
The consolidated financial statements include the results of these acquired
businesses from their respective dates of acquisition. The aggregate
consideration paid for these acquisitions consisted of 5,216 shares of the
Company's common stock, $123,380 in cash, including applicable professional
fees, and $2,410 of debt assumed. The total purchase price was allocated to
the fair value of the net assets acquired, resulting in goodwill of $133,818.
 Contingent Consideration Agreements
   In conjunction with acquisitions, the Company entered into certain
contingent consideration agreements which provided for the payment of cash
and/or shares of common stock based on the financial performance of such
acquired operations during the one- to two-year period immediately following
the acquisition. During the years ended December 31, 2001 and 2000, $3,224 and
$62,297, respectively, of consideration was recorded to goodwill related to
contingent consideration and final purchase price settlements of acquired
companies. The cash payable is reflected as due to related parties and the
estimated value of the shares to be issued is reflected as additional paid-in
capital in the consolidated balance sheet. These common shares to be issued
are included in weighted average shares outstanding since the date earned for
purposes of computing basic earnings per share and since the later of the date
of acquisition or the beginning of the year for purposes of computing diluted
earnings per share.
                                      40
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
   During the years ended December 31, 2001 and 2000, $16,872 and $63,030 of
cash was paid, respectively, and 1,201 and 145 shares were issued,
respectively, related to previously recorded contingent consideration and
final purchase price settlements. There are no significant amounts of unearned
contingent consideration under these agreements at December 31, 2001.
   A rollforward of the due to related parties balance in the consolidated
balance sheets related to the above activity is as follows:
<TABLE>
<CAPTION>
                                                              2001      2000
                                                            --------  --------
   <S>                                                      <C>       <C>
   Balance at beginning of year...........................  $ 11,385  $ 10,290
   Balances assumed in the Merger.........................        --    13,207
   Record cash contingent consideration and final purchase
    price settlement......................................     6,476    50,918
   Payments...............................................   (16,872)  (63,030)
                                                            --------  --------
   Balance at end of year.................................  $    989  $ 11,385
                                                            ========  ========
</TABLE>
4. CERTAIN BALANCE SHEET ACCOUNTS
 Allowance for Doubtful Accounts
   The following summarizes the activity in the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
                                                                2001     2000
                                                               -------  -------
   <S>                                                         <C>      <C>
   Balance at beginning of year............................... $17,270  $ 2,976
   Provision for bad debts from continuing operations.........  37,359    6,988
   Provision for bad debts from discontinued operations.......  18,557    1,255
   Allowance balances from acquired companies.................      --   11,427
   Write-off of bad debts, net of recoveries.................. (27,842)  (5,376)
                                                               -------  -------
   Balance at end of year..................................... $45,344  $17,270
                                                               =======  =======
</TABLE>
 Costs and Estimated Earnings on Uncompleted Contracts
   The summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
                                                          December 31,
                                                     ------------------------
                                                        2001         2000
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Costs incurred on uncompleted contracts.......... $ 3,864,476  $ 3,636,828
   Estimated earnings recognized, net of losses.....     627,496      675,568
                                                     -----------  -----------
                                                       4,491,972    4,312,396
   Less billings to date............................  (4,549,479)  (4,400,701)
                                                     -----------  -----------
                                                     $   (57,507) $   (88,305)
                                                     ===========  ===========
<CAPTION>
                                                          December 31,
                                                     ------------------------
                                                        2001         2000
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Costs and estimated earnings in excess of
    billings on uncompleted contracts............... $   101,719  $   119,997
   Billings in excess of costs and estimated
    earnings on uncompleted contracts...............    (159,226)    (208,302)
                                                     -----------  -----------
                                                     $   (57,507) $   (88,305)
                                                     ===========  ===========
</TABLE>
                                      41
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
 Property and Equipment
   The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
                                                 Estimated    December 31,
                                                  Useful    ------------------
                                                   Lives      2001      2000
                                                ----------- --------  --------
   <S>                                          <C>         <C>       <C>
   Land........................................          -- $  1,596  $  2,264
   Buildings and improvements.................. 20-30 years    9,444    11,363
   Service and other vehicles..................   4-7 years   32,881    35,159
   Machinery and equipment.....................  5-10 years   64,039    54,960
   Office equipment, furniture and fixtures....  5-10 years   66,084    45,915
   Leasehold improvements......................  2-15 years   35,289    23,801
                                                            --------  --------
                                                             209,333   173,462
   Less accumulated depreciation...............              (84,785)  (49,517)
                                                            --------  --------
                                                            $124,548  $123,945
                                                            ========  ========
</TABLE>
5. SHORT- AND LONG-TERM DEBT
   Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                            December 31,
                                                          ------------------
                                                            2001      2000
                                                          --------  --------
   <S>                                                    <C>       <C>
   Revolving Credit Facility (7.4% and 9.0%,
    respectively)........................................ $ 90,000  $369,000
   Term loans (6.1% and 8.9%, respectively)..............  294,000   297,000
   Institutional term loan (7.0% and 10.2%,
    respectively)........................................   98,250    99,500
   10 1/2% Senior Subordinated Notes, net of discount....  327,900   196,243
   Other borrowings......................................    4,664     5,668
                                                          --------  --------
                                                           814,814   967,411
   Less: short-term borrowings and current maturities....   (4,551)   (5,805)
                                                          --------  --------
     Total long-term debt................................ $810,263  $961,606
                                                          ========  ========
</TABLE>
 Credit Facility
   On February 22, 2000, in connection with the Merger, the Company entered
into an $800,000 senior credit facility (the "Credit Facility") and borrowed
funds thereunder to repay prior indebtedness of GroupMAC and Building One. The
Credit Facility currently includes a revolving credit facility described below
expiring in February 2005, a $130,000 term loan, a $170,000 term loan and a
$100,000 institutional term loan. Borrowings under the Credit Facility are
secured by substantially all assets of the Company. The availability of
borrowings under the Credit Facility is subject to the Company's ability to
meet certain specified conditions, including compliance with certain financial
covenants and ratios measured as of the end of each fiscal quarter. On
November 9, 2001, the Company amended the Credit Facility. The amended terms
provide for a revolving credit facility of $300,000, increasing to $350,000
once certain debt leverage ratios are achieved. Borrowings under the amended
Credit Facility bear interest at variable rates, ranging from 2.0% to 3.75%
over the Eurodollar Rate (as defined in the Credit Facility) and from 0.50% to
2.25% over the Alternate Base Rate (as defined in the Credit Facility),
depending, in each case, on the Company's total debt-to-EBITDA ratio. In
addition, the amendment establishes certain restrictions on the Company's
ability to make acquisitions, capital expenditures and investments and
requires debt prepayment with future issuances of debt or equity. Such
restrictions will generally revert back to those under the original agreement
once certain debt leverage ratios are achieved. As of December 31, 2001, the
Company also had $1,457 in letters of credit outstanding, and $208,543
available for borrowing under the revolving credit facility.
                                      42
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
   The Company is currently in compliance with all financial covenants under
the Credit Facility. If the Company anticipates that it will violate any of
its financial covenants, it will be necessary to negotiate new terms with its
senior lenders or seek other financing alternatives in order to prevent an
event of default under the Credit Facility. There can be no assurance that, if
required, the Company will be able to successfully negotiate satisfactory new
terms with its bank lenders, or that any necessary alternative financing can
be secured when needed or on terms deemed acceptable by the Company.
   Debt issuance costs associated with the Credit Facility totaling $14,229
have been deferred and are being amortized over the five-year, six-year and
seven-year terms of the revolving credit facility, the term loans, and the
institutional term loan portions of the Credit Facility, respectively. In
connection with the amendment of the Credit Facility in November 2001, $1,580
of debt issuance costs related to the Credit Facility deferred prior to the
amendment were charged to interest expense. The unamortized portion of debt
issuance costs associated with the Credit Facility was approximately $8,451
and $9,980 at December 31, 2001 and 2000, respectively, and is included in
deferred debt issuance costs in the consolidated balance sheets.
 10 1/2% Senior Subordinated Notes
   In April 1999, the Company completed a private offering of $200,000 of 10
1/2% senior subordinated notes (the "Senior Subordinated Notes"). In June
2001, the Company completed a private offering of an additional $135,000 of
Senior Subordinated Notes. The Senior Subordinated Notes are unsecured and are
guaranteed by the Company's subsidiaries, require interest to be paid semi-
annually on May 1 and November 1 of each year and mature on May 1, 2009.
Borrowings outstanding under the Senior Subordinated Notes are subordinated in
all material respects to amounts outstanding under the Credit Facility. The
Senior Subordinated Notes were issued at discounts totaling $8,558, which are
being amortized to interest expense over the term of the notes. Additionally,
debt issuance costs totaling $13,715 incurred in connection with the offerings
have been deferred and are being amortized to interest expense over the term
of the notes. The unamortized portion of these costs was approximately $11,126
and $7,059 at December 31, 2001 and 2000, respectively, and is included in
deferred debt issuance costs in the consolidated balance sheets.
   The fair value of the Senior Subordinated Notes, based on quoted market
values, was approximately $217,750 and $130,000 at December 31, 2001 and 2000,
respectively.
   The Senior Subordinated Notes are guaranteed by all of the Company's
current and future U.S. subsidiaries other than "Unrestricted Subsidiaries"
(as defined in the indenture governing the Notes). As of December 31, 2001,
there were no "Unrestricted Subsidiaries." These guarantees are full,
unconditional and joint and several. In addition, Encompass has no non-
guarantor subsidiaries and no independent assets or operations outside of its
ownership of the subsidiaries. Accordingly, no separate financial statements
or consolidating information of the guarantor subsidiaries are presented
because management believes this information is not material to users of the
Company's financial statements.
   The Company may redeem the Senior Subordinated Notes, in whole or in part,
at any time on or after May 1, 2004 at specified redemption prices, plus
accrued interest. At any time (which may be more than once) before May 1,
2002, the Company may redeem up to 35% of the outstanding Senior Subordinated
Notes with money raised in equity offerings under certain circumstances. Upon
a change in control of the Company (as defined in the indenture for the Senior
Subordinated Notes), the Company will be required to offer to purchase all of
the outstanding Senior Subordinated Notes at 101% of the face amount plus
accrued interest. Additionally, the indenture governing the Senior
Subordinated Notes contains certain covenants relating to, among other things,
the Company's ability to incur indebtedness, pay dividends or repurchase
capital stock, incur liens, sell or otherwise dispose of a substantial portion
of its assets or merge or consolidate with another entity.
                                      43
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
   The aggregate maturities of debt as of December 31, 2001 are as follows:
<TABLE>
   <S>                                                                  <C>
   2002................................................................ $  4,551
   2003................................................................    5,613
   2004................................................................    6,500
   2005................................................................   94,000
   2006................................................................  283,000
   Thereafter..........................................................  421,150
                                                                        --------
                                                                        $814,814
                                                                        ========
</TABLE>
 Interest Rate Swap Agreements
   The Company has entered into interest rate swap agreements in the aggregate
notional amount of $110,000 to manage its mix of fixed and floating rate debt
to partially hedge its exposure to potential fluctuations in interest rates.
All such agreements are with large creditworthy financial institutions and
result in the Company paying a fixed rate of interest and receiving a floating
rate. At December 31, 2001, the Company's ratio of fixed rate debt to total
debt was 41% and the weighted average interest rate on its total debt was
8.64%, before considering the aforementioned interest rate swap agreements.
After giving effect to the interest rate swap agreements in effect at December
31, 2001, the ratio of fixed rate debt was 52% and the weighted average
interest rate on total debt was 9.19%.
   Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an Amendment of FASB Statement No. 133". These statements establish accounting
and reporting standards requiring that derivative instruments, including
certain derivative instruments embedded in other contracts, be recorded on the
balance sheet at fair value as either assets or liabilities. The accounting
for changes in the fair value of a derivative instrument depends on the
intended use and designation of the derivative at its inception. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results of the hedged item in the statement of operations, and
requires the Company to formally document, designate and assess the
effectiveness of the hedge transaction to receive hedge accounting treatment.
For derivatives designated as cash flow hedges, changes in fair value, to the
extent the hedge is effective, are recognized in other comprehensive income
until the hedged item is recognized in earnings. Overall hedge effectiveness
is measured at least quarterly. Any changes in the fair value of the
derivative instruments resulting from hedge ineffectiveness, as defined by
SFAS No. 133 and measured based on the cumulative changes in the fair value of
the derivative instrument and the cumulative changes in the estimated future
cash flows of the hedged item, are recognized immediately in earnings. The
Company has designated its interest rate swap agreements as cash flow hedges.
   Adoption of SFAS No. 133 at January 1, 2001 resulted in the recognition of
approximately $1,488, net of tax effect of $912, of hedging losses included in
accumulated other comprehensive loss as the cumulative effect of a change in
accounting principle and $2,400 of derivative liabilities which are included
in other long-term liabilities in the consolidated balance sheet. During the
year ended December 31, 2001, the Company recognized $2,373, net of tax effect
of $1,454, in additional interest expense attributable to the difference in
the variable interest receivable and fixed interest payable under the interest
rate swap agreements. No significant gain or loss from hedge ineffectiveness
was required to be recognized. At December 31, 2001, the fair value of the
interest rate swap agreements was a liability of $6,761. The Company estimates
that approximately $1,800, net of tax, of such amount is expected to be
recognized as additional interest expense over the next twelve months as
interest
                                      44
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
costs on the underlying debt are recognized. Amounts were determined as of the
balance sheet date based on quoted market values, the Company's portfolio of
interest rate swap agreements and the Company's measurement of hedge
effectiveness.
6. INCOME TAXES
   Total income taxes are allocated as follows:
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -------------------------
                                                       2001     2000     1999
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Income from continuing operations................. $16,545  $57,652  $42,027
   Income (loss) from discontinued operations........  (5,767)   2,093       --
   Loss on disposal of discontinued operations.......  (7,819)      --       --
   Extraordinary loss on debt settlement.............      --   (4,338)      --
   Other comprehensive income (loss).................  (2,217)     476     (179)
                                                      -------  -------  -------
                                                      $   742  $55,883  $41,848
                                                      =======  =======  =======
</TABLE>
   Income tax provision attributable to income from continuing operations
consists of the following:
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                         2001    2000    1999
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Current:
     Federal........................................... $11,812 $45,272 $37,960
     State.............................................   2,154   7,927   4,910
                                                        ------- ------- -------
                                                         13,966  53,199  42,870
   Deferred:
     Federal and state.................................   2,579   4,453    (843)
                                                        ------- ------- -------
                                                        $16,545 $57,652 $42,027
                                                        ======= ======= =======
</TABLE>
   Total income tax expense attributable to income from continuing operations
differs from the amounts computed by applying the U.S. federal statutory
income tax rate to income from continuing operations before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                   --------------------------
                                                    2001      2000     1999
                                                   -------  --------  -------
   <S>                                             <C>      <C>       <C>
   Income from continuing operations before
    income tax provision.........................  $ 2,853  $117,340  $95,089
                                                   -------  --------  -------
   Applicable U.S. federal statutory rate........       35%       35%      35%
                                                   -------  --------  -------
   Tax provision at statutory rate...............      999    41,069   33,281
   Increase (decrease) resulting from:
     State income taxes, net of federal benefit..    1,400     5,128    3,192
     Non-deductible goodwill amortization........   11,024    10,038    5,230
     Non-deductible meals and entertainment......    1,506     1,971      387
     Other, net..................................    1,616      (554)     (63)
                                                   -------  --------  -------
                                                   $16,545  $ 57,652  $42,027
                                                   =======  ========  =======
</TABLE>
                                      45
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
   The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               2001      2000
                                                             --------  --------
   <S>                                                       <C>       <C>
   Deferred income tax assets:
     Allowance for doubtful accounts........................ $ 11,257  $  6,735
     Inventories............................................      296       976
     Accrued expenses.......................................   16,170    13,834
     Deferred revenue.......................................    2,161     1,974
     Unrealized loss on interest rate swap agreements.......    2,217        --
     Net operating loss carryforward........................      288       308
                                                             --------  --------
       Total deferred income tax assets.....................   32,389    23,827
                                                             --------  --------
   Deferred income tax liabilities:
     Depreciation...........................................   (4,854)   (3,730)
     Completed contract accounting for tax purposes.........   (3,845)   (5,475)
     Amortization of goodwill...............................   (9,547)   (6,683)
     Other..................................................   (2,308)   (1,672)
                                                             --------  --------
     Total deferred income tax liabilities..................  (20,554)  (17,560)
                                                             --------  --------
     Net deferred income tax assets......................... $ 11,835  $  6,267
                                                             ========  ========
</TABLE>
   These deferred income tax assets and liabilities are included in the
consolidated balance sheets under the following captions:
<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                               2001      2000
                                                              -------  --------
   <S>                                                        <C>      <C>
   Deferred tax assets--current.............................. $19,219  $ 17,296
   Deferred tax liabilities--long-term.......................  (7,384)  (11,029)
                                                              -------  --------
                                                              $11,835  $  6,267
                                                              =======  ========
</TABLE>
   Management believes it is more likely than not that the Company will have
future taxable income to allow it to realize the benefits of the net deferred
tax assets. Accordingly, no valuation allowance has been recorded as of
December 31, 2001 or 2000.
7. CONVERTIBLE PREFERRED STOCK
   In connection with the Merger, the Company issued 256 shares of 7.25%
Convertible Preferred Stock (the "Convertible Preferred Stock") to affiliates
of Apollo at a value of $1,000 per share in exchange for $150,000 in cash and
all of the outstanding 7 1/2% convertible junior subordinated debentures of
Building One (with an aggregate value of approximately $106,191).
   The Convertible Preferred Stock is convertible at the option of the holders
into shares of the Company's common stock at any time prior to maturity at a
conversion price of $14.00 per common share, subject to adjustment under
certain circumstances. Upon their maturity in February 2012, the Company is
required to redeem all shares of Convertible Preferred Stock then outstanding
at the redemption price per share equal to the Liquidation Amount (defined as
the original cost of $1,000 per share plus all accrued and accumulated and
unpaid dividends). As of December 31, 2001, the Liquidation Amount was
$292,799. The Company has the right
                                      46
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
to redeem, at any time after February 22, 2005, all, but not less than all, of
the shares of Convertible Preferred Stock then outstanding at an amount per
share equal to 103% of the Liquidation Amount; this amount declines to 102%
after February 22, 2006 and 101% after February 22, 2008. The Convertible
Preferred Stock bears a preferred cumulative dividend at the rate of 7.25% per
year, payable quarterly. Under the terms of the Convertible Preferred Stock
agreement, until February 22, 2003, dividends on the Convertible Preferred
Stock may be paid in cash on a current basis or accumulated at the option of
the Company. However, the Company's amended Credit Facility (see Note 5)
prohibits the payment of cash dividends until certain financial ratios are
achieved. At December 31, 2001, accrued dividends were approximately $36,608
and are included in the carrying value of the Convertible Preferred Stock in
the consolidated balance sheet. The Company has elected to defer the payment
of the dividends payable to date and that would otherwise be payable on March
31, 2002. Holders of the Convertible Preferred Stock are also entitled to
share in any dividends the Company may declare on its common stock.
   Holders of the Convertible Preferred Stock are entitled to vote on all
matters presented to the holders of common stock. Each share of Convertible
Preferred Stock entitles the holder thereof to cast the number of votes such
holder would have been entitled to cast had such holder converted such share
of Convertible Preferred Stock into shares of common stock (common stock
equivalents). As of December 31, 2001, the Convertible Preferred Stock
comprised approximately 25% of the voting power of Encompass.
   Convertible Preferred Stock issuance costs of approximately $3,750 are
being amortized against retained earnings over the 12-year term of the
Convertible Preferred Stock. The unamortized portion of these costs of
approximately $3,178 at December 31, 2001 is recorded against mandatorily
redeemable convertible preferred stock in the consolidated balance sheets.
   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has appointed three members of the Company's board
of directors. If the Company violates certain protective covenants, which
include a total debt leverage covenant under the Investors' Rights Agreement,
Apollo will have the right to appoint additional directors, such that the
Apollo-appointed directors would constitute a majority of the board of
directors. This debt leverage covenant differs from the similar covenant
included in the Credit Facility, and is not as clearly defined. As such, the
Company believes it is not conclusive as to whether or not a violation of such
covenant has occurred. Regardless, the Company believes there is a substantial
probability that the Company will violate this total debt leverage covenant in
the first half of 2002. A violation of such total debt leverage covenant will
not trigger a right of acceleration of the Company's obligations under any of
its debt or preferred stock instruments.
8. SHAREHOLDERS' EQUITY
 Common Stock
   The Company has not paid dividends on its common stock since its
incorporation and does not anticipate paying dividends on its common stock in
the foreseeable future.
   In December 2000, the Board of Directors authorized a stock buyback
program, pursuant to which the Company may purchase up to 2,500 shares of its
common stock on the open market. As of December 31, 2001, the Company had
repurchased 1,414 shares of its common stock under this program for an
aggregate cost of $9,290. Under the terms of the amended Credit Facility (see
Note 5), the Company is prohibited from making further repurchases of its
common stock until certain financial ratios are achieved.
                                      47
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
 Warrants
   The Company has 4,446 shares of common stock reserved for issuance upon
exercise of warrants. The warrants have a weighted average exercise price of
$16.25 per share. These warrants are currently exercisable. Of these warrants,
1,413 expire on November 25, 2002, 2,438 expire on November 25, 2007 and the
remainder expire on various dates ranging from December 2003 to July 2007. The
warrants also contain certain rights for registration.
9. STOCK-BASED PLANS
   The Company has a number of stock-based incentive and awards plans in
place, which provide the Company the latitude to grant a variety of awards,
including stock options, stock appreciation rights ("SARs"), restricted stock
awards, performance awards and phantom stock awards, to officers, directors,
key employees and other persons working for the Company and its subsidiaries.
The plans require that stock options be granted at exercise prices not less
than the fair market value of the underlying common stock on the grant date.
Stock options vest at varying time periods ranging from six months to four
years and expire after five to ten years from the date of grant. At December
31, 2001, stock-based awards equivalent to approximately 3,900 shares were
generally available for granting under such plans. There are an additional
4,900 shares available for granting under Building One stock option plans (the
"Building One Plans") however, the Company does not intend to issue additional
options under the Building One Plans over and above the number of options
(approximately 5,800) that were issued and outstanding under the Building One
Plans as of the date of the Merger.
   The following is a summary of stock option and warrant activity:
<TABLE>
<CAPTION>
                                              Outstanding       Exercisable
                                           ----------------- -----------------
                                            Number            Number
                                              of    Weighted    of    Weighted
                                           Options  Average  Options  Average
                                             and    Exercise   and    Exercise
                                           Warrants  Price   Warrants  Price
                                           -------- -------- -------- --------
<S>                                        <C>      <C>      <C>      <C>
Balance at December 31, 1998..............   8,939   $15.41    4,919   $14.81
Granted...................................   2,216    12.37    1,840    16.00
Exercised.................................  (1,145)   12.14   (1,145)   12.14
Surrendered...............................    (413)   16.10       --       --
                                            ------   ------   ------   ------
Balance at December 31, 1999..............   9,597    15.07    5,614    15.18
Options and warrants assumed in the
 Merger...................................   5,282    12.79    1,908    14.30
Granted...................................   2,050     6.73      641    15.68
Exercised.................................      (5)    3.87       (5)    3.87
Surrendered...............................  (2,125)   13.87       --       --
                                            ------   ------   ------   ------
Balance at December 31, 2000..............  14,799    13.27    8,158    15.02
Granted...................................   1,560     6.08    2,648    11.10
Exercised.................................    (189)    3.74     (189)    3.74
Surrendered...............................    (957)   11.74     (341)   12.99
                                            ------   ------   ------   ------
Balance at December 31, 2001..............  15,213   $12.75   10,276   $14.28
                                            ======   ======   ======   ======
</TABLE>
                                      48
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
   A summary of outstanding and exercisable options and warrants as of
December 31, 2001 follows:
<TABLE>
<CAPTION>
                                                              Weighted
                                                               Average
                            Weighted              Weighted    Exercise
                            Average                Average    Price of
                             Option   Number of   Remaining  Exercisable  Number of
                              and    Outstanding Contractual   Options   Exercisable
     Range of Option and    Warrant  Options and    Life         and     Options and
        Warrant Prices       Prices   Warrants     (Years)    Warrants    Warrants
     -------------------    -------- ----------- ----------- ----------- -----------
   <S>                      <C>      <C>         <C>         <C>         <C>
   $ 3.08 to $ 5.00........  $ 3.97       977        5.2       $ 3.66         616
   $ 5.01 to $10.00........    6.95     3,070        7.9         7.44         498
   $10.01 to $15.00........   12.93     4,949        4.6        13.05       3,397
   $15.01 to $20.00........   16.58     5,762        4.5        16.51       5,404
   $20.01 to $20.20........   20.19       455        6.5        20.19         361
                                       ------                              ------
                                       15,213                              10,276
                                       ======                              ======
</TABLE>
   The following pro forma data are calculated as if compensation expense for
the Company's stock option plans and warrants were determined based on the
fair value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation":
<TABLE>
<CAPTION>
                               Year Ended           Year Ended         Year Ended
                            December 31, 2001   December 31, 2000  December 31, 1999
                            ------------------  ------------------ ------------------
                               As       Pro        As       Pro       As       Pro
                            Reported   Forma    Reported   Forma   Reported   Forma
                            --------  --------  ------------------ ------------------
   <S>                      <C>       <C>       <C>       <C>      <C>       <C>
   Net income (loss)
    available to common
    shareholders........... $(71,738) $(77,552) $ 38,728  $ 27,693 $ 53,062  $ 45,449
   Net income (loss) per
    share:
     Basic................. $  (1.12) $  (1.21) $   0.65  $   0.47 $   1.28  $   1.10
     Diluted............... $  (1.12) $  (1.21) $   0.63  $   0.45 $   1.21  $   1.05
</TABLE>
   The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
                                                            2001   2000   1999
                                                            -----  -----  -----
      <S>                                                   <C>    <C>    <C>
      Dividend yield.......................................    --     --     --
      Expected volatility..................................  75.0%  68.0%  58.2%
      Risk-free interest rate..............................   4.5%   5.1%   5.6%
      Expected lives (years)...............................    10      9      5
      Fair value of options at grant date.................. $2.30  $5.24  $6.81
</TABLE>
Employee Stock Purchase Plan
   The Company has an Employee Stock Purchase Plan (the "Purchase Plan"),
which permits eligible employees of the Company to purchase shares of common
stock at a discount. Employees who elect to participate have amounts withheld
through payroll deduction during purchase periods. At the end of each purchase
period, accumulated payroll deductions are used to purchase common stock at a
price equal to 85% of
                                      49
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
the market price at the beginning of the period or the end of the period,
whichever is lower. Shares purchased under the Purchase Plan are subject to a
one-year holding period. During the years ended December 31, 2001, 2000 and
1999, 584, 227 and 195 shares, respectively, were issued pursuant to the
Purchase Plan and its predecessor. In 2001, the Company's shareholders
approved an increase in the number of shares permitted to be issued under the
Purchase Plan from 1,000 to 3,000. As of December 31, 2001, 1,903 shares were
available for issuance under the Purchase Plan.
10. EMPLOYEE BENEFIT PLANS
   The Company maintains a defined contribution savings plan (the "Savings
Plan"), which is available to most employees after 90 days of service.
Employee contributions and employer matching contributions occur at different
rates and the matched portions of the funds vest over a one-year period.
Company contributions to the Savings Plan and predecessor plans maintained by
certain of the Company's subsidiaries totaled approximately $15,300, $14,300
and $5,600 for the years ended December 31, 2001, 2000 and 1999, respectively.
   Certain of the Company's subsidiaries make contributions to union-
administered benefit funds, which cover the majority of the Company's union
employees. For the years ended December 31, 2001 and 2000, the participant
costs charged to operations were approximately $35,346 and $32,302,
respectively. Governmental regulations require that, in the event of plan
termination or employer withdrawal, an employer may be liable for a portion of
the plan's unfunded vested benefits, if any. The Company is not aware of any
liabilities resulting from unfunded vested benefits related to union-
administered benefit plans. The Company does not anticipate withdrawal from
the plans, nor is the Company aware of any expected plan terminations.
11. COMMITMENTS AND CONTINGENCIES
   Operating leases for certain facilities, transportation equipment and
office equipment expire at various dates through 2015. Certain leases contain
renewal options. Minimum future rental payments at December 31, 2001 are as
follows:
<TABLE>
      <S>                                                               <C>
      2002............................................................. $ 42,633
      2003.............................................................   38,664
      2004.............................................................   31,992
      2005.............................................................   25,582
      2006.............................................................   16,928
      Thereafter.......................................................   74,422
                                                                        --------
                                                                        $230,221
                                                                        ========
</TABLE>
   Total rental expense for the years ended December 31, 2001, 2000 and 1999
was approximately $78,900, $42,700 and $12,100, respectively (including
$9,400, $9,000 and $3,600, respectively, to related parties).
   The Company is involved in various legal actions in the normal course of
business. It is not possible to predict the outcome of these matters; however,
in the opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations. The Company has provided accruals for probable losses
and legal fees incurred with respect to certain of these actions.
                                      50
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
12. RESTRUCTURING AND RECAPITALIZATION CHARGES
 Recapitalization charges
   On May 11, 1999, Building One completed its recapitalization plan under a
tender offer (the "Tender Offer"), pursuant to which Building One repurchased
30,772 shares of its common stock at $18 per share for cash and 1,104 shares
of its common stock underlying stock options at $18 per share less the
exercise price per share of the options. In conjunction with the
recapitalization, compensation expense of $2,770 ($1,662 after the associated
tax benefit) was recognized for stock options exercised and the underlying
shares of common stock repurchased by Building One. In addition, $4,323 of
costs incurred in connection with the Tender Offer have been reflected as a
reduction of shareholders' equity.
   Friedman, Billings, Ramsey Group, Inc. ("FBR") acted as a financial advisor
to Building One in connection with the Tender Offer, and received a fee of
$3,000. One of Building One's directors at that time is President and a
principal stockholder of FBR.
Restructuring charges
   In the second quarter of 1999, Building One's Board of Directors approved a
restructuring plan which included a relocation of Building One's corporate
headquarters and integration of the cleaning systems operations. The corporate
headquarters was relocated from Washington, D.C. to Minneapolis, Minnesota. In
addition, certain back office operations of the cleaning systems operations
were consolidated into two locations. The restructuring costs included costs
directly related to Building One's restructuring plan in accordance with EITF
No. 94-3 which provides specific requirements as to the appropriate
recognition of costs associated with employee termination benefits and other
exit costs.
   As a result of this restructuring plan, Building One incurred severance
costs for certain employees, identified certain assets which were no longer of
service and incurred certain lease termination costs. Severance costs covered
33 employees, of which 30 were terminated as of December 31, 1999 and the
remaining three were terminated in 2000.
   The following table sets forth a summary of these restructuring costs:
<TABLE>
<CAPTION>
                                                     Corporate   Cleaning
                                                    Headquarters Systems  Total
                                                    ------------ -------- ------
   <S>                                              <C>          <C>      <C>
   Severance.......................................    $3,530     $  900  $4,430
   Impaired assets.................................        55        520     575
   Lease costs.....................................       205         40     245
                                                       ------     ------  ------
   Total...........................................    $3,790     $1,460  $5,250
                                                       ======     ======  ======
</TABLE>
   Included in the $5,250 restructuring charge incurred in the second quarter
of 1999 are $4,675 of cash costs and $575 in non-cash related costs. The
following table is a detailed reconciliation of the restructuring reserve
balance reflecting the accruals recorded and payments applied:
<TABLE>
<CAPTION>
                                                                  Lease
                                                        Severance Costs  Total
                                                        --------- -----  ------
   <S>                                                  <C>       <C>    <C>
   Restructuring accruals recorded in 1999.............  $4,430   $245   $4,675
   Payments............................................  (4,173)  (183)  (4,356)
                                                         ------   ----   ------
   Balance at December 31, 1999........................     257     62      319
   Payments............................................    (257)   (62)    (319)
                                                         ------   ----   ------
   Balance at December 31, 2000........................  $   --   $ --   $   --
                                                         ======   ====   ======
</TABLE>
                                      51
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
13. OPERATING SEGMENTS
   The Company modified its internal organizational structure during fiscal
2001, combining the Electrical Technologies, Mechanical Services and
Industrial Services businesses into one Commercial/Industrial business aligned
geographically. The corresponding segment information for 2000 and 1999 has
been restated to conform to the new business segment presentation. The
Company's reportable segments are strategic business units that, for the most
part, offer products and services to distinct customer groups. They are
managed separately because each business requires different operating and
marketing strategies. Intersegment transactions are established based on
negotiations among the parties at rates generally consistent with those
charged to third parties. Intersegment revenues in 1999 were not significant.
   After discontinuing the Global Technologies segment as discussed in Note
16, the Company has three reportable segments: Commercial/Industrial Services,
Residential Services and Cleaning Systems. The Commercial/Industrial Services
Group provides installation and repair services to the electrical, heating,
ventilation and air conditioning ("HVAC"), plumbing, control and monitoring
and process piping systems of commercial and industrial facilities. The
Residential Services Group provides mechanical, plumbing and other contracting
services primarily in single family and low-rise multifamily housing units.
The Cleaning Systems Group provides a wide variety of facility cleaning and
maintenance management services nationwide. From time to time, management may
move business units from one segment to another for management reporting and
evaluation purposes.
   The Company evaluates performance based on income from operations before
amortization of goodwill and other intangibles, unallocated corporate
expenses, merger and related charges, costs to exit certain activities and
related costs and restructuring and recapitalization charges. While
amortization of goodwill is not considered in evaluating segment performance,
the goodwill associated with each segment is included in the total assets of
each segment.
   Unallocated corporate expenses primarily include corporate overhead and
savings from national purchase agreements relating to materials and
property/casualty insurance. Costs related to group and regional management,
operational, sales and marketing, accounting and administrative support are
included in the operating costs of each segment. Corporate assets primarily
include cash, deferred tax assets, deferred debt issuance costs and other
intangible assets, certain computer hardware and software, fixed assets
related to the Company's corporate office, cost-based investments and
miscellaneous non-trade accounts receivable.
                                      52
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (In thousands, except per share amounts)
   Segment information is as follows:
<TABLE>
<CAPTION>
                          Commercial/ Residential Cleaning  Corporate/
                          Industrial   Services   Systems  Eliminations   Total
                          ----------- ----------- -------- ------------ ----------
<S>                       <C>         <C>         <C>      <C>          <C>
YEAR ENDED DECEMBER 31,
 2001:
Third-party revenues....  $3,280,434   $331,166   $293,135   $     --   $3,904,735
Intersegment revenues...      17,385         18         21    (17,424)          --
                          ----------   --------   --------   --------   ----------
Total revenues..........   3,297,819    331,184    293,156    (17,424)   3,904,735
Operating costs.........   3,209,763    300,913    275,446     (6,142)   3,779,980
                          ----------   --------   --------   --------   ----------
Segment operating
 earnings...............  $   88,056   $ 30,271   $ 17,710   $(11,282)     124,755
                          ==========   ========   ========   ========
Amortization of goodwill
 and other intangible
 assets.................                                                    36,919
                                                                        ----------
Operating income........                                                $   87,836
                                                                        ==========
Capital expenditures....  $   26,902   $  1,115   $  9,536   $  4,499   $   42,052
Depreciation expense....      26,674      2,262      5,152      2,900       36,988
YEAR ENDED DECEMBER 31,
 2000:
Third-party revenues....  $3,429,629   $287,477   $265,160   $     --   $3,982,266
Intersegment revenues...      12,397        151         52    (12,600)          --
                          ----------   --------   --------   --------   ----------
Total revenues..........   3,442,026    287,628    265,212    (12,600)   3,982,266
Operating costs.........   3,221,110    257,308    248,615     (3,218)   3,723,815
                          ----------   --------   --------   --------   ----------
Segment operating
 earnings...............  $  220,916   $ 30,320   $ 16,597   $ (9,382)     258,451
                          ==========   ========   ========   ========
Amortization of goodwill
 and other intangible
 assets.................                                                    33,339
Merger and related
 charges and costs to
 exit certain activities
 and related costs......                                                    20,000
                                                                        ----------
Operating income........                                                $  205,112
                                                                        ==========
Capital expenditures....  $   36,060   $  1,632   $  4,976   $    641   $   43,309
Depreciation expense....      23,365      2,209      4,564      1,007       31,145
YEAR ENDED DECEMBER 31,
 1999:
Third-party revenues....  $1,532,729   $     --   $245,790   $ (5,935)  $1,772,584
Operating costs.........   1,397,430         --    227,116       (701)   1,623,845
                          ----------   --------   --------   --------   ----------
Segment operating
 earnings...............  $  135,299   $     --   $ 18,674   $ (5,234)     148,739
                          ==========   ========   ========   ========
Amortization of goodwill
 and
 other intangible
 assets.................                                                    16,004
Restructuring and
 recapitalization
 charges................                                                     8,020
                                                                        ----------
Operating income........                                                $  124,715
                                                                        ==========
Capital expenditures....  $   16,161   $     --   $ 10,585   $  1,580   $   28,326
Depreciation expense....       9,977         --      3,329      2,672       15,978
TOTAL ASSETS:
As of December 31,
 2001...................  $1,980,868   $148,394   $148,740   $123,324   $2,401,326
As of December 31,
 2000...................   2,255,065    153,813    146,092    142,912    2,697,882
As of December 31,
 1999...................   1,111,341         --    152,614     49,799    1,313,754
</TABLE>
                                       53
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
14. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
                          First (a)   Second (b)    Third     Fourth (c)  Full Year (d)
                          ----------  ----------  ----------  ----------  -------------
<S>                       <C>         <C>         <C>         <C>         <C>
2001:
Revenues................  $1,015,813  $1,017,686  $  939,489  $  931,747   $3,904,735
Operating income
 (loss).................      46,296      50,259       3,224     (11,943)      87,836
Income (loss) from
 continuing operations..      12,793      16,322     (18,499)    (24,308)     (13,692)
Income (loss) from
 discontinued
 operations.............       1,002      (7,527)     (4,418)         --      (10,943)
Loss on disposal of
 discontinued
 operations.............          --          --     (23,055)     (3,436)     (26,491)
Income (loss) before
 extraordinary loss.....      13,795       8,795     (45,972)    (27,744)     (51,126)
Net income (loss).......      13,795       8,795     (45,972)    (27,744)     (51,126)
Net income (loss)
 available to common
 shareholders...........       8,778       3,688     (51,170)    (33,034)     (71,738)
Earnings per share:
  Basic.................
  Income (loss) from
   continuing
   operations...........  $     0.12  $     0.18  $    (0.37) $    (0.46)  $    (0.54)
  Income (loss) from
   discontinued
   operations...........        0.02       (0.12)      (0.07)         --        (0.17)
  Loss on disposal of
   discontinued
   operations...........          --          --       (0.36)      (0.06)       (0.41)
  Net income (loss).....        0.14        0.06       (0.80)      (0.52)       (1.12)
  Diluted...............
  Income (loss) from
   continuing
   operations...........  $     0.12  $     0.18  $    (0.37) $    (0.46)  $    (0.54)
  Income (loss) from
   discontinued
   operations...........        0.02       (0.12)      (0.07)         --        (0.17)
  Loss on disposal of
   discontinued
   operations...........          --          --       (0.36)      (0.06)       (0.41)
  Net income (loss).....        0.14        0.06       (0.80)      (0.52)       (1.12)
2000:
Revenues................  $  668,317  $1,056,258  $1,134,576  $1,123,115   $3,982,266
Operating income........      15,394      72,153      53,344      64,221      205,112
Income (loss) from
 continuing operations..      (2,285)     27,135      13,979      20,859       59,688
Income from discontinued
 operations.............         768       1,280       1,042         575        3,665
Income (loss) before
 extraordinary loss.....      (1,517)     28,415      15,021      21,434       63,353
Net income (loss).......      (9,574)     28,415      15,021      21,434       55,296
Net income (loss)
 available to common
 shareholders...........     (11,612)     23,657      10,178      16,505       38,728
Earnings per share:
  Basic.................
  Income (loss) from
   continuing
   operations...........  $    (0.10) $     0.35  $     0.14  $     0.25   $     0.73
  Income from
   discontinued
   operations...........        0.02        0.02        0.02        0.00         0.06
  Income (loss) before
   extraordinary loss...       (0.08)       0.37        0.16        0.25         0.79
  Net income (loss).....       (0.26)       0.37        0.16        0.25         0.65
  Diluted...............
  Income (loss) from
   continuing
   operations...........  $    (0.10) $     0.33  $     0.14  $     0.24   $     0.71
  Income from
   discontinued
   operations...........        0.02        0.02        0.02        0.01         0.06
  Income (loss) before
   extraordinary loss...       (0.08)       0.35        0.16        0.25         0.77
  Net income (loss).....       (0.26)       0.35        0.16        0.25         0.63
</TABLE>
--------
(a) The first quarter of 2000 includes merger and related charges and costs to
    exit certain activities and related costs discussed in Note 3 totaling
    $20,000 or $0.28 per basic and diluted share for the first quarter, and
    $0.21 and $0.20 per basic and diluted share, respectively, for the full
    year.
(b) Continuing operations in the second quarter of 2001 includes a provision
    for doubtful accounts receivable from telecommunication customers of
    $9,800, or $0.09 per basic and diluted share.
(c) Continuing operations in the fourth quarter of 2001 includes a provision
    for doubtful accounts receivable from telecommunication customers of
    $18,000, or $0.18 per basic and diluted share.
(d) The arithmetic total of the individual quarterly net income per share
    amounts does not reconcile to the annual amount of net income per share in
    all instances due to the timing of net income in relation to the issuance
    of common shares during the course of the year.
                                      54
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (In thousands, except per share amounts)
15. EARNINGS PER SHARE
   The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations for the years ended December 31,
2001, 2000 and 1999.
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     --------------------------
                                                       2001     2000     1999
                                                     --------  -------  -------
<S>                                                  <C>       <C>      <C>
Basic earnings per share:
  Income (loss) from continuing operations.......... $(13,692) $59,688  $53,062
  Less: convertible preferred stock dividends.......  (20,612) (16,568)      --
                                                     --------  -------  -------
  Income (loss) from continuing operations available
   to common shareholders...........................  (34,304)  43,120   53,062
  Income (loss) from discontinued operations........  (10,943)   3,665       --
  Loss on disposal of discontinued operations.......  (26,491)      --       --
  Extraordinary loss on debt settlement.............       --   (8,057)      --
                                                     --------  -------  -------
  Net income (loss) available to common
   shareholders..................................... $(71,738) $38,728  $53,062
                                                     ========  =======  =======
  Weighted average shares outstanding--Basic........   63,845   59,234   41,538
                                                     ========  =======  =======
  Income (loss) from continuing operations.......... $   (.54) $   .73  $  1.28
  Income (loss) from discontinued operations........     (.17)     .06       --
  Loss on disposal of discontinued operations.......     (.41)      --       --
  Extraordinary loss on debt settlement.............       --     (.14)      --
                                                     --------  -------  -------
  Net income (loss) per share--Basic................ $  (1.12) $   .65  $  1.28
                                                     ========  =======  =======
Diluted earnings per share:
  Income (loss) from continuing operations available
   to common shareholders........................... $(34,304) $43,120  $53,062
  Income (loss) from discontinued operations........  (10,943)   3,665       --
  Loss on disposal of discontinued operations.......  (26,491)      --       --
  Extraordinary loss on debt settlement.............       --   (8,057)      --
                                                     --------  -------  -------
  Net income (loss) available to common
   shareholders.....................................  (71,738)  38,728   53,062
  Plus: interest expense on convertible junior
   subordinated debentures and related amortization
   of debt issuance costs...........................       --       --    3,205
                                                     --------  -------  -------
  Net income (loss) on an as-if converted basis..... $(71,738) $38,728  $56,267
                                                     ========  =======  =======
Weighted average shares outstanding--Diluted........   63,845   61,089   46,406
                                                     ========  =======  =======
  Income (loss) from continuing operations.......... $   (.54) $   .71  $  1.21
  Income (loss) from discontinued operations........     (.17)     .06       --
  Loss on disposal of discontinued operations.......     (.41)      --       --
  Extraordinary loss on debt settlement.............       --     (.14)      --
                                                     --------  -------  -------
  Net income (loss) per share--Diluted.............. $  (1.12) $   .63  $  1.21
                                                     ========  =======  =======
Weighted average shares (in thousands):
  Weighted average shares outstanding--Basic........   63,845   59,234   41,538
  Common stock equivalents from stock options and
   warrants.........................................       --      181      160
  Contingently issuable shares......................       --    1,674      932
  Convertible junior subordinated debentures, on an
   as-if converted basis............................       --       --    3,776
                                                     --------  -------  -------
  Weighted average shares outstanding--Diluted......   63,845   61,089   46,406
                                                     ========  =======  =======
Common stock equivalents excluded from the
 computation of diluted earnings per share due to
 their anti-dilutive effect:
  Convertible Preferred Stock.......................   20,914   19,464       --
  Stock options and warrants........................   15,213   12,464    8,970
</TABLE>
                                       55
                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (In thousands, except per share amounts)
16. DISCONTINUED OPERATIONS
   On September 25, 2001, the Company announced its decision to cease
operations of its Global Technologies segment effective September 30, 2001.
With the exception of some minor job wrap-up and receivables collection,
substantially all of these operations were terminated as of December 31, 2001.
The shutdown of these operations represents the disposal of a business segment
under APB No. 30. Accordingly, the consolidated statements of operations have
been restated to reflect the historical, after-tax results of these operations
as "Income (loss) from discontinued operations, net of tax".
   Revenues from the discontinued Global Technologies segment were $75,750,
$117,168 and zero in the years ended December 31, 2001, 2000 and 1999,
respectively. Assets and liabilities attributable to the Global Technologies
operations were as follows:
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2001    2000
                                                                ------- -------
<S>                                                             <C>     <C>
Current assets................................................. $ 4,394 $48,827
Goodwill and other long-term assets, net.......................     468  14,428
Current liabilities............................................  15,166  39,042
Long-term liabilities..........................................  10,440      --
</TABLE>
   In connection with the decision to discontinue these operations, a charge
of $26,491, net of the related income tax benefit of $7,819, was recorded in
2001 to provide for the estimated costs of disposal of these operations. This
charge is reported under the caption "Loss on disposal of discontinued
operations, net of tax" in the consolidated statements of operations. The loss
on disposal of discontinued operations primarily consists of the write-off of
non-deductible, unamortized goodwill of $11,972, net facility and equipment
lease obligations of $12,449, net asset writedowns of $3,779 and estimated net
operating losses and severance costs incurred subsequent to September 30, 2001
of $6,110.
                                      56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
   None
                                   PART III
Item 10. Directors and Executive Officers of the Registrant.
   The information appearing under the caption "Election of Directors" in
Encompass' proxy statement for the 2002 Annual Meeting of Shareholders is
incorporated herein by reference. Information regarding executive officers of
Encompass is presented in Item 4A of this Form 10-K under the caption
"Executive Officers of the Registrant."
Item 11. Executive Compensation.
   Information appearing under the caption "Executive Compensation" in
Encompass' proxy statement for the 2002 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
   Information appearing under the captions "Stock Ownership of Management and
Directors" and "Ownership of Voting Securities in Excess of Five Percent by a
Beneficial Owner" in Encompass' proxy statement for the 2002 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
   Information appearing under the caption "Transactions with Management and
Others" in Encompass' proxy statement for the 2002 Annual Meeting of
Shareholders is incorporated herein by reference.
                                      57
                                    PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
   (a) The following documents are filed as part of this report:
   1. Financial statements
    Independent Auditors' Report
    Report of Independent Accountants
    Consolidated Balance Sheets
    Consolidated Statements of Operations
    Consolidated Statements of Shareholders' Equity and Other Comprehensive
 Income
    Consolidated Statements of Cash Flows
    Notes to Consolidated Financial Statements
   2. Financial statement schedules
    None
   3. Exhibits
<TABLE>
<CAPTION>
 Exhibit
   No.   Description of Exhibit
 ------- ----------------------
 <C>     <S>
  2.1*   --Agreement and Plan of Merger dated as of November 2, 1999 by and
          between Group Maintenance America Corp. and Building One Services
          Corporation (Annex A to Joint Proxy Statement/Prospectus
          of GroupMAC and Building One dated January 18, 2000).
  3.1*   --Certificate of Merger dated February 22, 2000 merging Building One
          Services Corporation into Group Maintenance America Corp., together
          with Exhibit A thereto (the Amended and Restated Articles of
          Incorporation of Encompass) (Exhibit 3.1 to Encompass' Annual Report
          on Form 10-K for the fiscal year ended December 31, 1999, File No. 1-
          13565).
  3.2*   --Statement of Designation dated February 15, 2000 relating to the
          7.25% Convertible Preferred Stock of Encompass (Exhibit 3.2 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 1999, File No. 1-13565).
  3.3*   --By-laws of Encompass, as amended (Exhibit 3.2 to Annual Report on
          Form 10-K/A for the fiscal year ended December 31, 1998, File No. 1-
          13565).
  4.1*   --Indenture dated as of April 30, 1999, among Building One Services
          Corporation, the guarantors named therein and IBJ Whitehall Bank &
          Trust Company, as Trustee (Exhibit 4.1 to Encompass' Annual Report on
          Form 10-K for the fiscal year ended December 31, 1999, File No. 1-
          13565).
  4.2*   --First Supplemental Indenture dated as of November 12, 1999, among
          Building One Services Corporation, the guarantors named therein and
          IBJ Whitehall Bank & Trust Company, as Trustee (Exhibit 4.2 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 1999, File No. 1-13565).
  4.3*   --Second Supplemental Indenture dated as of January 31, 2000, among
          Building One Services Corporation, the guarantors named therein and
          IBJ Whitehall Bank & Trust Company, as Trustee (Exhibit 4.3 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 1999, File No. 1-13565).
  4.4*   --Third Supplemental Indenture dated as of February 22, 2000 among
          Building One Services Corporation, Group Maintenance America Corp.,
          the guarantors named therein and The Bank of New York, as successor
          to IBJ Whitehall Bank & Trust Company, as Trustee (Exhibit 4.4 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 1999, File No. 1-13565).
  4.5*   --Fourth Supplemental Indenture dated as of June 28, 2001 to Indenture
          dated as of April 30, 1999 among Encompass, the guarantors named
          therein and The Bank of New York, as successor to IBJ Whitehall Bank
          & Trust Company, as Trustee (filed as Exhibit 10.2 to the Company's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
          File No. 1-13565).
</TABLE>
                                       58
<TABLE>
<CAPTION>
 Exhibit
   No.   Description of Exhibit
 ------- ----------------------
 <C>     <S>
  4.6*   --Form of 10 1/2% Senior Subordinated Note (contained in the Fourth
          Supplemental Indenture filed as Exhibit 4.5).
  4.7*   --Form of Registration Rights Agreement dated as of June 28, 2001
          between the Company and the Initial Purchasers named therein (Exhibit
          4.7 to Registration Statement No. 333-68064).
 10.1*   --Encompass Services Corporation Amended and Restated 1997 Stock
          Awards Plan (formerly Group Maintenance America Corp. 1997 Stock
          Awards Plan, which was amended and restated as of December 5, 2000).
          (filed as Exhibit 10.1 to Encompass' Annual Report on Form 10-K for
          the fiscal year ended December 31, 2000, File No. 1-13565).
 10.2*   --Group Maintenance America Corp. 1997 Stock Option Plan (Exhibit 10.2
          to Registration Statement No. 333-34067).
 10.3*   --2000 Stock Performance Incentive Plan of Encompass Services
          Corporation (Annex G to Joint Proxy Statement of Encompass dated
          January 18, 2000).
 10.4*   --2000 Stock Awards Plan of Encompass Services Corporation (Annex H to
          Joint Proxy Statement of Encompass dated January 18, 2000).
 10.5*   --Employment Agreement dated effective as of March 28, 2000 between
          Encompass and J. Patrick Millinor, Jr. (Exhibit 10.5 to Encompass'
          Annual Report on Form 10-K for the fiscal year ended December 31,
          2000, File No. 1-13565).
 10.6*   --First Amendment to Employment Agreement between Encompass and J.
          Patrick Millinor, Jr. (Exhibit 10.1 to Encompass' Quarterly Report on
          Form 10-Q for quarter ended September 30, 2000, File No. 1-13565).
 10.7*   --Employment Agreement dated effective as of March 28, 2000 between
          Encompass and Joseph M. Ivey, Jr. (Exhibit 10.7 to Encompass' Annual
          Report on Form 10-K for the fiscal year ended December 31, 2000, File
          No. 1-13565).
 10.8*   --First Amendment to Employment Agreement dated effective as of March
          1, 2001 between Encompass and Joseph M. Ivey, Jr. (Exhibit 10.8 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 2000, File No. 1-13565).
 10.9*   --Employment Agreement dated effective as of November 1, 2000 between
          Encompass and Henry P. Holland. (Exhibit 10.9 to Encompass' Annual
          Report on Form 10-K for the fiscal year ended December 31, 2000, File
          No. 1-13565).
 10.10*  --First Amendment to Employment Agreement dated effective as of
          October 16, 2000 between Encompass and Henry P. Holland establishing
          the date of employment as October 16, 2000. (Exhibit 10.10 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 2000, File No. 1-13565).
 10.11   --Second Amendment to Employment Agreement dated effective as of March
          1, 2002 between Encompass and Henry P. Holland.
 10.12*  --Employment Agreement dated effective as of March 21, 2000 between
          Encompass and Robert Tyler (Exhibit 10.14 to Encompass' Annual Report
          on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-
          13565).
 10.13   --Employment Agreement dated effective as of April 1, 2001 between
          Encompass and Ray Naizer.
 10.14*  --Credit Agreement dated as of February 22, 2000 among Encompass, the
          subsidiaries of Encompass named therein, Bank of America, N. A., as
          administrative agent, Chase Bank of Texas, National Association, as
          syndication agent, First Union National Bank, as documentation agent,
          and the banks named therein (Exhibit 10.15 to Encompass' Annual
          Report on Form 10-K for the fiscal year ended December 31, 1999, File
          No. 1-13565).
 10.15*  --First Amendment dated effective as of March 23, 2000 to Credit
          Agreement dated as of February 22, 2000 among Encompass, the
          subsidiaries of Encompass named therein, Bank of America, N. A., as
          administrative agent, Chase Bank of Texas, National Association, as
          syndication agent, First Union National Bank, as documentation agent,
          and the banks named therein (Exhibit 10.1 to Encompass' Quarterly
          Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-
          13565).
</TABLE>
                                       59
<TABLE>
<CAPTION>
 Exhibit
   No.   Description of Exhibit
 ------- ----------------------
 <C>     <S>
 10.16*  --Second Amendment dated effective as of May 10, 2000 to Credit
          Agreement dated as of February 22, 2000 among Encompass, the
          subsidiaries of Encompass named therein, Bank of America, N. A., as
          administrative agent, Chase Bank of Texas, National Association, as
          syndication agent, First Union National Bank, as documentation agent,
          and the banks named therein (Exhibit 10.2 to Encompass' Quarterly
          Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-
          13565).
 10.17*  --Third Amendment dated effective as of June 8, 2001 to Credit
          Agreement dated as of February 22, 2000 among Encompass, the
          subsidiaries of Encompass named therein, Bank of America, N.A., as
          administrative agent, The Chase Manhattan Bank, as successor to Chase
          Bank of Texas, National Association, as syndication agent, First
          Union National Bank, as documentation agent, and the banks named
          therein therein (Exhibit 10.1 to Encompass' Quarterly Report on Form
          10-Q for the quarter ended June 30, 2001, File No. 1-13565).
 10.18*  --Fourth Amendment dated effective as of November 9, 2001 to Credit
          Agreement dated as of February 22, 2000 among Encompass, the
          subsidiaries of Encompass named therein, Bank of America, N.A., as
          administrative agent, The Chase Manhattan Bank, as successor to Chase
          Bank of Texas, National Association, as syndication agent, First
          Union National Bank, as documentation agent, and the banks named
          therein therein (Exhibit 10 to Encompass' Quarterly Report on
          Form 10-Q for the quarter ended September 30, 2001, File No. 1-
          13565).
 10.19*  --Subscription and Exchange Agreement dated November 2, 1999 between
          Group Maintenance America Corp. and BOSS II, LLC (Exhibit 10.11 to
          Registration Statement No. 333-93649).
 10.20*  --Investors' Rights Agreement dated as of February 22, 2000 between
          Group Maintenance America Corp. and BOSS II, LLC (Exhibit 10.17 to
          Encompass' Annual Report on Form 10-K for the fiscal year ended
          December 31, 1999, File No. 1-13565).
 10.21*  --Warrant Agreement dated as of November 25, 1997 between
          Consolidation Capital Corporation and Jonathan J. Ledecky (Exhibit
          10.19 to Annual Report on Form 10-K for the fiscal year ended
          December 31, 1999, File No. 1-13565).
 10.22*  --Warrant Agreement dated as of November 25, 1997 between Consolidated
          Capital Corporation and Friedman, Billings, Ramsey & Co., Inc.
          (Exhibit 10.18 to Annual Report on Form 10-K for the fiscal year
          ended December 31, 1999, File No. 1-13565).
 10.23*  --Encompass Services Corporation 1997 Long-Term Incentive Plan for
          Employees of Building One Services Corporation (Exhibit 10.01 to
          Building One Registration Statement on Form S-1, Registration
          Statement No. 333-36193).
 10.24*  --Encompass Services Corporation 1997 Non-Employee Directors' Stock
          Plan for Non-Employee Directors of Building One Services Corporation
          (Exhibit 10.02 to Building One's Annual Report on Form 10-K for the
          year ended December 31, 1997, File No. 0-23421).
 10.25*  --Encompass Services Corporation Option Agreements for Employees of
          Building One Services Corporation (Building One Registration
          Statement on Form S-8, Registration Statement No. 333-59205).
 10.26*  --Encompass Services Corporation 1998 Long-Term Incentive Plan for
          Employees of Building One
          Services Corporation (Exhibit A to Building One's Proxy Statement on
          Schedule 14A dated
          August 14, 1998, File No. 0-23421).
 10.27*  --Encompass Services Corporation 1999 Long-Term Incentive Plan for
          Employees of Building One Services Corporation (Exhibit B to Building
          One's Proxy Statement on Schedule 14A dated June 8, 1999, File No. 0-
          23421).
 21      --Subsidiaries of Encompass as of March 1, 2002.
 23.1    --Consent of KPMG LLP.
 23.2    --Consent of PricewaterhouseCoopers.
 24      --Powers of Attorney.
</TABLE>
--------
*Incorporated by reference from a prior filing as indicated.
   (b) Reports on Form 8-K.
                                       60
   On December 5, 2001, Encompass filed an amendment to the Current Report on
Form 8-K that it filed on August 21, 2001 with respect to its modification of
its reporting and evaluation of segment performance. The amendment included
audited financial statements reflecting restated after-tax results of
discontinued operations.
   (c) Encompass has not filed with this report copies of certain instruments
defining the rights of holders of long-term debt of Encompass and its
subsidiaries. Encompass agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
   (d) None.
                                       61
                                  SIGNATURES
   Pursuant to the requirements of Section 13 or 15(d) 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, on the 14th day
of March, 2002.
                                          ENCOMPASS SERVICES CORPORATION
                                              /s/ J. Patrick Millinor, Jr.*
                                          By: _________________________________
                                                J. Patrick Millinor, Jr.
                                                  Chairman of the Board
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
  /s/ J. Patrick Millinor, Jr.*        Director and Chairman of     March 14, 2002
______________________________________  the Board
       J. Patrick Millinor, Jr.
        /s/ Joseph M. Ivey             Director and Chief           March 14, 2002
______________________________________  Executive Officer
            Joseph M. Ivey              (principal executive
                                        officer)
       /s/ Darren B. Miller            Senior Vice President and    March 14, 2002
______________________________________  Chief Financial Officer
           Darren B. Miller             (principal financial
                                        officer)
        /s/ L. Scott Biar              Vice President and Chief     March 14, 2002
______________________________________  Accounting Officer
            L. Scott Biar               (principal accounting
                                        officer)
        /s/ Andrew Africk*             Director                     March 14, 2002
______________________________________
            Andrew Africk
      /s/ Vincent W. Eades*            Director                     March 14, 2002
______________________________________
           Vincent W. Eades
        /s/ Michael Gross*             Director                     March 14, 2002
______________________________________
            Michael Gross
       /s/ Scott Kleinman*             Director                     March 14, 2002
______________________________________
            Scott Kleinman
</TABLE>
                                      62
<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
       /s/ Donald L. Luke*             Director                     March 14, 2002
______________________________________
            Donald L. Luke
     /s/ Lucian L. Morrison*           Director                     March 14, 2002
______________________________________
          Lucian L. Morrison
   /s/ William M. Mounger, II*         Director                     March 14, 2002
______________________________________
        William M. Mounger, II
      /s/ John M. Sullivan*            Director                     March 14, 2002
______________________________________
           John M. Sullivan
       /s/ Darren B. Miller                                         March 14, 2002
*By: _________________________________
           Darren B. Miller
    (Attorney-in-fact for persons
              indicated)
</TABLE>
                                       63

<PAGE>

                                  EXHIBIT B-2

  Encompass Service Corporation's Form 10-K/A for the year ended December 31,
                                     2001,
                          as filed on April 30, 2002

                                 Exhibit B-2-1

<PAGE>

================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                  Form 10-K/A

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

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

                  For the fiscal year ended December 31, 2001

                                      or

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

          For the transition period from           to

                          Commission File No. 1-13565

                        ENCOMPASS SERVICES CORPORATION
            (Exact name of registrant as specified in its charter)

                       Texas                   76-0535259
                  (State or other
                  jurisdiction of           (I.R.S. Employer
                 incorporation or
                   organization)         Identification Number)

                         3 Greenway Plaza, Suite 2000
                             Houston, Texas 77046
                    (Address of principal executive office)
                                (713) 860-0100
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:

                                        Name of each exchange on
                Title of each class         which registered
                -------------------     ------------------------
              Common stock, par value
                           $0.001......  New York Stock Exchange

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

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

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

   As of March 1, 2002, (i) there were 64,020,898 shares of common stock, par
value $0.001 per share, of the registrant issued and outstanding and (ii) the
aggregate market value of the common stock held by non-affiliates of the
registrant (based on the closing price per share of the registrant's common
stock reported on the New York Stock Exchange on that date) was $144,404,942.
For purposes of the above statement only, all directors and executive officers
of the registrant are assumed to be affiliates.

================================================================================

<PAGE>

                              TABLE OF CONTENTS*

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
  <C>      <S>                                                            <C>
                                 PART III

  Item 10. Directors and Executive Officers of the Registrant............   1

  Item 11. Executive Compensation........................................   4

  Item 12. Security Ownership of Certain Beneficial Owners and Management   9

  Item 13. Certain Relationships and Related Transactions................  10
</TABLE>

* Items omitted from this Form 10-K/A are included in the Company's Annual
  Report on Form 10-K, as filed with the Securities and Exchange Commission on
  March 14, 2002.

                                       i

<PAGE>

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant.

   Information regarding executive officers of Encompass is presented in Item
4A of this Form 10-K under the caption "Executive Officers of the Registrant."

   The following sets forth certain information concerning the current
directors of Encompass. As of April 1, 2002, certain affiliates of Apollo
Management IV, L.P. ("Apollo") held in the aggregate 256,191 shares of 7.25%
Convertible Preferred Stock of the Company (the "Preferred Stock"). For so long
as Apollo or its affiliates hold in the aggregate Preferred Stock or any
security representing the right to receive common stock ("common stock
equivalents") equal to at least 50% of the common stock equivalents represented
by Apollo's initial investment in the Preferred Stock, Apollo is entitled to
elect the greater of three directors or the number of directors representing
30% of the Board of Directors of the Company, rounded up to the nearest whole
director. The number of directors that may be elected by Apollo decreases as
its ownership of common stock equivalents decreases. Messrs. Africk, Gross and
Kleinman have been elected to serve as directors of Encompass by Apollo. All
directors hold office until the next succeeding annual meeting of shareholders
and until their respective successors have been elected and qualified.

Andrew Africk
Director since 2000

   Mr. Africk, age 35, became a Director of the Company upon the merger of
Building One Services Corporation ("BOSC") into the Company on February 22,
2000. He was previously a Director of BOSC from April 1999 until February 2000.
Mr. Africk has been a principal of Apollo Advisors, L.P. for more than five
years and of Lion Advisors, L.P., a financial advisor to, and representative
of, institutional investors with respect to securities investments. Mr. Africk
is also a Director of Rare Medium Group, Inc. and several private venture
companies.

Vincent W. Eades
Director since 2000

   Mr. Eades, age 43, became a Director of the Company upon the merger of BOSC
into the Company on February 22, 2000. He was previously a Director of BOSC
from November 1997 until February 2000. Since January 2002, Mr. Eades has
served as President of Meline USA, L.L.C., an importer of leather apparel for
motorcycle enthusiasts. Previously, between May 1998 and October 2002, Mr.
Eades served as the Chairman and Chief Executive Officer of Powerride
Motorsports, Inc., a consolidator of the motorcycle and leisure sports
dealership industry. Between May 1995 and May 1998, he served as the Senior
Vice President of sales and marketing for Starbucks Coffee Co., Inc. From
November 1985 through May 1995, Mr. Eades was employed by Hallmark Cards, Inc.,
most recently as a general manager. Additionally, he serves as a Director of
USA Floral Products, Inc. and UniCapital Corporation.

Michael Gross
Director since 2000

   Mr. Gross, age 40, became a Director of the Company upon the merger of BOSC
into the Company on February 22, 2000. He was previously a Director of BOSC
from April 1999 until February 2000. Mr. Gross is one of the founding
principals of Apollo Advisors, L.P., which together with its affiliates acts as
managing general partner of the Apollo Investment Funds, private securities
investment funds. Mr. Gross is also a Director of Allied Waste Industries,
Inc., Breuners Home Furnishings Corporation, Clark Retail Enterprises, Inc.,
Converse, Inc., Florsheim Group, Inc., Pacer International, Inc., Rare Medium
Group, Inc., Saks Incorporated, Sylvan Leaning Systems, Inc. and United
Rentals, Inc.

                                      1

<PAGE>

Joseph M. Ivey, Jr.
Director since 2000

   Mr. Ivey, age 43, became President and Chief Executive Officer and a
Director of the Company in February 2000. He previously served as the President
and Chief Executive Officer of BOSC from February 1999 to February 2000. He
also served as a Director of BOSC from October 1998 to February 2000. From
September 1998 to February 1999, Mr. Ivey served as the President of the BOSC
mechanical group. Prior to joining BOSC, Mr. Ivey served as the Chairman and
Chief Executive Officer of Ivey Mechanical Company, Inc., a mechanical services
company that BOSC acquired in September 1998. Mr. Ivey is a graduate of, and
serves as a trustee of, Freed-Hardeman University.

Scott Kleinman
Director since 2000

   Mr. Kleinman, age 29, is currently a principal of Apollo Advisors, L.P. and
has been employed by Apollo Advisors since February 1996. Previously, Mr.
Kleinman was employed by Smith Barney Inc. in its investment banking division
from July 1994 through January 1996. Mr. Kleinman is also a Director of
Resolution Performance Products, LLC and Compass Minerals Group, Inc.

Donald L. Luke
Director since 1997

   Mr. Luke, age 65, has served as Chairman of the Board and Chief Executive
Officer of American Fire Protection Group, Inc., a fire protection and life
safety corporation, since December 2001 and as Chief Executive Officer since
November 2000. He previously served as Executive Vice President and Chief
Operating Officer of the Company from March 2000 to August 2000. From August
1997 until the merger of BOSC into the Company in February 2000, he served as
President and Chief Operating Officer of the Company. Mr. Luke is also a
Director of MicroPower Electronics Inc.

J. Patrick Millinor, Jr.
Director since 1997

   Mr. Millinor, age 56, became Chairman of the Board of the Company in
February 2000. He previously served as Chief Executive Officer of the Company
from April 1997 to February 2000 and also served as President of the Company
from April 1997 until June 1997. From October 1996 through April 1997, he
served as Chief Executive Officer of the Company's predecessor. From September
1994 to October 1996, Mr. Millinor worked directly for Mr. Gordon Cain, a
significant shareholder in the Company, assisting in the formation and
management of Agennix Incorporated and Lexicon Genetics, two biotechnology
companies. He currently serves as Chairman of the Board of ADViSYS, Inc., and
as a Director of Agennix Incorporated and Haelan Health(R) Corporation.

Lucian L. Morrison
Director since 1997

   Mr. Morrison, age 65, has been engaged as a trustee and consultant with
respect to trust, estate, probate and qualified plan matters since 1992. From
1990 through 1992, he served as Chief Fiduciary Officer of Northern Trust Bank
of Texas and from 1979 until 1990 he served as Chief Executive Officer of
Heritage Trust Company.

William M. Mounger II
Director since 2000

   Mr. Mounger, age 45, currently serves as Chairman of the Board, President
and Chief Operating Officer of Genesis Resources LLC. From November 2000
through February 2002, he served as Chairman of the Board of TeleCorp PCS,
Inc., which provides personal communications services in 14 states and Puerto
Rico. Previously, he co-founded and served as Chief Executive Officer and
Chairman of the Board of Tritel, Inc. from January

                                      2

<PAGE>

1999 to November 2000. He also co-founded and served as Chief Executive Officer
and Chairman of the Board of Mercury Communications Company from June 1990 to
January 1999. Mr. Mounger also serves as a director on the Mississippi Advisory
Board of AmSouth Bank.

John M. Sullivan
Director since 1997

   Mr. Sullivan, age 66, has been President of Beta Consulting, Inc., which
provides management services for family enterprises, since 1994. From 1992
through 1994, he was an International Tax Director for General Motors
Corporation. Prior to 1992, Mr. Sullivan was a tax partner with Arthur Andersen
LLP. He currently serves as a Director of Atlantic Coast Airlines Holdings, Inc.

Section 16(a) Beneficial Ownership Reporting Compliance

   Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, among others, to file reports of ownership
and changes in ownership of the Company's Common Stock with the Securities and
Exchange Commission and the New York Stock Exchange. Copies of these reports
must also be furnished to the Company. Based solely upon a review of the copies
of the forms filed under Section 16(a) and furnished to the Company, or written
representations from reporting persons, the Company believes that, except for
late filings by Mr. William Hill and Mr. Ray Naizer described below, all filing
requirements applicable to its executive officers and directors were complied
with during 2001.

   Mr. William Hill became a reporting person, as defined by Section 16(a), on
December 1, 2001. Mr. Hill inadvertently omitted from his Form 3, 125 shares of
Common Stock held in trust for one of his children. This omission was
acknowledged on the Form 5 filed with the Securities and Exchange Commission on
February 8, 2002 on Mr. Hill's behalf.

   Mr. Ray Naizer became a reporting person, as defined by Section 16(a), on
April 1, 2001. Mr. Naizer inadvertently omitted from his Form 3 a grant of an
option to purchase 35,000 shares of Common Stock. This omission was
acknowledged on the Form 5 filed with the Securities and Exchange Commission on
February 8, 2002 on Mr. Naizer's behalf.

                                      3

<PAGE>

Item 11.  Executive Compensation.

Executive Compensation

   The following table sets forth the remuneration paid by the Company to the
Chief Executive Officer and the four other most highly compensated key
executive officers of the Company based on 2001 salaries and bonuses.

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                    Annual         Long-Term
                                                Compensation(1)  Compensation
                                               ----------------- -------------
                                                                  Underlying      All Other
      Name and Principal Position         Year  Salary   Bonus   Stock Options Compensation(2)
      ---------------------------         ---- -------- -------- ------------- ---------------
<S>                                       <C>  <C>      <C>      <C>           <C>
J. Patrick Millinor, Jr.................. 2001 $424,992 $      0         --        $10,351
  Chairman of the Board                   2000  406,831        0    160,000          5,250
                                          1999  210,000  225,000         --          4,791

Joseph M. Ivey, Jr.(3)................... 2001  490,634        0    100,000          8,487
  President and Chief Executive Officer   2000  316,961        0    125,000         27,485

Henry P. Holland(4)...................... 2001  383,757        0     50,000          6,047
  Executive Vice President,               2000   78,125        0    100,000             --
  Chief Operating Officer

Ray Naizer(5)............................ 2001  263,208  401,627     60,000         10,846
  Senior Vice President, Operations

Robert Tyler(6).......................... 2001  238,125  128,000     30,000          4,424
  Senior Vice President, Operations       2000  210,607  140,000     60,000          5,604
                                          1999  145,000  108,750         --          3,754
</TABLE>
--------
(1) The annual amount of perquisites or other personal benefits provided to
    each individual does not exceed the lesser of $50,000 or 10% of reported
    salary and bonus.
(2) All Other Compensation for 2001 consists of (i) car allowance for Mr.
    Naizer of $1,212, (ii) insurance premiums and related income tax expense
    for Messrs. Millinor, Ivey, Holland and Tyler of $6,321, $1,740, $3,049 and
    $1,849, respectively, (iii) Company contributions to retirement programs on
    behalf of Messrs. Millinor, Ivey, Naizer, and Tyler of $2,100, $5,250,
    $9,634, and $600, respectively, and (iv) club dues for Messrs. Millinor,
    Ivey, Holland and Tyler of $1,930, $1,497, $2,998 and $1,975, respectively.
(3) Mr. Ivey became an officer of the Company as of February 22, 2000.
(4) Mr. Holland became an officer of the Company as of October 16, 2000.
(5) Mr. Naizer became an officer of the Company as of April 1, 2001.
(6) Mr. Tyler resigned as Senior Vice President, Operations of the Company as
    of January 31, 2002. See "Employment Agreements" below.

                                      4

<PAGE>

Stock Option Grants in 2001

   The following table sets forth certain information with respect to stock
option grants made to the persons named in the Summary Compensation Table
during 2001 under the Company's 1997 Stock Awards Plan and 2000 Stock Awards
Plan. During 2001, there was no repricing by the Company of stock options held
by the persons named in the Summary Compensation Table and no stock
appreciation rights were granted.

                       Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                    Individual Grants
                        -----------------------------------------
                                                                  Potential Realizable
                                   % of Total                     Value at Assumed
                        Number of   Options                       Annual Rate of Stock
                        Securities Granted to Exercise            Price Appreciation for
                        Underlying Employees   Price               Option Term(2)
                         Options   In Fiscal    Per    Expiration ----------------------
         Name           Granted(1)    2001     Share      Date       5%         10%
         ----           ---------- ---------- -------- ----------  --------    --------
<S>                     <C>        <C>        <C>      <C>        <C>         <C>
J. Patrick Millinor, Jr        0       --         --           -- $      0    $      0
Joseph M. Ivey, Jr.....  100,000      6.3%     $6.00    2/13/2011  377,340     956,250
Henry P. Holland.......   25,000      1.6       4.28    4/16/2011   67,292     170,530
                          25,000      1.6       3.20   10/16/2011   50,312     127,500
Ray Naizer.............   25,000      1.6       6.28    1/22/2011   98,737     250,218
                          35,000      2.2       6.00    4/01/2011  132,069     334,688
Robert Tyler(3)........   30,000      1.9       6.00    2/13/2011  113,202     286,875
</TABLE>
--------
(1) All options granted in 2001 have an exercise price equal to or greater than
    100% of the fair market value on the date of grant, have ten year terms and
    become exercisable with respect to 25% of the shares subject to the option
    on each anniversary of the date of grant.
(2) The dollar amounts under these columns represent the potential realizable
    value of each grant of options assuming that the market price of Common
    Stock appreciates in value from the date of grant at the 5% and 10% annual
    rates prescribed by the Securities and Exchange Commission and therefore
    not intended to forecast possible future appreciation, if any, of the price
    of Common Stock.
(3) Mr. Tyler resigned as Senior Vice President, Operations of the Company as
    of January 31, 2002. In accordance with the terms of his employment
    agreement, all of his stock options expired on March 2, 2002. See
    "Employment Agreements" below.

Options Exercised in 2001 and 2001 Year-End Values

   The following table sets forth information concerning the number of shares
of Common Stock acquired on exercise of stock options, the value realized on
such exercise, and the number and value of unexercised stock options held at
December 31, 2001 by the persons named in the Summary Compensation Table.

              Aggregated Option Exercises in Last Fiscal Year and
                         Fiscal Year End Option Values

<TABLE>
<CAPTION>
                                               Number of Securities
                                              Underlying Unexercised     Value of Unexercised
                                                    Options at          In-the-Money Options at
                          Shares                 December 31, 2001       December 31, 2001(1)
                         Acquired    Value   ------------------------- -------------------------
         Name           On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
         ----           ----------- -------- ----------- ------------- ----------- -------------
<S>                     <C>         <C>      <C>         <C>           <C>         <C>
J. Patrick Millinor, Jr      0         0       140,349      121,250        $0           $0
Joseph M. Ivey, Jr.....      0         0       265,625      428,125         0            0
Henry P. Holland.......      0         0        31,250      118,750         0            0
Ray Naizer.............      0         0        18,500       78,500         0            0
Robert Tyler(2)........      0         0        40,500       83,500         0            0
</TABLE>
--------
(1) Based on the closing price of the Common Stock on December 31, 2001 of
    $2.90.
(2) Mr. Tyler resigned as Senior Vice President, Operations of the Company as
    of January 31, 2002. In accordance with the terms of his employment
    agreement, all of his stock options expired on March 2, 2002. See
    "Employment Agreements" below.

                                      5

<PAGE>

Long-Term Incentive Plan ("LTIP") Awards

   None of the officers named in the Summary Compensation Table were granted
any stock awards in 2001 under the Company's 2000 Stock Performance Incentive
Plan.

Employment Agreements

   Mr. Millinor entered into an employment agreement with the Company effective
March 28, 2000, which was amended on August 2, 2000. The agreement provides
that Mr. Millinor will serve as non-executive Chairman of the Board of the
Company through March 28, 2003, and provides for an initial annual base salary
of $425,000 and a cash bonus equal to 100% of the Chief Executive Officer's
bonus in 2000, 75% in 2001, 50% in 2002 and 25% in 2003, prorated through March
28, 2003. Under the agreement, the Company will provide Mr. Millinor with
customary employee benefits and indemnification with respect to matters
relating to his services as an officer of the Company. The agreement is
terminable by either party upon 60 days' prior written notice, but if the
termination is by the Company without cause or by Mr. Millinor for good reason
(as defined in the agreement), including a change of control, then Mr. Millinor
will be entitled to receive an amount equal to three times the sum of his
annual base salary then in effect and his prior year's bonus, as well as
amounts sufficient to pay medical, life and disability insurance premiums until
such time as Mr. Millinor is eligible to receive Medicare coverage and a tax
gross up amount to eliminate any excise tax imposed on such payments, if any.
In addition, all options granted to him prior to such termination will become
immediately exercisable. Furthermore, as of March 28, 2003, all options granted
to Mr. Millinor prior to October 1, 2000 will become immediately exercisable
and the Company will continue to pay Mr. Millinor amounts sufficient to pay
medical, life and disability insurance until such time as he is eligible to
receive Medicare coverage. The agreement provides that Mr. Millinor may
participate in other business activities, provided such activities do not
violate the provisions of the employment agreement.

   Mr. Ivey entered into an employment agreement with the Company effective
March 28, 2000, which was amended on March 1, 2001. The agreement provides for
an initial annual base salary of $425,000 and a target bonus of not less than
120% of his base salary, contingent upon the actual performance of the Company.
Under the agreement, the Company will provide Mr. Ivey with customary employee
benefits and indemnification with respect to matters relating to his services
as an officer of the Company. The initial term of his employment will be for
three years, and the agreement will automatically be extended for an additional
year each anniversary of the employment agreement unless notice of nonrenewal
is provided by either party or the agreement is otherwise terminated. The
agreement is terminable by either party upon 60 days' prior written notice, but
if the termination is by the Company without cause or by Mr. Ivey for good
reason (as defined in the agreement), including a change of control, then Mr.
Ivey will be entitled to receive an amount equal to three times the sum of his
annual base salary then in effect and the amount of his target bonus, as well
as amounts sufficient to pay 36 months of medical, life and disability
insurance premiums and a tax gross up amount to eliminate any excise tax
imposed on such payments, if any. If his employment is terminated by the
Company without cause or by Mr. Ivey for good reason, including a change of
control, all stock options granted to him will become immediately exercisable.

   Mr. Holland entered into an employment agreement with the Company effective
October 16, 2000, which was amended March 1, 2002. The agreement provides for
an initial annual base salary of $375,000 and a target bonus of not less than
100% of his base salary, contingent upon the actual performance of the Company.
Under the agreement, the Company will provide Mr. Holland with customary
employee benefits and indemnification with respect to matters relating to his
services as an officer of the Company. The initial term of his employment will
be for two years, and the agreement will automatically renew for an additional
year on the termination date and on each anniversary of that date unless notice
of nonrenewal is provided by either party or the agreement is otherwise
terminated. The agreement is terminable by either party upon 30 days' prior
written notice, but if the termination is by the Company without cause or by
Mr. Holland for good reason (as defined in the agreement), then Mr. Holland
will be entitled to receive an amount equal to two times the sum of his annual
base salary then

                                      6

<PAGE>

in effect and the lesser of the amount of his actual bonus earned with respect
to the preceding calendar year and his target bonus, as well as amounts
sufficient to pay 18 months of medical, life and disability insurance premiums
and a tax gross up amount to eliminate any excise tax imposed on such payments,
if any. The agreement also provides that if Mr. Holland's employment is
terminated or not renewed as a result of a change of control, he will be
entitled to receive an amount equal to two times the sum of his annual base
salary then in effect and the amount of his actual bonus earned with respect to
the preceding calendar year, as well as amounts sufficient to pay 18 months of
medical, life and disability insurance premiums and a tax gross up amount to
eliminate any excise tax imposed on such payments, if any. In addition, all
stock options granted to him will become immediately exercisable. If the
Company elects not to renew the agreement at the end of any term, Mr. Holland
will be entitled to receive an amount equal to two times his annual base salary
then in effect, an amount equal to his pro-rata bonus earned for the period of
time in which he was employed by the Company in such calendar year, as well as
amounts sufficient to pay 18 months of medical, life and disability insurance
premiums and a tax gross up amount to eliminate any excise tax imposed on such
payments, if any.

   Mr. Naizer entered into an employment agreement with the Company effective
April 1, 2001. The agreement provides for an initial annual base salary of
$265,000 and a target bonus of not less than 135% of his base salary,
contingent upon the actual performance of the Company. Under the agreement, the
Company will provide Mr. Naizer with customary employee benefits and
indemnification with respect to matters relating to his services as an officer
of the Company. The initial term of his employment will be for two years, and
the agreement will automatically renew for an additional year on the
termination date and on each anniversary of that date unless notice of
nonrenewal is provided by either party or the agreement is otherwise
terminated. The agreement is terminable by either party upon 30 days' prior
written notice, but if the termination is by the Company without cause or by
Mr. Naizer for good reason (as defined in the agreement), then Mr. Naizer will
be entitled to receive an amount equal to the sum of his annual base salary
then in effect and the lesser of the amount of his actual bonus earned with
respect to the preceding calendar year and his target bonus, as well as amounts
sufficient to pay 18 months of medical, life and disability insurance premiums
and a tax gross up amount to eliminate any excise tax imposed on such payments,
if any. The agreement also provides that if Mr. Naizer's employment is
terminated or not renewed as a result of a change of control, he will be
entitled to receive an amount equal to the sum of his annual base salary then
in effect and the lesser of the amount of his actual bonus earned with respect
to the preceding calendar year and his target bonus, as well as amounts
sufficient to pay 18 months of medical, life and disability insurance premiums
and a tax gross up amount to eliminate any excise tax imposed on such payments,
if any. If the Company elects not to renew the agreement at the end of any
term, Mr. Naizer will be entitled to receive an amount equal to his annual base
salary, as well as amounts sufficient to pay 12 months of medical, life and
disability insurance premiums and a tax gross up amount to eliminate any excise
tax imposed on such payments, if any.

   Each of the foregoing employment agreements obligates the employee not to
disclose Company information and to not compete with the Company for a one-year
period following such employee's termination of employment (or for a longer
period if the termination was by the Company without cause or by the employee
for good reason).

   Effective as of January 31, 2002, Mr. Tyler resigned his position as Senior
Vice President, Operations. In accordance with the terms of his employment
agreement, and in consideration of certain covenants, including a covenant not
to compete, the Company paid Mr. Tyler upon his termination of employment an
amount equal to the sum of his annual base salary and target bonus plus amounts
sufficient to pay 12 months of medical, life and disability insurance premiums.
In accordance with the terms of his employment agreement, all of his stock
options expired on March 2, 2002.

Compensation of Directors

   Directors who are not receiving compensation as officers, employees or
consultants of the Company are entitled to receive an annual retainer fee of
$25,000. Non-employee directors may elect to be paid his or her fees

                                      7

<PAGE>

in the form of a Phantom Stock Award under the Company's 2000 Stock Awards
Plan, in lieu of a cash payment of such fees. Additionally, each director who
is not receiving compensation as an officer, employee or consultant of the
Company receives $1,000 for each regular Board meeting attended and $500 for
each Committee meeting attended on a day other than the day upon which a
meeting of the entire Board has been called. Each non-employee director who
serves as Chairman of the Board or of any regular Committee of the Board
receives an additional fee of $1,000 per annum. In addition, each non-employee
director receives an automatic initial grant of an option to purchase 20,000
shares of Common Stock on the date of such person's initial election to the
Board of Directors. Thereafter, upon re-election each director receives an
automatic grant of an option to purchase 5,000 shares. Each such option has and
will have an exercise price equal to the fair market value of a share of Common
Stock on the date of grant and will have a ten-year term. Options granted upon
initial election to the Board of Directors will become exercisable with respect
to 25% of the shares subject to such option following 6, 12, 18 and 24 months
of the date of grant, respectively. Options granted upon reelection to the
Board of Directors will become exercisable with respect to 50% of the shares
subject to such option following 6 and 12 months of the date of grant,
respectively.

Compensation Committee Interlocks and Insider Participation

   During 2001, Messrs. Africk, Eades, Gross, Morrison and Mounger (none of
whom was or had been an officer or employee of the Company or any of its
subsidiaries) served on the Company's Compensation Committee. There were no
interlocks or insider participation with other companies within the meaning of
the proxy rules of the Securities and Exchange Commission during 2001.

                                      8

<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

Stock Ownership of Management and Directors

   The following table sets forth, as of April 1, 2002, the number of shares of
Common Stock of the Company beneficially owned by (i) each of the Company's
directors and the executive officers named in the summary compensation table on
page 4 and (ii) all executive officers and directors as a group:

<TABLE>
<CAPTION>
                                                            Beneficial
                                                             Ownership                         Percent
                                                            (excluding      Stock                Of
                 Name of Beneficial Owner                   options)(1)   Options(5)   Total    Class
                 ------------------------                   -----------   ---------- --------- -------
<S>                                                         <C>           <C>        <C>       <C>
Andrew Africk..............................................          0(2)    32,500     32,500     *
Vincent W. Eades...........................................          0       41,284     41,284     *
Michael Gross..............................................          0(2)    32,500     33,238     *
Henry P. Holland...........................................          0       31,250     31,250     *
Joseph M. Ivey, Jr.........................................    935,638(3)   400,000  1,335,638   2.1
Scott Kleinman.............................................          0(2)     7,500      7,500     *
Donald L. Luke.............................................        978       87,219     88,197     *
J. Patrick Millinor, Jr....................................    167,288(4)   347,637    180,349     *
Lucian L. Morrison.........................................      3,618       20,750     24,368     *
William M. Mounger II......................................     10,000        2,500     12,500     *
Ray Naizer.................................................     74,523       33,500    108,023     *
John M. Sullivan...........................................     13,937       31,250     45,187     *
Robert Tyler(6)............................................      1,400       63,000     64,400     *
All executive officers and directors as a group(23 persons)  1,283,378    1,320,746  2,601,624   4.0
</TABLE>
--------
 * Less than one percent.
(1) Except as otherwise noted, each director and executive officer has sole
    voting and investment power over the shares beneficially owned as set forth
    in this column.
(2) Does not include, and the director disclaims beneficial ownership of, the
    shares of Preferred Stock and Common Stock beneficially owned by Apollo
    Investment Fund IV, L.P. ("AIF") and Apollo Overseas Partners IV, L.P.
    ("AOP"). The director is a principal of Apollo Advisors IV, L.P., the
    general partner of AIF and AOP, and may be deemed to beneficially own such
    shares as a result of his position with Apollo Advisors IV, L.P. See
    "Security Ownership of Certain Beneficial Owners."
(3) Includes 300,438 shares held by Ivey National Corporation (the principal
    stockholder of which is Mr. Ivey's father), of which Mr. Ivey disclaims
    beneficial ownership beyond his pecuniary interest.
(4) Includes 143 shares held by Mr. Millinor's children, of which Mr. Millinor
    disclaims beneficial ownership.
(5) The directors and executive officers have the right to acquire the shares
    of Common Stock reflected in this column within 60 days of April 1, 2002,
    through the exercise of stock options or warrants.
(6) Mr. Tyler resigned as Senior Vice President, Operations of the Company
    effective as of January 31, 2002. In accordance with the terms of his
    employment agreement, all of his stock options expired on March 2, 2002.
    See "Employment Agreements" below.

                                      9

<PAGE>

Security Ownership of Certain Beneficial Owners

   As of April 1, 2002, the entities known to the Company to be beneficial
owners of more than five percent of any class of equity security of the Company
were:

<TABLE>
<CAPTION>
                                           Total              Total
                                         Number of          Number of
                                         Shares of          Shares of
                                         Preferred            Common
                                           Stock              Stock
                                        Beneficially % of  Beneficially % of
   Name and Address of Beneficial Owner    Owned     Class    Owned     Class
   ------------------------------------ ------------ ----- ------------ -----
   <S>                                  <C>          <C>   <C>          <C>
   Apollo Investment Fund IV, L.P.(1)..   242,946    94.8%  21,414,379  25.1%
    c/o Apollo Advisors IV, L.P.
    Two Manhattanville Road
    Purchase, N.Y. 10577
   Apollo Overseas Partners IV, L.P.(1)    13,245     5.2%   1,166,390   1.8%
    c/o Apollo Advisors IV, L.P.
    Two Manhattanville Road
    Purchase, N.Y. 10577
   Dimensional Fund Advisors(2)........                      3,847,400   6.0%
    1299 Ocean Avenue
    11th Floor
    Santa Monica, CA 90401
</TABLE>
--------
(1) The number of shares of Common Stock beneficially owned by Apollo
    Investment Fund IV, L.P. ("AIF") and Apollo Overseas Partners IV, L.P.
    ("AOP") consists of 21,293,269 shares that are issuable upon conversion of
    the Preferred Stock and 1,287,500 shares that may be purchased pursuant to
    warrants issued by Building One Services Corporation ("BOSC") and assumed
    by the Company in accordance with the merger agreement between the Company
    and BOSC, having an exercise price of $16.00 per share. The shares of
    Preferred Stock are convertible by AIF and AOP at $14.00 per share into
    20,192,413 and 1,100,856 shares of Common Stock, respectively, based upon
    the face amount of the Preferred Stock of $256,191,000 plus accrued
    dividends of $41,914,767 as of April 1, 2002. Both AIF and AOP, as well as
    the general partner of these entities, Apollo Advisors IV, L.P. are
    affiliated with Apollo Management IV, L.P.
(2) Based on a Schedule 13G filed on January 30, 2002, Dimensional Fund
    Advisors Inc. ("Dimensional") reports sole voting and dispositive power
    with respect to all such shares as a result of acting as investment advisor
    to various investment companies. The Schedule 13G states that no one
    investment advisory client of Dimensional owns more than 5% of the shares
    and disclaims beneficial ownership by Dimensional of all such securities.
    Percentage ownership shown is calculated based on the number of shares of
    Common Stock outstanding as of April 1, 2002, rather than January 30, 2002.

Item 13.  Certain Relationships and Related Transactions.

Transactions with Management and Others

   Mr. Ivey is an officer and stockholder of two corporations that lease real
property and an airplane to Encompass Mechanical Services Southeast, Inc.
(formerly known as Ivey Mechanical Company, Inc., one of the Company's
subsidiaries acquired in September 1998). The leases provide for lease payments
in the aggregate amount of $8,330 per month, or $99,960 annually. In addition,
the Company pays a fee based upon the use of the airplane. In 2001, the Company
paid $66,560 in usage fees for the airplane. Encompass Mechanical Services
Southeast, Inc. also leases a facility from J. Marlin Ivey, father to Mr. Ivey,
for $18,429 per month, or $221,148 annually.

                                      10

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of
April, 2002.

                                              ENCOMPASS SERVICES CORPORATION

                                              By:     /s/ DARREN B. MILLER
                                                  -----------------------------
                                                        Darren B. Miller
                                                    Senior Vice President and
                                                     Chief Financial Officer

                                      11

<PAGE>

                                  EXHIBIT B-3

  Encompass Service Corporation's Form 10-K/A for the year ended December 31,
                                     2001,
                           as filed on July 1, 2002

                                 Exhibit B-3-1

<PAGE>

================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                  FORM 10-K/A

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

                  For the fiscal year ended December 31, 2001

                                      or

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

              For the transition period from        to

                          Commission File No. 1-13565


                        ENCOMPASS SERVICES CORPORATION
            (Exact name of registrant as specified in its charter)

                       Texas                   76-0535259
                  (State or other           (I.R.S. Employer
                  jurisdiction of        Identification Number)
                 incorporation or
                   organization)

                         3 Greenway Plaza, Suite 2000
                             Houston, Texas 77046
                    (Address of principal executive office)
                                 713-860-0100
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:

                                        Name of each exchange on
                Title of each class         which registered
                -------------------     ------------------------
              Common stock, par value
                       $0.001            New York Stock Exchange

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

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

   As of June 28, 2002, (i) there were 64,280,367 shares of common stock, par
value $0.001 per share, of the registrant issued and outstanding and (ii) the
aggregate market value of the common stock held by non-affiliates of the
registrant (based on the closing price per share of the registrant's common
stock reported on the New York Stock Exchange on that date) was $35,908,704.
For purposes of the above statement only, all directors and executive officers
of the registrant are assumed to be affiliates.


================================================================================

<PAGE>

                               TABLE OF CONTENTS

                                    PART II

Item 6. Selected Financial Data.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.

Item 8. Financial Statements and Supplementary Data.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

*  Items omitted from this Form 10-K/A are included in the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission on
March 14, 2002, or in the Company's Form 10-K/A, as filed with the Securities
and Exchange Commission on April 30, 2002.

  Item included in this Form 10-K/A reflect the following changes from the
corresponding items included in the Company's Annual Report on Form 10-K, as
filed on March 14, 2002. During the three months ended March 31, 2002, the
Company sold three business units. In accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which was adopted January 1,
2002, these business units are classified as discontinued operations.
Accordingly, the amounts disclosed herein have been restated to classify these
business units as discontinued operations and, therefore, to reflect the
historical, after-tax results of these operations as "Income (loss) from
discontinued operations, net of tax." See Note 17 herein for further
discussion. Also, effective January 1, 2002, the registrant adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The
accompanying audited consolidated financial statements include the transitional
disclosures required by SFAS No. 142. See Note 18. No other changes to the
previously filed consolidated financial statements are included herein.

                                       1

<PAGE>

Item 6. Selected Financial Data.

   Except as discussed below, the following selected financial data have been
derived from the audited consolidated financial statements of the Company and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and notes thereto, included elsewhere herein.

   As discussed in Notes 1 and 3 of Notes to Consolidated Financial Statements,
the financial results for periods prior to the Merger on February 22, 2000
reflect the historical results of Building One. Per share results for such
periods presented below have been adjusted to reflect the 1.25 exchange ratio
applied in the Merger. Since Building One was formed in late 1997, the
financial data for 1997 presented below reflect only the operating results of
three businesses acquired by Building One in 1998 under the
pooling-of-interests method of accounting.

<TABLE>
<CAPTION>
                                                               For the Years Ended December 31,
                                                     ---------------------------------------------------
                                                        2001        2000        1999      1998     1997
                                                     ----------  ----------  ---------- -------- -------
                                                            (in thousands, except per share data)
<S>                                                  <C>         <C>         <C>        <C>      <C>
INCOME STATEMENT DATA:
Revenues............................................ $3,825,268  $3,902,734  $1,731,649 $787,644 $70,101
Gross profit........................................    603,682     694,684     342,309  167,406  11,244
Selling, general and administrative expenses........    443,432     431,019     195,215   95,939  11,771
Provision for doubtful accounts.....................     37,258       6,894         766      732       5
Amortization of goodwill and other intangible assets     36,274      32,724      15,620    7,557      --
Other operating costs...............................         --      20,000       8,020       --      --
                                                     ----------  ----------  ---------- -------- -------
Operating income (loss).............................     86,718     204,047     122,688   63,178    (532)
Income (loss) from continuing operations............    (14,413)     59,257      51,951   46,219   1,443
Income (loss) before extraordinary loss.............    (51,126)     63,353      53,062   46,219   1,443
Net income (loss)...................................    (51,126)     55,296      53,062   46,219   1,443
Convertible preferred stock dividends...............    (20,612)    (16,568)         --       --      --
                                                     ----------  ----------  ---------- -------- -------
Net income (loss) available to common shareholders.. $  (71,738) $   38,728  $   53,062 $ 46,219 $ 1,443
                                                     ==========  ==========  ========== ======== =======
Income (loss) from continuing operations per share:
   Basic............................................ $    (0.55) $     0.72  $     1.25 $   0.93 $  0.20
   Diluted..........................................      (0.55)       0.70        1.19     0.90    0.20
Net income (loss) per share:
   Basic............................................ $    (1.12) $     0.65  $     1.28 $   0.93 $  0.20
   Diluted..........................................      (1.12)       0.63        1.21     0.90    0.20
Weighted average shares outstanding:
   Basic............................................     63,845      59,234      41,538   49,885   7,104
   Diluted..........................................     63,845      61,089      46,406   51,161   7,332
ADJUSTED DATA TO EXCLUDE AMORTIZATION OF GOODWILL,
 NET OF TAX EFFECT (a):
Income (loss) before extraordinary loss............. $  (17,441) $   93,919  $   67,880
Net income (loss)...................................    (17,441)     85,862      67,880
Basic earnings (loss) per share..................... $    (0.60) $     1.17  $     1.63
Diluted earnings (loss) per share...................      (0.60)       1.17        1.53
</TABLE>

<TABLE>
<CAPTION>
                                                                    As of December 31,
-                                                  ----------------------------------------------------
                                                      2001       2000       1999       1998      1997
                                                   ---------- ---------- ---------- ---------- --------
                                                                      (In thousands)
<S>                                                <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $   20,572 $   10,094 $   17,085 $  213,096 $528,972
Working capital...................................    324,236    491,335    220,431    307,390  528,235
Total assets......................................  2,401,326  2,697,882  1,313,754  1,043,922  539,159
Total debt........................................    814,814    967,411    600,178      5,454    3,232
Mandatorily redeemable convertible preferred stock    289,621    269,009         --         --       --
Shareholders' equity..............................    676,112    763,875    428,757    837,537  529,480
</TABLE>
--------
(a) Effective January 1, 2002, the Company adopted the provisions of Statement
    of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
    Assets," which established new accounting and reporting requirements for
    goodwill and other intangible assets. See Note 18 to the Consolidated
    Financial Statements included elsewhere herein for further discussion.


                                      2

<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations.

   The following discussion should be read in conjunction with the consolidated
financial statements of Encompass Services Corporation ("Encompass" or the
"Company") and notes thereto, included elsewhere herein. This discussion
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on the
Company's current expectations and involve risks and uncertainties that could
cause the Company's actual results to differ materially from those set forth in
the forward-looking statements. See "Forward Looking Statements" and "Risk
Factors".

Introduction

   Encompass is one of the largest providers of facilities services in the
United States. The Company provides electrical and mechanical contracting
services and cleaning and maintenance management services to commercial,
industrial and residential customers nationwide, including construction,
installation and maintenance. On February 22, 2000, the shareholders of
GroupMAC and Building One approved the merger of the two companies (the
"Merger"). In connection with the Merger, GroupMAC changed its name to
Encompass Services Corporation.

   GroupMAC was the surviving legal entity in the Merger. However, for
accounting purposes, Building One was deemed to be the acquiror and,
accordingly, the Merger was accounted for as a "reverse acquisition". Under
this method of accounting, Encompass' historical results for periods prior to
the Merger are the same as Building One's historical results. See Note 3 of
Notes to Consolidated Financial Statements for further discussion of the Merger.

   Encompass operates in three reportable segments: Commercial/Industrial
Services, Residential Services and Cleaning Systems. See Note 13 of Notes to
Consolidated Financial Statements for a description of each of these reportable
segments.

Critical Accounting Policies

   The Company's significant accounting policies are described in Note 2 of
Notes to Consolidated Financial Statements. Management believes that the
Company's most critical accounting policy is in accounting for long-term
construction contracts. Determining the points at which revenue should be
recognized as earned and costs should be recognized as expenses is a major
accounting issue common to all businesses engaged in the performance of
long-term construction contracts. The Company uses the percentage-of-completion
accounting method for construction contracts in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts". Each of the Company's business units calculates the
percentage-of-completion of each contract by dividing the costs incurred to
date by the estimated total contract costs at completion (the "cost-to-cost"
method). This percentage is then applied to the estimated total contract value
(the total amount of revenue expected to be realized from the contract) in
order to calculate the amount of revenue to be recognized to date on each
contract. Provisions are recognized in the statement of operations for the full
amount of estimated losses on uncompleted contracts whenever evidence indicates
that the estimated total cost of a contract exceeds its estimated total
contract value.

   Percentage-of-completion accounting requires considerable reliance on
estimates in determining revenues, costs, profit margins and the extent of
progress toward completion on a contract-by-contract basis. Uncertainties
inherent in the performance of contracts generally include labor availability
and productivity, job conditions, material cost, change order scope and
pricing, final contract settlements and other factors. These uncertainties are
evaluated continually for each contract, and the impact of changes in estimates
of total contract costs, total contract value, and other factors are reflected
in the consolidated financial statements in the period in which the revisions
are determined.

                                      3

<PAGE>

   Company business units enter into contracts primarily through competitive
bids, with the final terms and prices often negotiated with the customer.
Although the pricing terms and conditions of contracts vary considerably, most
of these contracts are known as "fixed-price" (or "lump-sum") contracts, in
which the business unit essentially agrees to perform all acts under the
contract for a stated price. Company business units also enter into "cost-plus"
contracts (costs incurred plus a stated mark-up percentage or a stated fee) and
"time-and-materials" contracts (stated hourly labor rate plus the cost of
materials). Fixed-price contracts inherently contain higher risk of loss than
the other contract types, but management believes that the Company is generally
able to achieve higher gross profit margins on fixed-price contracts as a
result of the expertise and experience of its business units in bidding and job
performance. No assurance can be given, however, that the Company will not
incur significant job losses on contracts in the future.

   The Company recognizes maintenance, repair and replacement revenues,
including cleaning and maintenance management services, as services are
performed. Service contract revenue is recognized ratably over the life of the
service contract. The Company accounts for revenues from fixed price
installation and retrofit contracts on a percentage-of-completion basis using
the cost-to-cost method.

   Cost of services consists primarily of salaries, wages, benefits and
insurance of service and installation technicians, project managers and other
field support employees; materials, components, parts and supplies; engineered
equipment; subcontracted services; depreciation; fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for management,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.

   Accounts receivable collectibility represents another significant accounting
policy. Company business units grant credit, generally without collateral, to
their customers, which primarily include general contractors, property owners
and developers, governmental agencies, educational and medical institutions,
and commercial and industrial companies in a variety of industries. The Company
is subject to potential credit risk related to changes in business and economic
factors throughout the United States. However, the Company is entitled to
payment for work performed and often has certain lien rights that can be
attached to the work performed. Additionally, management continually monitors
the financial condition of its customers to reduce risk of loss. The Company
provides an allowance for doubtful accounts when future collection is
considered doubtful. Historically, receivables collectibility has not been a
significant issue in the facilities services industry, particularly with
respect to new construction. However, the Company recorded provisions for bad
debts totaling $37.3 million from continuing operations during 2001, compared
to $6.9 million in 2000. The significant increase is primarily attributable to
the collapse of the telecommunications industry discussed below and, to a
lesser extent, the general economic downturn which contributed to financial
difficulties of certain customers outside the technology sector.

   Included in the Company's customer base are a number of companies involved
in the telecommunications industry, including fiber-optic network companies,
wireless phone companies and high-speed Internet providers. During 2001, many
companies in the telecommunications sector, including some of the Company's
customers, experienced a dramatic reduction in the amount of new capital
available to them, upon which certain of them are reliant to successfully
achieve their business plans. Consequently, the Company has experienced slower
payment from certain customers, several of which have filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. During 2001, the Company provided
allowances of $27.8 million in continuing operations and $17.7 million in the
discontinued Global Technologies operations to reserve certain accounts
receivable from customers in the telecommunications industry to management's
best estimates of their ultimate collectibility.

   On September 25, 2001, the Company announced its decision to cease
operations of its Global Technologies segment effective September 30, 2001.
With the exception of some minor job wrap-up and receivables collection,
substantially all of these operations have been terminated as of December 31,
2001. The shutdown of these operations represents the disposal of a business
segment under Accounting Principles Board Opinion

                                       4

<PAGE>

("APB") No. 30. Accordingly, the amounts disclosed herein have been restated to
reflect the historical, after-tax results of these operations as "Income (loss)
from discontinued operations, net of tax". In connection with the decision to
discontinue these operations, a charge of $26.5 million, net of the related
income tax benefit of $7.8 million, was recorded in 2001 to provide for the
estimated costs of disposal of these operations. Such estimated costs of
disposal primarily consist of the write-off of non-deductible, unamortized
goodwill of $12.0 million, net facility and equipment lease obligations of
$12.4 million, net asset writedowns of $3.8 million and estimated net operating
losses and severance costs incurred subsequent to September 30, 2001 of $6.1
million. See Note 16 of Notes to Consolidated Financial Statements for further
discussion.

   During the three months ended March 31, 2002, the Company sold three
business units for aggregate cash proceeds of $9.6 million. In accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which was
adopted effective January 1, 2002, these business units are also classified as
discontinued operations. Accordingly, the amounts disclosed herein have been
restated to reflect these businesses as discontinued operations.

Results of Operations

  Year ended December 31, 2001 compared to Year ended December 31, 2000

   Operating results for the years ended December 31, 2001 and 2000 are
summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                                        Year ended          Year ended
                                                                     December 31, 2001   December 31, 2000
                                                                    ------------------  ------------------
                                                                              Operating           Operating
                                                                    Revenues   Income   Revenues   Income
                                                                    --------  --------- --------  ---------
<S>                                                                 <C>       <C>       <C>       <C>
Commercial/Industrial Services..................................... $3,218.4   $ 86.3   $3,362.5   $219.2
Residential Services...............................................    331.2     30.3      287.6     30.3
Cleaning Systems...................................................    293.1     17.7      265.2     16.6
Corporate and other................................................       --    (11.3)        --     (9.4)
Amortization of goodwill and other intangible assets...............       --    (36.3)        --    (32.7)
Merger and related charges and costs to exit certain activities and
  related costs....................................................       --       --         --    (20.0)
Eliminations.......................................................    (17.4)      --      (12.6)      --
                                                                    --------   ------   --------   ------
Total.............................................................. $3,825.3   $ 86.7   $3,902.7   $204.0
                                                                    ========   ======   ========   ======
</TABLE>

   Segment Results.  Commercial/Industrial Services Group revenues decreased 4%
to $3,218.4 million in 2001 compared to 2000, despite the inclusion for the
full year of the GroupMAC operations acquired in February 2000, primarily as a
result of the decline in revenues from the technology and telecommunications
sector and the general economic slowdown. Commercial/Industrial Services
operating income decreased 61% to $86.3 million in 2001 compared to 2000,
primarily as a result of increased pricing pressures on projects as a result of
deteriorating economic conditions, a greater than normal level of losses
recorded on certain fixed-price projects, reduced levels of work done for
customers in the higher margin technology and telecommunications sector, and
significant provisions for doubtful accounts largely attributable to
telecommunications customers. Residential Services Group revenues increased
15%, reflecting a full year of the GroupMAC operations acquired in the February
2000 Merger. Residential Services operating income remained flat at $30.3
million, reflecting increased price competition in certain new construction
markets. Cleaning Systems Group revenues increased 11% to 293.1 million and
operating income increased 7% to $17.7 million, primarily as a result of an
increased volume of national service contracts.

   Revenues.  Revenues decreased $77.5 million, or 2%, to $3,825.3 million for
the year ended December 31, 2001 from $3,902.7 million for the year ended
December 31, 2000. The decrease is primarily attributable to

                                      5

<PAGE>

decreases in revenues from technology and telecommunications customers in the
West and Southwest regions of the Company's Commercial/Industrial Services
Group partially offset by the inclusion of a full year of the GroupMAC
businesses, which were acquired in the February 22, 2000 Merger, and an 11%
increase in Cleaning Systems Group revenues.

   Gross profit.  Gross profit decreased $91.0 million, or 13%, to $603.7
million for the year ended December 31, 2001 from $694.7 million for the year
ended December 31, 2000. This decrease in gross profit is primarily due to
increased pricing pressures on projects as a result of deteriorating economic
conditions, a greater than normal level of losses recorded on certain
fixed-price projects and reduced levels of work done for customers in the
higher margin technology and telecommunications sectors.

   Gross profit margin decreased to 15.8% for the year ended December 31, 2001
compared to 17.8% for the year ended December 31, 2000. This decline is
primarily attributable to the lower volume of technology projects in 2001 which
tend to be higher margin, increased price competition as a result of general
economic weakness, and the increased job losses on fixed-price projects
mentioned above.

   Selling, general and administrative expenses.  Selling, general and
administrative expenses increased $12.4 million, or 3%, to $443.4 million for
the year ended December 31, 2001 from $431.0 million for the year ended
December 31, 2000. The increase in these expenses is primarily attributable to
the inclusion of the GroupMAC operations for a full year of activity, partially
offset by integration-related cost savings. As a percentage of revenues,
selling, general and administrative expenses increased to 11.6% for the year
ended December 31, 2001 from 11.0% for the year ended December 31, 2000. This
increased percentage is primarily the result of increased costs to support the
Company's branding, cross selling, training and internal growth initiatives,
partially offset by integration-related cost savings.

   Provision for doubtful accounts.  Provision for doubtful accounts increased
$30.4 million to $37.3 million for the year ended December 31, 2001 from $6.9
million for the year ended December 31, 2000. This increase is primarily
attributable to $27.8 million in charges recorded in 2001 to reserve certain
accounts receivable from customers in the telecommunications industry to
management's best estimates of their ultimate collectibility.

   Amortization of goodwill and other intangible assets.  Amortization of
goodwill and other intangible assets for the year ended December 31, 2001
increased $3.6 million, or 11%, to $36.3 million from $32.7 million for the
year ended December 31, 2000. This increase primarily relates to the GroupMAC
businesses that were acquired in the Merger and the impact of payments under
contingent consideration agreements relating to previously acquired companies.

   Merger and related charges.  In connection with the Merger, the Company
recorded $7.8 million of costs and expenses related to severance and office
closing costs in the first quarter of 2000. These costs relate to the closing
of Building One's corporate headquarters in Minneapolis, Minnesota and the
resulting consolidation with the GroupMAC corporate office in Houston, Texas.
These costs are more fully described in Note 3 in the Notes to Consolidated
Financial Statements included herein.

   Costs to exit certain activities and related costs.  In the first quarter of
2000, the Company recorded $12.2 million of costs and expenses related to the
shutdown of certain operations, the reorganization of other operations and
other costs resulting from the Merger. These costs are more fully described in
Note 3 in the Notes to Consolidated Financial Statements included herein.

   Other income (expense).  Other income (expense) primarily includes net
interest expense of $83.3 million for the year ended December 31, 2001,
reflecting a $3.9 million decrease from the year ended December 31, 2000.
Average debt balances outstanding were higher during 2001 as compared to 2000
due primarily to debt incurred in connection with the Merger in February 2000.
Despite the higher average debt balance, net interest expense was lower as a
result of lower prevailing interest rates during the year ended December 31,
2001 as compared to 2000.

                                      6

<PAGE>

   Income tax provision.  As a result of lower earnings before taxes, the
income tax provision decreased $41.0 million to $16.0 million for the year
ended December 31, 2001 from $57.0 million for the year ended December 31,
2000. The effective tax rate exceeds the statutory rate due primarily to
non-deductible goodwill amortization. See Note 6 of Notes to Consolidated
Financial Statements included herein.

   Income (loss) from discontinued operations, net of tax.  The Company
recorded a net loss from the discontinued Global Technologies segment and three
businesses sold in 2002 of $10.2 million for the year ended December 31, 2001
compared to income from discontinued operations, net of tax, of $4.1 million
for the prior year period. The loss in the year ended December 31, 2001 is due
primarily to charges totaling approximately $14.0 million to reserve certain
accounts receivable from customers in the telecommunications industry to
management's best estimates of their ultimate collectibility and to lower
volumes of work with customers in the technology and telecommunications sectors
as projects were delayed or canceled due to the inability of many customers to
access capital required to fund such projects.

   Loss on disposal of discontinued operations, net of tax.  The loss on
disposal of the discontinued Global Technologies segment of $26.5 million, net
of related income tax benefit of $7.8 million, primarily consists of the
write-off of non-deductible, unamortized goodwill of $12.0 million, net
facility and equipment lease obligations of $12.4 million, net asset writedowns
of $3.8 million and estimated net operating losses and severance costs incurred
subsequent to September 30, 2001 of $6.1 million.

   Extraordinary loss, net.  The net of tax extraordinary loss of $8.1 million
for the year ended December 31, 2000 relates to the write-off of deferred debt
issuance costs associated with Building One's revolving credit facility, term
credit facility and junior subordinated notes that were repaid in connection
with the Merger.

  Year ended December 31, 2000 compared to Year ended December 31, 1999

   Operating results for the years ended December 31, 2000 and 1999 are
summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                                        Year ended          Year ended
                                                                     December 31, 2000   December 31, 1999
                                                                    ------------------  ------------------
                                                                              Operating           Operating
                                                                    Revenues   Income   Revenues   Income
                                                                    --------  --------- --------  ---------
<S>                                                                 <C>       <C>       <C>       <C>
Commercial/Industrial Services..................................... $3,362.5   $219.2   $1,491.8   $132.9
Residential Services...............................................    287.6     30.3         --       --
Cleaning Systems...................................................    265.2     16.6      245.8     18.6
Corporate and other................................................       --     (9.4)        --     (5.2)
Amortization of goodwill and other intangibles assets..............       --    (32.7)        --    (15.6)
Merger and related charges and costs to exit certain activities and
  related costs....................................................       --    (20.0)        --       --
Restructuring and recapitalization charges.........................       --       --         --     (8.0)
Eliminations.......................................................    (12.6)      --       (6.0)      --
                                                                    --------   ------   --------   ------
Total.............................................................. $3,902.7   $204.0   $1,731.6   $122.7
                                                                    ========   ======   ========   ======
</TABLE>

   Segment Results.  Commercial/Industrial Services Group revenues increased
125% to $3,362.5 million in 2000 compared to 1999, primarily as a result of the
inclusion of the GroupMAC businesses that were acquired in the Merger. For the
same reason, Commercial/Industrial operating income increased 65% to $219.2
million in 2000 compared to 1999. All of the Residential Services Group was
acquired from GroupMAC. Cleaning Systems Group revenues increased 8% to $265.2
million as a result of increased volume of regional and national service
contracts. Operating income in the Cleaning Systems Group declined $2.0 million
to $16.6 million, primarily as a result of increased bad debts and costs
incurred to relocate the group headquarters in 2000.

                                      7

<PAGE>

   Revenues.  Revenues increased $2,171.1 million, or 125%, to $3,902.7 million
for the year ended December 31, 2000 from $1,731.6 million for the year ended
December 31, 1999. This increase in revenues is attributable to the following:

  .   $1,712.9 million relates to the GroupMAC businesses that were acquired in
      the Merger.

  .   $137.5 million relates to the incremental revenues contributed in the
      year ended December 31, 2000 by Commercial/Industrial Services Group
      companies acquired during or subsequent to the year ended December 31,
      1999.

  .   $301.3 million relates to internal growth in the Commercial/Industrial
      Services Group. This increase primarily relates to volume increases in
      the Midwest, California, Arizona, Colorado and Texas markets.

  .   $19.4 million relates to internal growth in the Cleaning Systems Group.

   Gross profit.  Gross profit increased $352.4 million, or 103%, to $694.7
million for the year ended December 31, 2000 from $342.3 million for the year
ended December 31, 1999. This increase in gross profit is attributable to the
following:

  .   $323.7 million relates to the GroupMAC businesses that were acquired in
      the Merger.

  .   $34.8 million relates to the incremental gross profit contributed in the
      year ended December 31, 2000 by Commercial/Industrial Services Group
      companies acquired during or subsequent to the year ended December 31,
      1999.

  .   Partially offsetting the above increases was a $6.1 million decrease in
      same store results related primarily to the negative impact of job
      contract losses in the California operations of the Commercial/Industrial
      Services Group and economic softness in the Southeastern United States.

   Gross profit margin decreased to 17.8% for the year ended December 31, 2000
compared to 19.8% for the year ended December 31, 1999. This decline primarily
resulted from the decreased profitability of 11 eliminated business units and
from a local management focus on achieving targeted growth levels that drove
significant revenue growth at the expense of margin preservation. In addition,
management believes that, during the first half of 2000, issues related to the
Merger caused a significant amount of distraction among the operating
leadership of the Company. In addition, the Merger resulted in a higher
proportion of revenues for the year ended December 31, 2000 from mechanical and
industrial business units, which traditionally have lower gross margins than
electrical business units.

   Selling, general and administrative expenses.  Selling, general and
administrative expenses increased $235.8 million, or 121%, to $431.0 million
for the year ended December 31, 2000 from $195.2 million for the year ended
December 31, 1999. This increase in these expenses is attributable to the
following:

  .   $207.6 million relates to the GroupMAC businesses that were acquired in
      the Merger.

  .   $18.2 million relates to the incremental selling, general and
      administrative expense incurred in the year ended December 31, 2000 by
      Commercial/Industrial Services Group companies acquired during or
      subsequent to the year ended December 31, 1999.

  .   $10.0 million relates to internal growth in the Commercial/Industrial
      Services Group and Cleaning Systems Group. This increase primarily
      relates to supporting the revenue growth in the Texas, California,
      Arizona and Colorado markets.

   As a percentage of revenues, selling, general and administrative expenses
decreased to 11.0% for the year ended December 31, 2000 from 11.3% for the year
ended December 31, 1999. This decrease is a result of leveraging corporate,
regional and operating unit overhead over a larger revenue base.

   Provision for doubtful accounts.  Provision for doubtful accounts increased
$6.1 million to $6.9 million for the year ended December 31, 2000 from $0.8
million for the year ended December 31, 1999. This increase is

                                      8

<PAGE>

attributable to an increase of $2.6 million related to GroupMAC companies that
were acquired in the Merger and same store increases due to higher revenues.

   Amortization of goodwill and other intangible assets.  Amortization of
goodwill and other intangible assets for the year ended December 31, 2000
increased $17.1 million, or 110%, to $32.7 million from $15.6 million for the
year ended December 31, 1999. This increase primarily relates to (i) the
GroupMAC businesses that were acquired in the Merger and (ii) the companies
acquired during or subsequent to the year ended December 31, 1999.

   Merger and related charges.  In connection with the Merger, the Company
recorded $7.8 million of costs and expenses related to severance and office
closing costs. These costs relate to the closing of Building One's corporate
headquarters in Minneapolis, Minnesota and the resulting consolidation with the
GroupMAC corporate office in Houston, Texas. These costs are more fully
described in Note 3 in the Notes to Consolidated Financial Statements included
herein.

   Costs to exit certain activities and related costs.  In the first quarter of
2000, the Company recorded $12.2 million of costs and expenses related to the
shutdown of certain operations, the reorganization of other operations and
other costs resulting from the Merger. These costs are more fully described in
Note 3 in the Notes to Consolidated Financial Statements included herein.

   Restructuring and recapitalization charges.  Restructuring and
recapitalization charges were $8.0 million for the year ended December 31,
1999. These charges included $2.8 million relating to compensation expense for
stock options exercised and the underlying shares of common stock repurchased
in Building One's recapitalization plan during 1999, and $5.2 million of
restructuring charges pertaining to the relocation of Building One's then
existing corporate headquarters and integration of the cleaning systems
operations. These costs are more fully described in Note 12 in the Notes to
Consolidated Financial Statements included herein.

   Other income (expense).  Other income (expense) primarily includes net
interest expense of $87.3 million for the year ended December 31, 2000,
compared to $29.9 million for the year ended December 31, 1999. This change is
primarily the result of increased borrowings related to the Merger and other
acquisitions.

   Income tax provision.  The income tax provision increased $15.9 million to
$57.0 million for the year ended December 31, 2000 from $41.1 million for the
year ended December 31, 1999. This increase primarily relates to the increased
pretax earnings. The increase in the effective tax rate from 44.2% in 1999 to
49.0% in 2000 results primarily from higher non-deductible goodwill
amortization as a proportion of pre-tax income.

   Income from discontinued operations, net of tax. The Company recorded income
from discontinued operations totaling $4.1 million, net of tax, in 2000
compared to $1.1 million in 1999. See Notes 16 and 17 in the Notes to
Consolidated Financial Statements included herein for further discussion.

   Extraordinary loss, net.  The net of tax extraordinary loss of $8.1 million
for the year ended December 31, 2000 relates to the write-off of deferred debt
issuance costs associated with Building One's revolving credit facility, term
credit facility and junior subordinated notes that were repaid in connection
with the Merger.

Liquidity and Capital Resources

   The Company finances its operations and growth from internally generated
funds and borrowings from commercial banks or other lenders. Management
anticipates that the Company's cash flow from operations and borrowing capacity
under its bank credit facilities, as amended effective as of June 26, 2002,
will be adequate for the Company to fund its normal working capital needs, debt
service requirements and planned capital expenditures for 2002.

   As of December 31, 2001, the Company had a $700 million Credit Facility,
consisting of approximately $400 million in Term Loans and a $300 million
Revolving Credit Facility, increasing to $350 million once certain debt
leverage ratios are achieved. Effective as of June 26, 2002, the Company
amended the Credit Facility (as amended, the "Amended Facility"). The Amended
Facility consists of approximately $400 million in Term Loans and a $300
million Revolving Credit Facility, temporarily limited to $250 million until
the funding of the Apollo investment discussed below.

                                      9

<PAGE>

   Under the Amended Facility, the Company is required to maintain compliance
with the following financial covenants, measured as of the end of each fiscal
quarter: (1) a minimum Fixed Charge Coverage Ratio (as defined); (2) a maximum
ratio of senior debt to pro forma EBITDA (as defined); (3) a maximum ratio of
Funded Debt (as defined) to pro forma EBITDA (as defined); (4) a minimum amount
of Consolidated Net Worth (as defined); and (5) a maximum amount of capital
expenditures. In addition, the Amended Facility restricts the Company's ability
to make acquisitions, pay dividends, capital expenditures and investments and
requires debt prepayment with future asset sales, issuances of debt or equity,
and excess cash flow (as defined in the Amended Facility).

   On June 27, 2002, the Company entered into a Securities Purchase Agreement
with affiliates of Apollo, whereby Apollo agreed to purchase $35.0 million of
equity securities of the Company (the "Apollo Investment"). In connection
therewith, the Company plans to enter into a rights offering whereby holders of
common stock, certain options and warrants, and the Convertible Preferred Stock
will receive rights to purchase up to $50.0 million of Company equity
securities, including the Apollo Investment. If the rights offering is fully
subscribed, the total amount raised, including the Apollo Investment, will be
$72.5 million. Pursuant to the Amended Facility, proceeds from the $35.0
million Apollo Investment, net of up to $4.0 million of certain permitted
expenses, are required to be applied against the terms loans, and 50 percent of
the proceeds received from the rights offering in excess of the Apollo
Investment, net of certain permitted expenses, will be applied toward permanent
reduction of the revolving credit facility and the term loans under the Amended
Facility, on a pro rata basis. In the event the Apollo Investment is not
received by October 15, 2002, the Company will be in immediate default under
the Amended Facility.

   For the years ended December 31, 2001, 2000 and 1999, the Company generated
$231.4 million, generated $49.6 million and used $3.5 million of cash from
operating activities, respectively. Operating cash flow before changes in
working capital and other operating accounts for the year ended December 31,
2001 totaled $104.0 million compared to $139.5 million for the year ended
December 31, 2000 and $85.7 million for the year ended December 31, 1999. The
decrease in 2001 compared to 2000 is primarily the result of lower
profitability levels in 2001. Net changes in working capital and other
operating accounts generated $127.4 million in 2001, primarily as a result of
management focus on working capital management and a general business slowdown.
Changes in operating accounts utilized $89.9 million for the year ended
December 31, 2000 and $89.2 million in 1999, primarily to support the growth in
the Company's operations in all its business segments.

   For the year ended December 31, 2001, the Company used $53.1 million of cash
in investing activities compared to $98.9 million for the year ended December
31, 2000 and $188.0 million for the year ended December 31, 1999. This decrease
is primarily the result of a reduction in cash paid for acquisitions, which
primarily consisted of payments of earned contingent consideration related to
businesses acquired in prior years. Capital expenditures in 2001 totaled $41.6
million, compared to $42.1 million in 2000 and $27.3 million in 1999. Capital
expenditures in 2001 primarily consisted of the expansion of facilities in
certain markets and the investment in information systems to support the
Company's integration and growth initiatives.

   The Company used $167.0 million of cash for financing activities in 2001,
primarily representing the repayment of amounts borrowed under the Company's
Revolving Credit Facility. In the aggregate, the Company repaid $153.3 million
of indebtedness during 2001. Financing activities provided cash of $35.2
million for the year ended December 31, 2000 and used cash of $6.1 million in
1999.

   Borrowings under the Amended Facility bear interest at variable rates,
ranging from 2.0% to 4.25% over the Eurodollar Rate (as defined in the Amended
Facility) and from 0.50% to 2.75% over the Alternate Base Rate (as defined in
the Amended Facility), depending, in each case, on the Company's total
debt-to-EBITDA ratio.

   The Company has entered into interest rate swap agreements, in the aggregate
notional amount of $110 million as of December 31, 2001, to manage its mix of
fixed and floating rate debt to partially hedge its exposure to potential
fluctuations in interest rates. All such agreements are with large creditworthy
financial institutions

                                      10

<PAGE>

and result in the Company paying a fixed rate of interest and receiving a
floating rate. At December 31, 2001, the Company's ratio of fixed rate debt to
total debt was 41% and the weighted average interest rate on its total debt was
8.64%, before considering the aforementioned interest rate swap agreements.
After giving effect to the interest rate swap agreements in effect at December
31, 2001, the ratio of fixed rate debt was 52% and the weighted average
interest rate on its total debt was 9.19%.

   In April 1999 and June 2001, the Company completed private offerings of $200
million and $135 million, respectively, of 10 1/2% senior subordinated notes
(the "Senior Subordinated Notes"). The Senior Subordinated Notes are unsecured
and guaranteed by the Company's subsidiaries, require interest to be paid
semi-annually on May 1 and November 1 of each year and mature on May 1, 2009.

   The Company may redeem the Senior Subordinated Notes, in whole or in part,
at any time on or after May 1, 2004 at specified redemption prices, plus
accrued interest. At any time (which may be more than once) before May 1, 2002,
the Company may redeem up to 35% of the outstanding Senior Subordinated Notes
with money raised in equity offerings under certain circumstances. Upon a
change of control of the Company (as defined in the indenture for the Senior
Subordinated Notes), the Company will be required to offer to purchase all of
the outstanding Senior Subordinated Notes at 101% of the face amount plus
accrued interest. Additionally, the indenture governing the Senior Subordinated
Notes contains certain covenants that restrict, among other things, the
Company's ability to incur indebtedness, pay dividends or repurchase capital
stock, incur liens, sell or otherwise dispose of a substantial portion of
assets or merge or consolidate with another entity.

   Concurrent with the closing of the Merger, affiliates of Apollo exchanged
approximately $106 million of Building One convertible junior subordinated
debentures and $150 million of cash for 256,191 shares of the Company's
Convertible Preferred Stock. The Convertible Preferred Stock, if not otherwise
converted, is redeemable in 2012, and is entitled to receive an annual dividend
of 7.25% payable quarterly. Under the terms of the Convertible Preferred Stock
agreement, until February 22, 2003, dividends on the Convertible Preferred
Stock may be paid in cash on a current basis or accumulated, at the option of
the Company. However, the Amended Facility prohibits the payment of cash
dividends. As a result, beginning in April 2003, the Convertible Preferred
Stock will accrue dividends at an annual rate of 9.25%. However, such event
does not trigger a right of acceleration of the Company's redemption
obligation. The Convertible Preferred Stock is convertible into shares of the
Company's common stock at any time by the holders at a conversion price of $14
per common share, subject to adjustment under certain circumstances.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has appointed three members of the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a total debt leverage ratio (total debt to EBITDA, as defined) of 4.00
to 1. This debt leverage covenant differs from the similar covenant included in
the Credit Facility and is not as clearly defined. The Company believes that it
did not maintain a leverage ratio less than 4.00 to 1 during the second quarter
of 2002. If such event is deemed both material and intentional, and so long as
the requirements of the covenant are not met, Apollo would be entitled to
appoint additional directors to the Company's Board of Directors, such that the
Apollo-appointed directors would constitute a majority of the Board of
Directors. Not meeting the total debt leverage covenant does not trigger a
right of acceleration of the Company's obligations under any of its debt or
outstanding participating preferred stock instruments.

   On May 11, 1999, Building One completed its recapitalization plan under a
tender offer, pursuant to which Building One repurchased approximately 30.8
million shares of its common stock and 1.1 million shares of common stock
underlying stock options for $564.4 million, including related expenses. This
tender offer was primarily funded with proceeds from long-term debt borrowings.

Other Contractual Obligations and Commercial Commitments

   As is common in the facilities services industry, the Company enters into
certain off-balance sheet arrangements in the ordinary course of business,
including non-cancelable operating leases, letters of credit and surety
guarantees. The Company does not own any "special purpose" financing
subsidiaries.

                                      11

<PAGE>

   The Company enters into operating leases for many of its facility, vehicle
and equipment needs. Such lease arrangements enable the Company to conserve
cash by paying monthly lease rental fees for the applicable assets rather than
purchasing them. At the end of the lease period, the Company has no further
obligation to the lessor. If the Company decides to cancel or terminate a lease
prior to the end of its term, the Company is typically obligated to pay the
remaining lease payments over the term of the lease, and in certain cases may
be allowed to sublet the asset to another party.

   The Company is occasionally required to post letters of credit generally
issued by a bank as collateral under certain insurance programs or to ensure
performance under contracts. A letter of credit commits the issuer to remit
specified amounts to the holder, if the holder demonstrates that the Company
has failed to meet its obligations under the letter of credit. If this were to
occur, the Company would be obligated to reimburse the issuer for any payments
the issuer was required to remit to the holder of the letter of credit.
Generally, a letter of credit is released when the Company has performed the
obligations that the letter of credit is securing. To date, the Company has not
had a claim made against a letter of credit that resulted in a payment made by
an issuer or the Company to the holder. The Company believes that it is
unlikely that it will have to fund claims made under letters of credit in the
foreseeable future.
   Particularly in connection with larger construction contracts, the Company
is often required to post bid or performance bonds issued by a financial
institution known as a surety. Such bonds provide a guarantee to the customer
that the Company will perform under the terms of the contract and be able to
pay its subcontractors and vendors. If the Company were to fail to perform its
obligations under the contract, the customer would have the right to demand
payment or services from the surety under the bond. The Company would then be
obligated to reimburse the surety for any expenses or outlays that it incurred
in the matter. The Company believes that it is unlikely that it will be
required to fund any material surety claims in the foreseeable future.

   At December 31, 2001, the Company's contractual obligations are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
                                   Less than
                                   one year   2003    2004     2005     2006   Thereafter   Total
                                   --------- ------- ------- -------- -------- ---------- ----------
<S>                                <C>       <C>     <C>     <C>      <C>      <C>        <C>
Debt obligations..................  $ 4,551  $ 5,613 $ 6,500 $ 94,000 $283,000  $428,250  $  821,914
Convertible Preferred Stock.......       --       --      --       --       --   292,799     292,799
Operating leases..................   42,633   38,664  31,992   25,582   16,928    74,422     230,221
                                    -------  ------- ------- -------- --------  --------  ----------
Total contractual cash obligations  $47,184  $44,277 $38,492 $119,582 $299,928  $795,471  $1,344,934
                                    =======  ======= ======= ======== ========  ========  ==========
</TABLE>

   In addition, the Company's other commercial commitments as of December 31,
2001 expire as follows (in thousands):

<TABLE>
<CAPTION>
                  Less than
                  one year    2003    2004     2005     2006   Thereafter   Total
                  --------- -------- ------- -------- -------- ---------- ----------
<S>               <C>       <C>      <C>     <C>      <C>      <C>        <C>
Letters of credit  $ 1,083  $    374 $    -- $     -- $     --  $     --  $    1,457
                   =======  ======== ======= ======== ========  ========  ==========
</TABLE>

Seasonality and Cyclicality

   A significant portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial, industrial
and residential facilities. The portion of the Company's business related to
new construction is subject to seasonal fluctuations. Specifically, the demand
for the Company's contracting services involving new construction is generally
lower during the winter months, when construction activities are reduced as a
result of inclement weather in many areas of the United States. In addition,
the demand for mechanical maintenance, repair and replacement services tends to
also be lower in the winter months due to lower air conditioning usage during
these months. Accordingly, the Company expects its revenues and operating
results generally will be lowest in the first fiscal quarter of the year.

   Historically, the construction industry has also been highly cyclical. The
level of new construction in the commercial and industrial sectors is affected
by, among other things, local and national economic conditions,

                                      12

<PAGE>

interest rates, inflationary concerns, levels of corporate and government
capital spending, capital market activities and governmental activities at the
regional and national levels. Factors impacting the level of new residential
construction tend to be regional in nature, and include general employment and
personal income levels, the availability and cost of financing for new home
buyers and the general economic outlook for a given geographic region.

   The Company performs contracting services related to new construction in a
variety of industries including, among others, automotive, heavy industrial,
commercial real estate development, residential housing, retail, health care,
education, government/institutional, petrochemical refining, data and
telecommunications, and sports and entertainment. Consequently, management
believes that a temporary slowdown in new construction related to any one of
these industries would not likely have a material impact on the Company's
financial condition. However, concurrent downturns in new construction in
multiple industries or geographic regions, or prolonged slowdowns in specific
industries or geographic regions, could have a material adverse impact on the
Company's business, including its financial condition, results of operations
and liquidity.

Inflation

   Inflation did not have a significant effect on the results of operations for
the years ended December 31, 2001, 2000 and 1999.

New Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and specifies criteria for recording intangible assets other than goodwill in
business combinations, noting that values allocated to dedicated workforce may
not be reported separately from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives will no longer be amortized
to expense, but instead will be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized to
expense.

   The Company adopted the provisions of SFAS No. 141 in July 2001 and the
provisions of SFAS No. 142 effective January 1, 2002. At January 1, 2002, net
goodwill balances attributable to each of the Company's reporting units were
tested for impairment by comparing the fair value of each reporting unit to its
carrying value. Based upon these impairment tests, the Company recognized a
charge of $451.9 million, or $7.06 per share, net of tax benefit of $48.2
million, at January 1, 2002, which is shown as a cumulative effect of a change
in accounting principle in the 2002 consolidated statement of operations. This
non-cash impairment charge has no impact on the calculation of financial
covenants under the Company's debt agreements.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes both SFAS No. 121 and the
accounting and reporting provisions of APB No. 30, for the disposal of a
business. SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the new rules change the criteria to be
met to classify an asset as held-for-sale. The new rules also broaden the
criteria regarding classification of a discontinued operation. The Company
adopted the provisions of SFAS No. 144 effective January 1, 2002. During the
three months ended March 31, 2002, the Company sold three business units that
are classified as discontinued operations in accordance with SFAS No. 144.
Accordingly, the amounts disclosed herein have been restated to reflect these
businesses as discontinued operations.

Risk Factors

   The Company has a significant amount of debt in relation to its current
level of operating income, which could limit the Company's flexibility with
respect to obtaining additional financing in the future to fund working capital
growth, debt service requirements or other purposes. This level of debt also
increases the Company's vulnerability to further adverse economic and industry
conditions and higher interest rates, and may place the Company at a
competitive disadvantage compared to competitors with less relative
indebtedness.

   The Company's ability to satisfy its debt obligations and other cash needs
will depend on, among other things, the Company's future operating performance
and its ability to refinance or exchange debt when

                                      13

<PAGE>

necessary. Each of these factors is, to a large extent, dependent on economic,
capital market, competitive and other factors beyond the Company's control. The
Company's future operating results are difficult to project and may be affected
by a number of factors, including general economic conditions, the level of new
construction of commercial and industrial facilities, commercial demand for
replacement of electrical, HVAC and plumbing systems, new housing starts, the
availability of qualified labor and project management personnel and other
factors in areas in which the Company operates.

   Particularly in connection with larger construction contracts, the Company
is often required to post bid or performance bonds issued by a financial
institution known as a surety. The surety industry has become an unsettled and
volatile market in recent months, in the aftermath of certain notable corporate
bankruptcies with significant surety exposure, other recent loss exposures and
other factors. Collectively, these events have caused certain reinsurers and
sureties to reevaluate their committed levels of underwriting and required
returns. The ultimate impact of these developments, if any, on the surety
market in general, or the Company specifically, cannot be determined at this
time. Historically, as needed in the normal course of operations, the Company
has been able to secure bid and performance bonds from its two current surety
sources. The Company continues to seek opportunities to expand it surety
relationships. However, given the uncertainty in the current surety market,
there can be no assurance that the Company's available bonding capacity will be
sufficient to satisfy its future bonding requirements.

   The Company has grown substantially by acquiring other companies in its
industry. The Company's future success depends in part on its ability to
integrate the businesses it has acquired and any future businesses it might
acquire into one enterprise with a common operating plan. Most of these
acquired businesses have recently changed or, in certain cases, are in the
process of changing their past operating processes and systems, such as
accounting, employment, purchasing, sales, estimating and project management.
There can be no assurance that the Company will be able to successfully
complete the integration of these businesses.

   As the holder of the Company's Convertible Preferred Stock and with the
pending Apollo Investment, Apollo is able to exert significant influence over
the election of the Company's directors and matters submitted to shareholders,
as well as over the Company's business operations. So long as Apollo
beneficially owns at least 25% of the Company's common stock underlying the
Convertible Preferred Stock, Apollo has the right to purchase for cash any
common stock equivalent that the Company offers in a private placement and the
right to preclude the Company from entering into various types of transactions
or making certain changes in capital structure or management without Apollo's
consent.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has appointed three members of the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a total debt leverage ratio (total debt to EBITDA, as defined) of 4.00
to 1. This debt leverage covenant differs from the similar covenant included in
the Credit Facility and is not as clearly defined. The Company believes that it
did not maintain a leverage ratio less than 4.00 to 1 during the second quarter
of 2002. If such event is deemed both material and intentional, and so long as
the requirements of the covenant are not met, Apollo would be entitled to
appoint additional directors to the Company's Board of Directors, such that the
Apollo-appointed directors would constitute a majority of the Board of
Directors. Not meeting the total debt leverage covenant does not trigger a
right of acceleration of the Company's obligations under any of its debt or
outstanding participating preferred stock instruments.

   Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should be
aware that the trading price of the Company's common stock may be subject to
wide fluctuations in response to quarterly variations in operating results,
general conditions in the construction industry, analyst recommendations and
earnings estimates, or other events.

                                      14

<PAGE>

Forward Looking Statements

   This Annual Report may contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on the Company's current expectations and involve risks and uncertainties
that could cause the Company's actual results to differ materially from those
set forth in the statements. The Company can give no assurance that such
expectations will prove to be correct. Factors that could cause the Company's
results to differ materially from current expectations include: the level of
demand for its services by multi-site customers; the level of interest rates,
which affects demand for the Company's services and its interest expense; the
potential impact of any acquisition, disposition, merger, joint venture or any
other significant financial transactions that could occur in the future;
working capital requirements; and general economic conditions; as well as other
factors listed in this Annual Report and in the Company's most recent Form 10-Q.


                                      15

<PAGE>

Item 8. Financial Statements and Supplementory Data.

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
Encompass Services Corporation:

   We have audited the accompanying consolidated balance sheets of Encompass
Services Corporation and Subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, shareholders' equity and other
comprehensive income and cash flows for each of the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Encompass
Services Corporation and Subsidiaries as of December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.

   As discussed in Note 5 to the consolidated financial statements, the Company
in 2001 changed its method of accounting for derivative instruments and hedging
activities.

KPMG LLP

Houston, Texas
February 19, 2002, except as to Note 17,
which is as of June 28, 2002

                                      16

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To Board of Directors and Shareholders of
Encompass Services Corporation

   In our opinion, the consolidated statements of operations, of shareholders'
equity and other comprehensive income and of cash flows for the year ended
December 31, 1999 present fairly, in all material respects, the results of
operations and cash flows of Encompass Services Corporation and its
subsidiaries for the year ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
February 12, 2000, except as to Note 13,
which is as of March 5, 2002, and Note 17,
which is as of June 28, 2002

                                      17

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                       (In thousands, except par value)

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                   ----------------------
                                      ASSETS                                          2001        2000
                                      ------                                       ----------  ----------
<S>                                                                                <C>         <C>
Current Assets:
   Cash and cash equivalents...................................................... $   20,572  $   10,094
   Accounts receivable, net of allowance of $45,344 and $17,270, respectively.....    728,203     969,469
   Inventories....................................................................     26,128      32,172
   Costs and estimated earnings in excess of billings on uncompleted contracts....    101,719     119,997
   Deferred tax assets............................................................     19,219      17,296
   Prepaid expenses and other current assets......................................     25,880      30,266
                                                                                   ----------  ----------
       Total current assets.......................................................    921,721   1,179,294
Property and equipment, net.......................................................    124,548     123,945
Goodwill, net.....................................................................  1,285,625   1,328,884
Other intangible assets, net......................................................     13,529      15,905
Deferred debt issuance costs, net.................................................     19,577      17,039
Other long-term assets............................................................     36,326      32,815
                                                                                   ----------  ----------
       Total assets............................................................... $2,401,326  $2,697,882
                                                                                   ==========  ==========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
                       ------------------------------------
Current Liabilities:
   Short-term borrowings and current maturities of long-term debt................. $    4,551  $    5,805
   Accounts payable...............................................................    269,226     280,630
   Billings in excess of costs and estimated earnings on uncompleted contracts....    159,226     208,302
   Accrued compensation...........................................................     88,578     105,343
   Other accrued liabilities......................................................     74,915      76,494
   Due to related parties.........................................................        989      11,385
                                                                                   ----------  ----------
       Total current liabilities..................................................    597,485     687,959
Long-term debt, net of current portion............................................    810,263     961,606
Deferred tax liabilities..........................................................      7,384      11,029
Other long-term liabilities.......................................................     20,461       4,404
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, $.001 par value; 50,000 shares
  authorized; 256 shares issued and outstanding...................................    289,621     269,009
Shareholders' equity:
   Common stock, $.001 par value; 200,000 shares authorized; 63,793 and 63,501
     shares outstanding, respectively.............................................         65          64
   Additional paid-in capital.....................................................    622,783     624,926
   Retained earnings..............................................................     67,307     139,045
   Treasury stock, at cost........................................................    (10,425)       (160)
   Accumulated other comprehensive loss...........................................     (3,618)         --
                                                                                   ----------  ----------
       Total shareholders' equity.................................................    676,112     763,875
                                                                                   ----------  ----------
       Total liabilities and shareholders' equity................................. $2,401,326  $2,697,882
                                                                                   ==========  ==========
</TABLE>


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

                                      18

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                              ----------------------------------
                                                                 2001        2000        1999
                                                              ----------  ----------  ----------
<S>                                                           <C>         <C>         <C>
Revenues..................................................... $3,825,268  $3,902,734  $1,731,649
Cost of services.............................................  3,221,586   3,208,050   1,389,340
                                                              ----------  ----------  ----------
   Gross profit..............................................    603,682     694,684     342,309
Selling, general and administrative expenses.................    443,432     431,019     195,215
Provision for doubtful accounts..............................     37,258       6,894         766
Amortization of goodwill and other intangible assets.........     36,274      32,724      15,620
Merger and related charges...................................         --       7,800          --
Costs to exit certain activities and related costs...........         --      12,200          --
Restructuring and recapitalization charges...................         --          --       8,020
                                                              ----------  ----------  ----------
   Operating income..........................................     86,718     204,047     122,688
Other income (expense):
   Interest income...........................................        966         825       5,737
   Interest expense..........................................    (84,311)    (88,101)    (35,618)
   Other, net................................................     (1,764)       (503)        255
                                                              ----------  ----------  ----------
Income from continuing operations before income tax provision      1,609     116,268      93,062
Income tax provision.........................................     16,022      57,011      41,111
                                                              ----------  ----------  ----------
Income (loss) from continuing operations.....................    (14,413)     59,257      51,951
Income (loss) from discontinued operations, net of tax.......    (10,222)      4,096       1,111
Loss on disposal of discontinued operations, net of tax......    (26,491)         --          --
                                                              ----------  ----------  ----------
Income (loss) before extraordinary loss......................    (51,126)     63,353      53,062
Extraordinary loss on debt settlement, net of tax............         --      (8,057)         --
                                                              ----------  ----------  ----------
Net income (loss)............................................    (51,126)     55,296      53,062
Less convertible preferred stock dividends...................    (20,612)    (16,568)         --
                                                              ----------  ----------  ----------
Net income (loss) available to common shareholders........... $  (71,738) $   38,728  $   53,062
                                                              ==========  ==========  ==========
Basic earnings (loss) per share:
   Income (loss) from continuing operations.................. $     (.55) $      .72  $     1.25
   Income (loss) from discontinued operations, net of tax....       (.16)        .07         .03
   Loss on disposal of discontinued operations, net of tax...       (.41)         --          --
                                                              ----------  ----------  ----------
   Income (loss) before extraordinary loss...................      (1.12)        .79        1.28
   Extraordinary loss on debt settlement, net of tax.........         --        (.14)         --
                                                              ----------  ----------  ----------
   Net income (loss)......................................... $    (1.12) $      .65  $     1.28
                                                              ==========  ==========  ==========
   Weighted average shares outstanding.......................     63,845      59,234      41,538
                                                              ==========  ==========  ==========
Diluted earnings (loss) per share:
   Income (loss) from continuing operations.................. $     (.55) $      .70  $     1.19
   Income (loss) from discontinued operations, net of tax....       (.16)        .07         .02
   Loss on disposal of discontinued operations, net of tax...       (.41)         --          --
                                                              ----------  ----------  ----------
   Income (loss) before extraordinary loss...................      (1.12)        .77        1.21
   Extraordinary loss on debt settlement, net of tax.........         --        (.14)         --
                                                              ----------  ----------  ----------
   Net income (loss)......................................... $    (1.12) $      .63  $     1.21
                                                              ==========  ==========  ==========
   Weighted average shares outstanding.......................     63,845      61,089      46,406
                                                              ==========  ==========  ==========
</TABLE>

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

                                      19

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME

                                (In thousands)

<TABLE>
<CAPTION>
                                                                             Common Stock
                                                                     ----------------------------

                                                                                        Additional
                                                                       Shares            Paid-in   Retained  Treasury
                                                                     Outstanding Amount  Capital   Earnings   Stock
                                                                     ----------- ------ ---------- --------  --------
<S>                                                                  <C>         <C>    <C>        <C>       <C>
BALANCE, December 31, 1998..........................................    56,574    $ 56  $ 832,503  $ 47,255  $(41,832)
  Shares purchased under stock purchase and option plans............       233       1      1,811        --        --
  Common stock issued or to be issued in acquisitions...............     9,101       9     96,980        --        --
  Cancellation of treasury stock....................................        --      --    (41,832)       --    41,832
  Repurchase of shares in Tender Offer..............................   (30,773)    (31)  (562,973)       --        --
  Compensation expense related to options exercised in Tender Offer.        --      --      2,629        --        --
  Unrealized loss on marketable securities, net of tax of $179......        --      --         --        --        --
  Net income........................................................        --      --         --    53,062        --

  Total comprehensive income........................................        --      --         --        --        --
                                                                       -------    ----  ---------  --------  --------
BALANCE, December 31, 1999..........................................    35,135      35    329,118   100,317        --
  Shares purchased under stock purchase and option plans............       232      --      1,074        --        --
  Common stock issued in Merger.....................................    27,909      28    282,404        --        --
  Common stock issued or to be issued in other acquisitions.........       441       1     13,390        --        --
  Purchase of treasury stock........................................       (32)     --         --        --      (160)
  Shares received in settlement of litigation.......................      (184)     --     (1,060)       --        --
  Reclassification adjustment, net of tax of $476...................        --      --         --        --        --
  Net income........................................................        --      --         --    55,296        --
  Convertible preferred stock dividends.............................        --      --         --   (16,568)       --

  Total comprehensive income........................................        --      --         --        --        --
                                                                       -------    ----  ---------  --------  --------
BALANCE, December 31, 2000..........................................    63,501      64    624,926   139,045      (160)
  Shares purchased under stock purchase and option plans............       774      --      3,020        --        --
  Common stock issued in acquisitions...............................     1,129       1     (4,656)       --        --
  Purchase of treasury stock........................................    (1,382)     --         --        --    (9,130)
  Treasury stock acquired in connection with sales of businesses....      (301)     --         --        --    (1,519)
  Treasury stock issued in acquisitions.............................        72      --       (507)       --       384
  Cumulative effect of an accounting change, net of tax of $912.....        --      --         --        --        --
  Net losses on interest rate swaps, net of tax of $2,759...........        --      --         --        --        --
  Reclassification adjustments related to interest rate swaps,
   net of tax of $1,454.............................................        --      --         --        --        --
  Net loss..........................................................        --      --         --   (51,126)       --
  Convertible preferred stock dividends.............................        --      --         --   (20,612)       --

  Total comprehensive loss..........................................        --      --         --        --        --
                                                                       -------    ----  ---------  --------  --------
BALANCE, December 31, 2001..........................................    63,793    $ 65  $ 622,783  $ 67,307  $(10,425)
                                                                       =======    ====  =========  ========  ========
</TABLE>
<TABLE>
<CAPTION>


                                                                      Accumulated
                                                                         Other         Total         Total
                                                                     Comprehensive Shareholders' Comprehensive
                                                                         Loss         Equity     Income (Loss)
                                                                     ------------- ------------- -------------
<S>                                                                  <C>           <C>           <C>
BALANCE, December 31, 1998..........................................    $  (445)     $ 837,537
  Shares purchased under stock purchase and option plans............         --          1,812
  Common stock issued or to be issued in acquisitions...............         --         96,989
  Cancellation of treasury stock....................................         --             --
  Repurchase of shares in Tender Offer..............................         --       (563,004)
  Compensation expense related to options exercised in Tender Offer.         --          2,629
  Unrealized loss on marketable securities, net of tax of $179......       (268)          (268)    $   (268)
  Net income........................................................         --         53,062       53,062
                                                                                                   --------
  Total comprehensive income........................................         --             --     $ 52,794
                                                                        -------      ---------     ========
BALANCE, December 31, 1999..........................................       (713)       428,757
  Shares purchased under stock purchase and option plans............         --          1,074
  Common stock issued in Merger.....................................         --        282,432
  Common stock issued or to be issued in other acquisitions.........         --         13,391
  Purchase of treasury stock........................................         --           (160)
  Shares received in settlement of litigation.......................         --         (1,060)
  Reclassification adjustment, net of tax of $476...................        713            713     $    713
  Net income........................................................         --         55,296       55,296
  Convertible preferred stock dividends.............................         --        (16,568)
                                                                                                   --------
  Total comprehensive income........................................         --             --     $ 56,009
                                                                        -------      ---------     ========
BALANCE, December 31, 2000..........................................         --        763,875
  Shares purchased under stock purchase and option plans............         --          3,020
  Common stock issued in acquisitions...............................         --         (4,655)
  Purchase of treasury stock........................................         --         (9,130)
  Treasury stock acquired in connection with sales of businesses....         --         (1,519)
  Treasury stock issued in acquisitions.............................         --           (123)
  Cumulative effect of an accounting change, net of tax of $912.....     (1,488)        (1,488)    $ (1,488)
  Net losses on interest rate swaps, net of tax of $2,759...........     (4,503)        (4,503)      (4,503)
  Reclassification adjustments related to interest rate swaps,
   net of tax of $1,454.............................................      2,373          2,373        2,373
  Net loss..........................................................         --        (51,126)     (51,126)
  Convertible preferred stock dividends.............................         --        (20,612)
                                                                                                   --------
  Total comprehensive loss..........................................         --             --     $(54,744)
                                                                        -------      ---------     ========
BALANCE, December 31, 2001..........................................    $(3,618)     $ 676,112
                                                                        =======      =========
</TABLE>

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

                                      20

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (In thousands)

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                                ---------------------------------
                                                                                   2001        2000        1999
                                                                                ---------  -----------  ---------
<S>                                                                             <C>        <C>          <C>
Cash flows from operating activities:
  Net income (loss)............................................................ $ (51,126) $    55,296  $  53,062
  Adjustments to reconcile net income (loss) to net cash provided by (used in)
   operating activities:
    Loss (income) from discontinued operations, net of tax.....................    10,222       (4,096)    (1,111)
    Loss on disposal of discontinued operations, net of tax....................    26,491           --         --
    Extraordinary loss on debt settlement, net of tax..........................        --        8,057         --
    Depreciation and amortization..............................................    72,222       62,517     30,858
    Provision for doubtful accounts............................................    37,258        6,894        766
    Provision (benefit) for deferred income taxes..............................     2,579        4,453       (843)
    Other non-cash charges.....................................................     6,403        6,356      2,978
    Changes in operating assets and liabilities:
     Accounts receivable.......................................................   147,359     (199,791)   (89,156)
     Costs and estimated earnings in excess of billings on
       uncompleted contracts...................................................    10,520       (6,649)   (22,849)
     Prepaid expenses and other current assets.................................    12,946       10,443    (11,635)
     Billings in excess of costs and estimated earnings on
       uncompleted contracts...................................................   (46,288)      56,153     15,778
     Accounts payable and accrued liabilities..................................    (7,252)      66,078     18,213
     Change in other assets and liabilities....................................    10,061      (16,074)       394
                                                                                ---------  -----------  ---------
       Net cash provided by (used in) operating activities.....................   231,395       49,637     (3,545)
                                                                                ---------  -----------  ---------
Cash flows from investing activities:
  Cash paid for acquisitions, net of cash acquired.............................   (16,872)     (59,617)  (161,084)
  Purchases of property and equipment..........................................   (41,550)     (42,139)   (27,264)
  Proceeds from sales of businesses, property and equipment....................     5,370        4,994        584
  Other, net...................................................................        --       (2,098)      (258)
                                                                                ---------  -----------  ---------
       Net cash used in investing activities...................................   (53,052)     (98,860)  (188,022)
                                                                                ---------  -----------  ---------
Cash flows from financing activities:
  Net payments on short-term debt..............................................    (1,003)      (9,869)    (4,907)
  Payments on long-term debt...................................................  (918,063)  (1,462,243)   (45,914)
  Proceeds from long-term debt issuance........................................   765,800    1,522,078    630,592
  Payment of debt issuance costs...............................................    (7,522)     (11,952)   (22,467)
  Issuance of preferred stock, net of issuance costs...........................        --      146,250         --
  Repurchase and retirement of GroupMAC common stock in the Merger.............        --     (150,000)        --
  Repurchase of common stock in Tender Offer, including related expenses.......        --           --   (564,407)
  Purchase of treasury stock...................................................    (9,130)        (160)        --
  Distribution to minority shareholders........................................        --           --       (842)
  Proceeds from issuance of stock under employee stock purchase and
   stock option plans..........................................................     2,950        1,074      1,812
                                                                                ---------  -----------  ---------
       Net cash provided by (used in) financing activities.....................  (166,968)      35,178     (6,133)
                                                                                ---------  -----------  ---------
Net cash flows provided by (used in) discontinued operations...................      (897)       7,054      1,689
                                                                                ---------  -----------  ---------
Net increase (decrease) in cash and cash equivalents...........................    10,478       (6,991)  (196,011)
Cash and cash equivalents, beginning of period.................................    10,094       17,085    213,096
                                                                                ---------  -----------  ---------
Cash and cash equivalents, end of period....................................... $  20,572  $    10,094  $  17,085
                                                                                =========  ===========  =========
Supplemental Disclosures of Cash Flow Information:
  Interest paid................................................................ $  80,032  $    85,146  $  22,422
  Income taxes paid............................................................    16,559       39,820     53,673
</TABLE>

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

                                      21

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     (In thousands, except per share data)

1.  BUSINESS AND ORGANIZATION

   Encompass Services Corporation ("Encompass", or the "Company"), a Texas
corporation, was formed to build a national company providing mechanical and
electrical services in the commercial, industrial and residential markets. On
February 22, 2000, the shareholders of Group Maintenance America Corp.
("GroupMAC") and Building One Services Corporation ("Building One") approved a
merger of the two companies (the "Merger"). In connection with the Merger,
GroupMAC changed its name to Encompass Services Corporation.

   GroupMAC was the surviving legal entity in the Merger. However, for
accounting purposes, Building One was deemed to be the acquirer and,
accordingly, the Merger was accounted for as a "reverse acquisition". Under
this method of accounting, Encompass' historical results for periods prior to
the Merger are the same as Building One's historical results. All share and per
share information has been restated to reflect the exchange ratio on a
retroactive basis. See Note 3 for discussion of the Merger.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation

   The accompanying consolidated financial statements and related notes include
the accounts of Encompass and the companies acquired in business combinations
accounted for under the purchase method from their respective acquisition dates.

  Principles of Consolidation

   The consolidated financial statements include the accounts of Encompass and
its majority owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation. The Company's Global Technologies
segment was discontinued in September 2001 and three additional business units
were discontinued in 2002. See Notes 16 and 17 for further discussion. Certain
prior year amounts have been reclassified to conform to the current year
presentation.

  Use of Estimates

   The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

  Revenue Recognition

   Revenues from construction contracts are recognized on the
percentage-of-completion accounting method, measured by the percentage of costs
incurred to date to the estimated total costs at completion for each contract
(the "cost-to-cost" method). Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability may result in
revisions to estimated costs and revenues and are recognized in the period in
which the revisions are determined. Revenues from work orders are recognized as
services are performed. Revenues from service and maintenance contracts are
recognized over the life of contracts.

                                      22

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   Receivable balances pursuant to retainage provisions in construction
contracts are due upon completion of the contracts and acceptance by the
customer. Based upon the Company's experience in recent years with similar
contracts, the retention balance at each balance sheet date is generally billed
and collected within the subsequent year. The unbilled retainage balance at
December 31, 2001 and 2000 was $122,872 and $151,477, respectively, and is
included in accounts receivable in the consolidated balance sheets.

  Concentration of Credit Risk

   Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company grants credit, generally without collateral, to its customers,
which primarily include general contractors, property owners and developers,
governmental agencies, educational and medical institutions, and commercial and
industrial companies in a variety of industries. The Company is subject to
potential credit risk related to changes in business and economic factors
throughout the United States. However, the Company is entitled to payment for
work performed and often has certain lien rights in that work. Additionally,
management continually monitors the financial condition of its customers to
reduce risk of loss. The Company provides an allowance for doubtful accounts
when future collection is considered doubtful.

  Financial Instruments

   The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, interest rate swaps and short- and
long-term debt. At December 31, 2001 and 2000, the Company's 101/2% Senior
Subordinated Notes had a carrying value, excluding unamortized discount, of
$335,000 and $200,000, respectively, and a fair value of $217,750 and $130,000,
respectively. The fair value of the Company's interest rate swaps at December
31, 2001 was a liability of $6,761. The Company believes that, with the
exception of the 101/2% Senior Subordinated Notes, the carrying values of
financial instruments on the consolidated balance sheets approximate their fair
value. See Note 5.

  Cash and Cash Equivalents

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

  Inventories

   Inventories consist primarily of purchased materials, parts and supplies
held for use in the ordinary course of business. Inventories are valued at the
lower of cost or market, with cost determined on a first-in, first-out ("FIFO")
basis.

  Property and Equipment

   Property and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the shorter of the
remaining lease term or the estimated useful life of the asset. As events or
circumstances dictate, the Company reviews the carrying amounts of property and
equipment for impairment. The amount of impairment, if any, is measured based
on comparing the estimated future undiscounted cash flows associated with the
asset to its carrying value.

                                      23

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   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. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized as other income (expense) in the consolidated statements
of operations.

  Goodwill

   Goodwill represents the excess of the aggregate purchase price over the fair
value of net identifiable assets of businesses acquired under the purchase
method of accounting. Goodwill is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The Company reviews the carrying value of
goodwill for impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable. At December 31, 2001 and 2000,
accumulated amortization of goodwill was $89,306 and $55,010, respectively. See
Note 18 for discussion of new accounting policy adopted January 1, 2002.

  Other Intangible Assets

   Other intangible assets represent the portion of purchase price paid in the
Merger which has been allocated, based on independent appraisals, to the value
of acquired customer lists and the value of dedicated workforces. Costs
allocated to these assets are being amortized on a straight-line basis over the
remaining estimated useful lives of these assets, as determined principally by
the underlying characteristics of customer retention and workforce turnover.
The amounts allocated to the value of the customer lists and dedicated
workforce at the Merger date are being amortized over 15 years and 5 years,
respectively. The Company reviews the carrying value of these intangibles for
impairment whenever events or circumstances indicate that the carrying amounts
may not be recoverable. At December 31, 2001 and 2000, accumulated amortization
related to other intangible assets was $4,356 and $1,980, respectively. See
Note 18 for discussion of new accounting policy adopted January 1, 2002.

  Deferred Debt Issuance Costs

   Deferred debt issuance costs relate to the Company's primary credit facility
and senior subordinated notes and are amortized to interest expense over the
scheduled maturity of the related debt.

  Stock-Based Compensation

   The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", as amended. Accordingly,
compensation expense for stock options is measured as the excess, if any, of
the quoted market price of the Company's common stock at the date of grant over
the amount an employee must pay to acquire the common stock. The Company has
also provided the pro forma disclosures required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".

                                      24

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


  Warranty Costs

   The Company generally warrants all of its work for a period of one year from
the date of installation. A provision for estimated warranty costs is recorded
at the time a product is sold or service is rendered based on the historical
level of warranty claims and management's estimate of future costs.

  Income Taxes

   The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when necessary to
reduce net deferred tax assets to the amount expected to be realized.

  Earnings Per Share

   Basic earnings per share have been calculated by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share are computed
considering the dilutive effect of stock options, warrants, the Convertible
Preferred Stock and, in 1999, the convertible junior subordinated debentures.
See Note 15.

  Other Comprehensive Income

   Other comprehensive income refers to revenues, 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 income is attributed to adjustments for unrealized losses, net of
tax, on marketable securities available for sale and changes in the fair value
of interest rate swap agreements. See Note 5 for further discussion of
accounting for interest rate swap agreements.

  New Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and specifies criteria for recording intangible assets other than goodwill in
business combinations, noting that values allocated to dedicated workforce may
not be reported separately from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives will no longer be amortized
to expense, but instead will be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized to
expense.

   The Company adopted the provisions of SFAS No. 141 in July 2001 and the
provisions of SFAS No. 142 effective January 1, 2002. See Note 18 for further
discussion.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes both SFAS No. 121 and the
accounting and reporting provisions of APB No. 30, for the disposal of a
business. SFAS No. 144 provides a single accounting model for long-lived assets
to be

                                      25

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)

disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the new rules change the criteria to be
met to classify an asset as held-for-sale. The new rules also broaden the
criteria regarding classification of a discontinued operation. The Company
adopted the provisions of SFAS No. 144 effective January 1, 2002. See Note 17
for further discussion.

3. BUSINESS COMBINATIONS

   On February 22, 2000, the shareholders of GroupMAC and Building One approved
the Merger. Under the terms of the Merger, each outstanding share of Building
One common stock was converted into 1.25 shares of GroupMAC common stock. As
part of the Merger, GroupMAC shareholders could elect to receive cash for up to
50% of their shares of Encompass common stock at $13.50 per share, subject to
proration. As a result of this election, 11,052 shares of Encompass common
stock were canceled in the Merger. The Merger was accounted for as a purchase
under generally accepted accounting principles. GroupMAC, which changed its
name to Encompass Services Corporation, was the surviving legal entity in the
Merger. However, for accounting purposes, Building One was deemed to be the
acquirer and, accordingly, the Merger was accounted for as a "reverse
acquisition".

   Concurrent with the closing of the Merger, affiliates of Apollo Management,
L.P. ("Apollo") exchanged approximately $106,191 of Building One convertible
junior subordinated debentures and $150,000 in cash for 256 shares of Encompass
Convertible Preferred Stock. See Note 7 for further discussion of the
Convertible Preferred Stock. The cash proceeds from the issuance of the
Convertible Preferred Stock were used to fund the cash election feature of the
Merger discussed above. In connection with the Merger, Apollo received a fee of
$2,500.

   Pursuant to the Merger, Encompass entered into a new credit agreement, the
proceeds of which were used to repay the existing revolving credit facilities
of GroupMAC and Building One, as well as GroupMAC's senior subordinated notes.
See Note 5 for further discussion of the credit agreement.

   The allocation of the total consideration to the assets and liabilities of
GroupMAC and the resultant goodwill are summarized as follows:

<TABLE>
        <S>                                                    <C>
        Estimated fair value of common stock consideration.... $282,432
        Long-term debt assumed................................  407,904
        Other long-term liabilities assumed...................    7,320
        Transaction costs.....................................    7,358
        Working capital.......................................  (47,807)
        Property and equipment, net and other long-term assets  (63,859)
        Intangible asset--value of dedicated workforce........   (8,878)
        Intangible asset--value of customer list..............   (9,007)
                                                               --------
        Goodwill.............................................. $575,463
                                                               ========
</TABLE>

                                      26

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   The following unaudited pro forma combined statement of operations data
utilize the financial information of GroupMAC and Building One for the periods
indicated, which give effect to the Merger and the acquisitions made by each
company during 1999 including amounts owed in connection with those
acquisitions, as if the Merger and all of the acquisitions were effective as of
the beginning of the period presented.

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                   -----------------------
                                                      2000        1999
                                                   ----------  ----------
       <S>                                         <C>         <C>
       Revenues................................... $4,164,004  $3,559,661
       Net income.................................     68,578      95,900
       Net income available to common shareholders     49,182      76,503
       Net income per share:......................
          Basic................................... $     0.75  $     1.17
          Diluted................................. $     0.75  $     1.13
</TABLE>

   Significant pro forma adjustments included in the above amounts consist of
(i) compensation differentials, (ii) goodwill amortization over a period of 40
years, (iii) interest expense as if borrowings outstanding as of March 31, 2000
had been outstanding for the first quarter of 2000 and throughout 1999 at
interest rates in effect on March 31, 2000, (iv) the issuance of the
Convertible Preferred Stock concurrent with the Merger and (v) federal and
state income tax provisions based on pro forma operating results. Net income
per share assumes all shares issued for the Merger and the acquisitions,
including subsequently earned contingent consideration, were outstanding from
the beginning of the periods presented. The pro forma results presented above
are not necessarily indicative of actual results that might have occurred had
the Merger and the acquisitions occurred at the beginning of the period
presented.

  Merger and Related Charges

   In connection with the Merger and related transactions, the Company recorded
the following costs and expenses related to severance, office closing costs and
other related costs:

<TABLE>
<CAPTION>
                                                Office
                                      Severance Closing Other   Total
                                      --------- ------- -----  -------
        <S>                           <C>       <C>     <C>    <C>
        Total charges................  $ 6,100  $1,000  $ 700  $ 7,800
        Non-cash portion.............       --      --   (400)    (400)
        Payments in 2000.............   (6,100)   (329)    --   (6,429)
                                       -------  ------  -----  -------
        Accrual at December 31, 2000.       --     671    300      971
        Payments in 2001.............       --    (671)  (300)    (971)
                                       -------  ------  -----  -------
        Accrual at December 31, 2001.  $    --  $   --  $  --  $    --
                                       =======  ======  =====  =======
</TABLE>

   The severance and office closing costs relate to the closing of Building
One's corporate headquarters in Minneapolis, Minnesota and the resulting
consolidation with the GroupMAC corporate office in Houston, Texas. As a result
of this plan, the Company incurred severance costs for substantially all of the
employees in the Building One corporate office, identified certain assets which
were no longer of service and incurred lease termination costs. Severance costs
covered 20 employees, all of whom were terminated in 2000.

   In addition, in connection with the Merger, the Company recorded costs of
$3,500 related to severance for twelve former GroupMAC employees, all of whom
were terminated in 2000. These costs were charged to goodwill, and
substantially all amounts were paid during 2000.

                                      27

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


  Costs to Exit Certain Activities and Related Costs

   In connection with the Merger and related transactions, the Company recorded
a charge for the shutdown of certain operations, the reorganization of other
operations and other costs resulting from the Merger. The following table sets
forth a summary of these costs:

<TABLE>
         <S>                                                    <C>
         Shutdown of demolition and site preparation operations $ 9,800
         Relocation of cleaning systems management offices.....   1,600
         Other costs resulting from the Merger.................     800
                                                                -------
            Total.............................................. $12,200
                                                                =======
</TABLE>

   The costs related to the shutdown of the demolition and site preparation
operations include (i) $5,200 related to obligations under existing jobs in
progress, (ii) $2,000 estimated for uncollectible accounts receivable, (iii)
$1,100 related to claims against the Company, (iv) $800 for impaired assets and
(v) $700 related to lease termination costs and other expenses. The Company
substantially completed the shutdown of these operations during 2001.

   The Company relocated the cleaning systems management offices from January
through May 2000. The related costs included (i) $600 for severance and related
costs, (ii) $500 for impaired assets, (iii) $300 related to lease termination
and related costs and (iv) $200 for other miscellaneous items. Substantially
all of these amounts were paid during 2000.

  Other Business Combinations

   The Company has not acquired any businesses since May 2000. In May 2000, the
Company acquired a business for cash paid of $10,207 and 296 shares of common
stock. The Company assumed approximately $1,518 of debt in this transaction.
The total purchase price was allocated to the fair value of the net assets
acquired, resulting in goodwill of $9,397.

   During the year ended December 31, 1999, the Company completed 23 business
combinations that were accounted for under the purchase method of accounting.
The consolidated financial statements include the results of these acquired
businesses from their respective dates of acquisition. The aggregate
consideration paid for these acquisitions consisted of 5,216 shares of the
Company's common stock, $123,380 in cash, including applicable professional
fees, and $2,410 of debt assumed. The total purchase price was allocated to the
fair value of the net assets acquired, resulting in goodwill of $133,818.

  Contingent Consideration Agreements

   In conjunction with acquisitions, the Company entered into certain
contingent consideration agreements which provided for the payment of cash
and/or shares of common stock based on the financial performance of such
acquired operations during the one- to two-year period immediately following
the acquisition. During the years ended December 31, 2001 and 2000, $3,224 and
$62,297, respectively, of consideration was recorded to goodwill related to
contingent consideration and final purchase price settlements of acquired
companies. The cash payable is reflected as due to related parties and the
estimated value of the shares to be issued is reflected as additional paid-in
capital in the consolidated balance sheet. These common shares to be issued are
included in weighted average shares outstanding since the date earned for
purposes of computing basic earnings per share and since the later of the date
of acquisition or the beginning of the year for purposes of computing diluted
earnings per share.

                                      28

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   During the years ended December 31, 2001 and 2000, $16,872 and $63,030 of
cash was paid, respectively, and 1,201 and 145 shares were issued,
respectively, related to previously recorded contingent consideration and final
purchase price settlements. There are no significant amounts of unearned
contingent consideration under these agreements at December 31, 2001.

   A rollforward of the due to related parties balance in the consolidated
balance sheets related to the above activity is as follows:

<TABLE>
<CAPTION>
                                                                           2001      2000
                                                                         --------  --------
<S>                                                                      <C>       <C>
Balance at beginning of year............................................ $ 11,385  $ 10,290
Balances assumed in the Merger..........................................       --    13,207
Record cash contingent consideration and final purchase price settlement    6,476    50,918
Payments................................................................  (16,872)  (63,030)
                                                                         --------  --------
Balance at end of year.................................................. $    989  $ 11,385
                                                                         ========  ========
</TABLE>

4. CERTAIN BALANCE SHEET ACCOUNTS

  Allowance for Doubtful Accounts

   The following summarizes the activity in the allowance for doubtful accounts:

<TABLE>
<CAPTION>
                                                           2001      2000
                                                         --------  -------
    <S>                                                  <C>       <C>
    Balance at beginning of year........................ $ 17,270  $ 2,976
    Provision for bad debts from continuing operations..   37,258    6,894
    Provision for bad debts from discontinued operations   18,658    1,349
    Allowance balances from acquired companies..........       --   11,427
    Write-off of bad debts, net of recoveries...........  (27,842)  (5,376)
                                                         --------  -------
    Balance at end of year.............................. $ 45,344  $17,270
                                                         ========  =======
</TABLE>

  Costs and Estimated Earnings on Uncompleted Contracts

   The summary of the status of uncompleted contracts is as follows:

<TABLE>
<CAPTION>
                                                        December 31,
                                                  ------------------------
                                                      2001         2000
                                                  -----------  -----------
     <S>                                          <C>          <C>
     Costs incurred on uncompleted contracts..... $ 3,864,476  $ 3,636,828
     Estimated earnings recognized, net of losses     627,496      675,568
                                                  -----------  -----------
                                                    4,491,972    4,312,396
     Less billings to date.......................  (4,549,479)  (4,400,701)
                                                  -----------  -----------
                                                  $   (57,507) $   (88,305)
                                                  ===========  ===========
</TABLE>

                                      29

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                      December 31,
                                                                  --------------------
                                                                     2001       2000
                                                                  ---------  ---------
<S>                                                               <C>        <C>
Costs and estimated earnings in excess of billings on uncompleted
  contracts...................................................... $ 101,719  $ 119,997
Billings in excess of costs and estimated earnings on uncompleted
  contracts......................................................  (159,226)  (208,302)
                                                                  ---------  ---------
                                                                  $ (57,507) $ (88,305)
                                                                  =========  =========
</TABLE>

  Property and Equipment

   The principal categories and estimated useful lives of property and
equipment are as follows:

<TABLE>
<CAPTION>
                                                            December 31,
                                             Estimated   ------------------
                                            Useful Lives   2001      2000
                                            ------------ --------  --------
   <S>                                      <C>          <C>       <C>
   Land....................................          --  $  1,596  $  2,264
   Buildings and improvements.............. 20-30 years     9,444    11,363
   Service and other vehicles..............   4-7 years    32,881    35,159
   Machinery and equipment.................  5-10 years    64,039    54,960
   Office equipment, furniture and fixtures  5-10 years    66,084    45,915
   Leasehold improvements..................  2-15 years    35,289    23,801
                                                         --------  --------
                                                          209,333   173,462
   Less accumulated depreciation...........               (84,785)  (49,517)
                                                         --------  --------
                                                         $124,548  $123,945
                                                         ========  ========
</TABLE>

5. SHORT- AND LONG-TERM DEBT

   Short- and long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                          ------------------
                                                            2001      2000
                                                          --------  --------
  <S>                                                     <C>       <C>
  Revolving Credit Facility (7.4% and 9.0%, respectively) $ 90,000  $369,000
  Term loans (6.1% and 8.9%, respectively)...............  294,000   297,000
  Institutional term loan (7.0% and 10.2%, respectively).   98,250    99,500
  101/2% Senior Subordinated Notes, net of discount......  327,900   196,243
  Other borrowings.......................................    4,664     5,668
                                                          --------  --------
                                                           814,814   967,411
  Less: short-term borrowings and current maturities.....   (4,551)   (5,805)
                                                          --------  --------
  Total long-term debt................................... $810,263  $961,606
                                                          ========  ========
</TABLE>


                                      30

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)

  Credit Facility

   On February 22, 2000, in connection with the Merger, the Company entered
into an $800,000 senior credit facility (the "Credit Facility") and borrowed
funds thereunder to repay prior indebtedness of GroupMAC and Building One. At
December 31, 2001, the Credit Facility included a revolving credit facility
described below expiring in February 2005, a $130,000 term loan, a $170,000
term loan and a $100,000 institutional term loan. Borrowings under the Credit
Facility are secured by substantially all assets of the Company. The
availability of borrowings under the Credit Facility is subject to the
Company's ability to meet certain specified conditions, including compliance
with certain financial covenants and ratios measured as of the end of each
fiscal quarter. On November 9, 2001, the Company amended the Credit Facility.
At December 31, 2001, the amended terms provided for a revolving credit
facility of $300,000, increasing to $350,000 once certain debt leverage ratios
were achieved. At December 31, 2001, borrowings under the amended Credit
Facility bore interest at variable rates, ranging from 2.0% to 3.75% over the
Eurodollar Rate (as defined in the Credit Facility) and from 0.50% to 2.25%
over the Alternate Base Rate (as defined in the Credit Facility), depending, in
each case, on the Company's total debt-to-EBITDA ratio. In addition, the
amendment established certain restrictions on the Company's ability to make
acquisitions, capital expenditures and investments and required debt prepayment
with future issuances of debt or equity. As of December 31, 2001, the Company
also had $1,457 in letters of credit outstanding, and $208,543 available for
borrowing under the revolving credit facility.

   The Credit Facility was amended again effective as of June 26, 2002 (as
amended, the "Amended Facility"). See Note 19 for further discussion of the
Amended Facility.

   Debt issuance costs associated with the Credit Facility totaling $14,229 at
December 31, 2001 have been deferred and are being amortized over the
five-year, six-year and seven-year terms of the revolving credit facility, the
term loans, and the institutional term loan portions of the Credit Facility,
respectively. In connection with the amendment of the Credit Facility in
November 2001, $1,580 of debt issuance costs related to the Credit Facility
deferred prior to the amendment were charged to interest expense. The
unamortized portion of debt issuance costs associated with the Credit Facility
was approximately $8,451 and $9,980 at December 31, 2001 and 2000,
respectively, and is included in deferred debt issuance costs in the
consolidated balance sheets.

  101/2% Senior Subordinated Notes

   In April 1999, the Company completed a private offering of $200,000 of
101/2% senior subordinated notes (the "Senior Subordinated Notes"). In June
2001, the Company completed a private offering of an additional $135,000 of
Senior Subordinated Notes. The Senior Subordinated Notes are unsecured and are
guaranteed by the Company's subsidiaries, require interest to be paid
semi-annually on May 1 and November 1 of each year and mature on May 1, 2009.
Borrowings outstanding under the Senior Subordinated Notes are subordinated in
all material respects to amounts outstanding under the Credit Facility. The
Senior Subordinated Notes were issued at discounts totaling $8,558, which are
being amortized to interest expense over the term of the notes. Additionally,
debt issuance costs totaling $13,715 incurred in connection with the offerings
have been deferred and are being amortized to interest expense over the term of
the notes. The unamortized portion of these costs was approximately $11,126 and
$7,059 at December 31, 2001 and 2000, respectively, and is included in deferred
debt issuance costs in the consolidated balance sheets.

   The fair value of the Senior Subordinated Notes, based on quoted market
values, was approximately $217,750 and $130,000 at December 31, 2001 and 2000,
respectively.

                                      31

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   The Senior Subordinated Notes are guaranteed by all of the Company's current
and future U.S. subsidiaries other than "Unrestricted Subsidiaries" (as defined
in the indenture governing the Notes). As of December 31, 2001, there were no
"Unrestricted Subsidiaries." These guarantees are full, unconditional and joint
and several. In addition, Encompass has no non-guarantor subsidiaries and no
independent assets or operations outside of its ownership of the subsidiaries.
Accordingly, no separate financial statements or consolidating information of
the guarantor subsidiaries are presented because management believes this
information is not material to users of the Company's financial statements.

   The Company may redeem the Senior Subordinated Notes, in whole or in part,
at any time on or after May 1, 2004 at specified redemption prices, plus
accrued interest. At any time (which may be more than once) before May 1, 2002,
the Company may redeem up to 35% of the outstanding Senior Subordinated Notes
with money raised in equity offerings under certain circumstances. Upon a
change in control of the Company (as defined in the indenture for the Senior
Subordinated Notes), the Company will be required to offer to purchase all of
the outstanding Senior Subordinated Notes at 101% of the face amount plus
accrued interest. Additionally, the indenture governing the Senior Subordinated
Notes contains certain covenants relating to, among other things, the Company's
ability to incur indebtedness, pay dividends or repurchase capital stock, incur
liens, sell or otherwise dispose of a substantial portion of its assets or
merge or consolidate with another entity.

   The aggregate maturities of debt as of December 31, 2001 are as follows:

<TABLE>
                              <S>        <C>
                              2002...... $  4,551
                              2003......    5,613
                              2004......    6,500
                              2005......   94,000
                              2006......  283,000
                              Thereafter  421,150
                                         --------
                                         $814,814
                                         ========
</TABLE>

  Interest Rate Swap Agreements

   The Company has entered into interest rate swap agreements in the aggregate
notional amount of $110,000 to manage its mix of fixed and floating rate debt
to partially hedge its exposure to potential fluctuations in interest rates.
All such agreements are with large creditworthy financial institutions and
result in the Company paying a fixed rate of interest and receiving a floating
rate. At December 31, 2001, the Company's ratio of fixed rate debt to total
debt was 41% and the weighted average interest rate on its total debt was
8.64%, before considering the aforementioned interest rate swap agreements.
After giving effect to the interest rate swap agreements in effect at December
31, 2001, the ratio of fixed rate debt was 52% and the weighted average
interest rate on total debt was 9.19%.

   Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an Amendment
of FASB Statement No. 133". These statements establish accounting and reporting
standards requiring that derivative instruments, including certain derivative
instruments embedded in other contracts, be recorded on the balance sheet at
fair value as either assets or liabilities. The accounting for changes in the
fair value of a derivative instrument depends on the intended use and
designation of the derivative at its inception. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related

                                      32

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)

results of the hedged item in the statement of operations, and requires the
Company to formally document, designate and assess the effectiveness of the
hedge transaction to receive hedge accounting treatment. For derivatives
designated as cash flow hedges, changes in fair value, to the extent the hedge
is effective, are recognized in other comprehensive income until the hedged
item is recognized in earnings. Overall hedge effectiveness is measured at
least quarterly. Any changes in the fair value of the derivative instruments
resulting from hedge ineffectiveness, as defined by SFAS No. 133 and measured
based on the cumulative changes in the fair value of the derivative instrument
and the cumulative changes in the estimated future cash flows of the hedged
item, are recognized immediately in earnings. The Company has designated its
interest rate swap agreements as cash flow hedges.

   Adoption of SFAS No. 133 at January 1, 2001 resulted in the recognition of
approximately $1,488, net of tax effect of $912, of hedging losses included in
accumulated other comprehensive loss as the cumulative effect of a change in
accounting principle and $2,400 of derivative liabilities which are included in
other long-term liabilities in the consolidated balance sheet. During the year
ended December 31, 2001, the Company recognized $2,373, net of tax effect of
$1,454, in additional interest expense attributable to the difference in the
variable interest receivable and fixed interest payable under the interest rate
swap agreements. No significant gain or loss from hedge ineffectiveness was
required to be recognized. At December 31, 2001, the fair value of the interest
rate swap agreements was a liability of $6,761. The Company estimates that
approximately $1,800, net of tax, of such amount is expected to be recognized
as additional interest expense over the next twelve months as interest costs on
the underlying debt are recognized. Amounts were determined as of the balance
sheet date based on quoted market values, the Company's portfolio of interest
rate swap agreements and the Company's measurement of hedge effectiveness.

6. INCOME TAXES

   Total income taxes are allocated as follows:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 -------------------------
                                                   2001     2000     1999
                                                 -------  -------  -------
     <S>                                         <C>      <C>      <C>
     Income from continuing operations.......... $16,022  $57,011  $41,111
     Income (loss) from discontinued operations.  (5,244)   2,734      916
     Loss on disposal of discontinued operations  (7,819)      --       --
     Extraordinary loss on debt settlement......      --   (4,338)      --
     Other comprehensive income (loss)..........  (2,217)     476     (179)
                                                 -------  -------  -------
                                                 $   742  $55,883  $41,848
                                                 =======  =======  =======
</TABLE>

   Income tax provision attributable to income from continuing operations
consists of the following:

<TABLE>
<CAPTION>
                                       Year Ended December 31,
                                       -----------------------
                                        2001    2000     1999
                                       ------- ------- -------
                 <S>                   <C>     <C>     <C>
                 Current:.............
                    Federal........... $11,571 $45,429 $37,186
                    State.............   2,067   7,852   4,768
                                       ------- ------- -------
                                        13,638  53,281  41,954
                 Deferred:............
                    Federal and state.   2,384   3,730    (843)
                                       ------- ------- -------
                                       $16,022 $57,011 $41,111
                                       ======= ======= =======
</TABLE>

                                      33

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   Total income tax expense attributable to income from continuing operations
differs from the amounts computed by applying the U.S. federal statutory income
tax rate to income from continuing operations before income tax provision as a
result of the following:

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                              --------------------------
                                                                2001     2000      1999
                                                              -------  --------  -------
<S>                                                           <C>      <C>       <C>
Income from continuing operations before income tax provision $ 1,609  $116,268  $93,062
                                                              -------  --------  -------
Applicable U.S. federal statutory rate.......................      35%       35%      35%
                                                              -------  --------  -------
Tax provision at statutory rate..............................     563    40,694   32,572
Increase (decrease) resulting from:..........................
   State income taxes, net of federal benefit................   1,313     5,053    3,050
   Non-deductible goodwill amortization......................  10,800     9,825    5,105
   Non-deductible meals and entertainment....................   1,476     1,941      380
   Other, net................................................   1,870      (502)       4
                                                              -------  --------  -------
                                                              $16,022  $ 57,011  $41,111
                                                              =======  ========  =======
</TABLE>

   The components of the deferred income tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
                                                            December 31,
                                                         ------------------
                                                           2001      2000
                                                         --------  --------
    <S>                                                  <C>       <C>
    Deferred income tax assets:
       Allowance for doubtful accounts.................. $ 11,257  $  6,735
       Inventories......................................      296       976
       Accrued expenses.................................   16,170    13,834
       Deferred revenue.................................    2,161     1,974
       Unrealized loss on interest rate swap agreements.    2,217        --
       Net operating loss carryforward..................      288       308
                                                         --------  --------
           Total deferred income tax assets.............   32,389    23,827
                                                         --------  --------
    Deferred income tax liabilities:....................
       Depreciation.....................................   (4,854)   (3,730)
       Completed contract accounting for tax purposes...   (3,845)   (5,475)
       Amortization of goodwill.........................   (9,547)   (6,683)
       Other............................................   (2,308)   (1,672)
                                                         --------  --------
           Total deferred income tax liabilities........  (20,554)  (17,560)
                                                         --------  --------
           Net deferred income tax assets............... $ 11,835  $  6,267
                                                         ========  ========
</TABLE>

   These deferred income tax assets and liabilities are included in the
consolidated balance sheets under the following captions:

<TABLE>
<CAPTION>
                                                    December 31,
                                                 -----------------
                                                   2001     2000
                                                 -------  --------
             <S>                                 <C>      <C>
             Deferred tax assets--current....... $19,219  $ 17,296
             Deferred tax liabilities--long-term  (7,384)  (11,029)
                                                 -------  --------
                                                 $11,835  $  6,267
                                                 =======  ========
</TABLE>

                                      34

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   Management believes it is more likely than not that the Company will have
future taxable income to allow it to realize the benefits of the net deferred
tax assets. Accordingly, no valuation allowance has been recorded as of
December 31, 2001 or 2000.

7. CONVERTIBLE PREFERRED STOCK

   In connection with the Merger, the Company issued 256 shares of 7.25%
Convertible Preferred Stock (the "Convertible Preferred Stock") to affiliates
of Apollo at a value of $1,000 per share in exchange for $150,000 in cash and
all of the outstanding 71/2% convertible junior subordinated debentures of
Building One (with an aggregate value of approximately $106,191).

   The Convertible Preferred Stock is convertible at the option of the holders
into shares of the Company's common stock at any time prior to maturity at a
conversion price of $14.00 per common share, subject to adjustment under
certain circumstances. Upon their maturity in February 2012, the Company is
required to redeem all shares of Convertible Preferred Stock then outstanding
at the redemption price per share equal to the Liquidation Amount (defined as
the original cost of $1,000 per share plus all accrued and accumulated and
unpaid dividends). As of December 31, 2001, the Liquidation Amount was
$292,799. The Company has the right to redeem, at any time after February 22,
2005, all, but not less than all, of the shares of Convertible Preferred Stock
then outstanding at an amount per share equal to 103% of the Liquidation
Amount; this amount declines to 102% after February 22, 2006 and 101% after
February 22, 2008. The Convertible Preferred Stock bears a preferred cumulative
dividend at the rate of 7.25% per year, payable quarterly. Under the terms of
the Convertible Preferred Stock agreement, until February 22, 2003, dividends
on the Convertible Preferred Stock may be paid in cash on a current basis or
accumulated at the option of the Company. However, the Company's amended Credit
Facility (see Note 5) prohibits the payment of cash dividends. At December 31,
2001, accrued dividends were approximately $36,608 and are included in the
carrying value of the Convertible Preferred Stock in the consolidated balance
sheet. The Company has elected to defer the payment of the dividends payable to
date and that would otherwise be payable on March 31, 2002. Holders of the
Convertible Preferred Stock are also entitled to share in any dividends the
Company may declare on its common stock.

   Holders of the Convertible Preferred Stock are entitled to vote on all
matters presented to the holders of common stock. Each share of Convertible
Preferred Stock entitles the holder thereof to cast the number of votes such
holder would have been entitled to cast had such holder converted such share of
Convertible Preferred Stock into shares of common stock (common stock
equivalents). As of December 31, 2001, the Convertible Preferred Stock
comprised approximately 25% of the voting power of Encompass.

   Convertible Preferred Stock issuance costs of approximately $3,750 are being
amortized against retained earnings over the 12-year term of the Convertible
Preferred Stock. The unamortized portion of these costs of approximately $3,178
at December 31, 2001 is recorded against mandatorily redeemable convertible
preferred stock in the consolidated balance sheets.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has appointed three members of the Company's board of
directors. If the Company violates certain protective covenants, which include
a total debt leverage covenant under the Investors' Rights Agreement, Apollo
will have the right to appoint additional directors, such that the
Apollo-appointed directors would constitute a majority of the board of
directors. This debt leverage covenant differs from the similar covenant
included in the Credit Facility, and is not as clearly defined. See Note 19 for
further discussion.

                                      35

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


8. SHAREHOLDERS' EQUITY

  Common Stock

   The Company has not paid dividends on its common stock since its
incorporation and does not anticipate paying dividends on its common stock in
the foreseeable future. The Amended Facility (see Note 19) prohibits the
payment of dividends.

   In December 2000, the Board of Directors authorized a stock buyback program,
pursuant to which the Company may purchase up to 2,500 shares of its common
stock on the open market. As of December 31, 2001, the Company had repurchased
1,414 shares of its common stock under this program for an aggregate cost of
$9,290. Under the terms of the Amended Facility (see Note 19), the Company is
prohibited from making further repurchases of its common stock.

  Warrants

   The Company has 4,446 shares of common stock reserved for issuance upon
exercise of warrants. The warrants have a weighted average exercise price of
$16.25 per share. These warrants are currently exercisable. Of these warrants,
1,413 expire on November 25, 2002, 2,438 expire on November 25, 2007 and the
remainder expire on various dates ranging from December 2003 to July 2007. The
warrants also contain certain rights for registration.

9. STOCK-BASED PLANS

   The Company has a number of stock-based incentive and awards plans in place,
which provide the Company the latitude to grant a variety of awards, including
stock options, stock appreciation rights ("SARs"), restricted stock awards,
performance awards and phantom stock awards, to officers, directors, key
employees and other persons working for the Company and its subsidiaries. The
plans require that stock options be granted at exercise prices not less than
the fair market value of the underlying common stock on the grant date. Stock
options vest at varying time periods ranging from six months to four years and
expire after five to ten years from the date of grant. At December 31, 2001,
stock-based awards equivalent to approximately 3,900 shares were generally
available for granting under such plans. There are an additional 4,900 shares
available for granting under Building One stock option plans (the "Building One
Plans") however, the Company does not intend to issue additional options under
the Building One Plans over and above the number of options (approximately
5,800) that were issued and outstanding under the Building One Plans as of the
date of the Merger.

                                      36

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   The following is a summary of stock option and warrant activity:

<TABLE>
<CAPTION>
                                                   Outstanding                 Exercisable
                                           --------------------------- ---------------------------
                                            Number of      Weighted     Number of      Weighted
                                             Options       Average       Options       Average
                                           and Warrants Exercise Price and Warrants Exercise Price
                                           ------------ -------------- ------------ --------------
<S>                                        <C>          <C>            <C>          <C>
Balance at December 31, 1998..............     8,939        $15.41         4,919        $14.81
Granted...................................     2,216         12.37         1,840         16.00
Exercised.................................    (1,145)        12.14        (1,145)        12.14
Surrendered...............................      (413)        16.10            --            --
                                              ------        ------        ------        ------
Balance at December 31, 1999..............     9,597         15.07         5,614         15.18
Options and warrants assumed in the Merger     5,282         12.79         1,908         14.30
Granted...................................     2,050          6.73           641         15.68
Exercised.................................        (5)         3.87            (5)         3.87
Surrendered...............................    (2,125)        13.87            --            --
                                              ------        ------        ------        ------
Balance at December 31, 2000..............    14,799         13.27         8,158         15.02
Granted...................................     1,560          6.08         2,648         11.10
Exercised.................................      (189)         3.74          (189)         3.74
Surrendered...............................      (957)        11.74          (341)        12.99
                                              ------        ------        ------        ------
Balance at December 31, 2001..............    15,213        $12.75        10,276        $14.28
                                              ======        ======        ======        ======
</TABLE>

   A summary of outstanding and exercisable options and warrants as of December
31, 2001 follows:

<TABLE>
<CAPTION>
                                                                       Weighted
                                   Weighted                            Average
                                   Average                Weighted     Exercise    Number of
                                    Option   Number of    Average      Price of   Exercisable
                                     and    Outstanding  Remaining   Exercisable    Options
                                   Warrant  Options and Contractual    Options        and
Range of Option and Warrant Prices  Prices   Warrants   Life (Years) and Warrants  Warrants
---------------------------------- -------- ----------- ------------ ------------ -----------
<S>                                <C>      <C>         <C>          <C>          <C>
        $ 3.08 to $ 5.00..........  $ 3.97       977        5.2         $ 3.66         616
        $ 5.01 to $10.00..........    6.95     3,070        7.9           7.44         498
        $10.01 to $15.00..........   12.93     4,949        4.6          13.05       3,397
        $15.01 to $20.00..........   16.58     5,762        4.5          16.51       5,404
        $20.01 to $20.20..........   20.19       455        6.5          20.19         361
                                              ------                                ------
                                              15,213                                10,276
                                              ======                                ======
</TABLE>

                                      37

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   The following pro forma data are calculated as if compensation expense for
the Company's stock option plans and warrants were determined based on the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation":

<TABLE>
<CAPTION>
                                          Year Ended         Year Ended        Year Ended
                                       December 31, 2001  December 31, 2000 December 31, 1999
                                      ------------------  ----------------  ----------------
                                         As        Pro       As       Pro      As       Pro
                                      Reported    Forma   Reported   Forma  Reported   Forma
                                      --------  --------  --------  ------- --------  -------
<S>                                   <C>       <C>       <C>       <C>     <C>       <C>
Net income (loss) available to common
  shareholders....................... $(71,738) $(77,552) $38,728   $27,693 $53,062   $45,449
Net income (loss) per share:
   Basic............................. $  (1.12) $  (1.21) $  0.65   $  0.47 $  1.28   $  1.10
   Diluted........................... $  (1.12) $  (1.21) $  0.63   $  0.45 $  1.21   $  1.05
</TABLE>

   The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.

   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                                 2001   2000   1999
                                                -----  -----  -----
            <S>                                 <C>    <C>    <C>
            Dividend yield.....................    --     --     --
            Expected volatility................  75.0%  68.0%  58.2%
            Risk-free interest rate............   4.5%   5.1%   5.6%
            Expected lives (years).............    10      9      5
            Fair value of options at grant date $2.30  $5.24  $6.81
</TABLE>

  Employee Stock Purchase Plan

   The Company has an Employee Stock Purchase Plan (the "Purchase Plan"), which
permits eligible employees of the Company to purchase shares of common stock at
a discount. Employees who elect to participate have amounts withheld through
payroll deduction during purchase periods. At the end of each purchase period,
accumulated payroll deductions are used to purchase common stock at a price
equal to 85% of the market price at the beginning of the period or the end of
the period, whichever is lower. Shares purchased under the Purchase Plan are
subject to a one-year holding period. During the years ended December 31, 2001,
2000 and 1999, 584, 227 and 195 shares, respectively, were issued pursuant to
the Purchase Plan and its predecessor. In 2001, the Company's shareholders
approved an increase in the number of shares permitted to be issued under the
Purchase Plan from 1,000 to 3,000. As of December 31, 2001, 1,903 shares were
available for issuance under the Purchase Plan.

10. EMPLOYEE BENEFIT PLANS

   The Company maintains a defined contribution savings plan (the "Savings
Plan"), which is available to most employees after 90 days of service. Employee
contributions and employer matching contributions occur at different rates and
the matched portions of the funds vest over a one-year period. Company
contributions to the Savings Plan and predecessor plans maintained by certain
of the Company's subsidiaries totaled approximately $14,920, $13,930 and $5,300
for the years ended December 31, 2001, 2000 and 1999, respectively.

                                      38

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   Certain of the Company's subsidiaries make contributions to
union-administered benefit funds, which cover the majority of the Company's
union employees. For the years ended December 31, 2001 and 2000, the
participant costs charged to operations were approximately $35,346 and $32,302,
respectively. Governmental regulations require that, in the event of plan
termination or employer withdrawal, an employer may be liable for a portion of
the plan's unfunded vested benefits, if any. The Company is not aware of any
liabilities resulting from unfunded vested benefits related to
union-administered benefit plans. The Company does not anticipate withdrawal
from the plans, nor is the Company aware of any expected plan terminations.

11. COMMITMENTS AND CONTINGENCIES

   Operating leases for certain facilities, transportation equipment and office
equipment expire at various dates through 2015. Certain leases contain renewal
options. Minimum future rental payments at December 31, 2001 are as follows:

<TABLE>
                              <S>        <C>
                              2002...... $ 41,640
                              2003......   37,719
                              2004......   31,491
                              2005......   25,230
                              2006......   16,633
                              Thereafter   73,689
                                         --------
                                         $226,402
                                         ========
</TABLE>

   Total rental expense for the years ended December 31, 2001, 2000 and 1999
was approximately $76,400, $41,600 and $10,900, respectively (including $8,700,
$8,200 and $3,600, respectively, to related parties).

   The Company is involved in various legal actions in the normal course of
business. It is not possible to predict the outcome of these matters; however,
in the opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations. The Company has provided accruals for probable losses
and legal fees incurred with respect to certain of these actions.

12. RESTRUCTURING AND RECAPITALIZATION CHARGES

  Recapitalization charges

   On May 11, 1999, Building One completed its recapitalization plan under a
tender offer (the "Tender Offer"), pursuant to which Building One repurchased
30,772 shares of its common stock at $18 per share for cash and 1,104 shares of
its common stock underlying stock options at $18 per share less the exercise
price per share of the options. In conjunction with the recapitalization,
compensation expense of $2,770 ($1,662 after the associated tax benefit) was
recognized for stock options exercised and the underlying shares of common
stock repurchased by Building One. In addition, $4,323 of costs incurred in
connection with the Tender Offer have been reflected as a reduction of
shareholders' equity.

   Friedman, Billings, Ramsey Group, Inc. ("FBR") acted as a financial advisor
to Building One in connection with the Tender Offer, and received a fee of
$3,000. One of Building One's directors at that time is President and a
principal stockholder of FBR.

                                      39

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


  Restructuring charges

   In the second quarter of 1999, Building One's Board of Directors approved a
restructuring plan which included a relocation of Building One's corporate
headquarters and integration of the cleaning systems operations. The corporate
headquarters was relocated from Washington, D.C. to Minneapolis, Minnesota. In
addition, certain back office operations of the cleaning systems operations
were consolidated into two locations. The restructuring costs included costs
directly related to Building One's restructuring plan in accordance with EITF
No. 94-3 which provides specific requirements as to the appropriate recognition
of costs associated with employee termination benefits and other exit costs.

   As a result of this restructuring plan, Building One incurred severance
costs for certain employees, identified certain assets which were no longer of
service and incurred certain lease termination costs. Severance costs covered
33 employees, of which 30 were terminated as of December 31, 1999 and the
remaining three were terminated in 2000.

   The following table sets forth a summary of these restructuring costs:

<TABLE>
<CAPTION>
                                   Corporate   Cleaning
                                  Headquarters Systems  Total
                                  ------------ -------- ------
                  <S>             <C>          <C>      <C>
                  Severance......    $3,530     $  900  $4,430
                  Impaired assets        55        520     575
                  Lease costs....       205         40     245
                                     ------     ------  ------
                  Total..........    $3,790     $1,460  $5,250
                                     ======     ======  ======
</TABLE>

   Included in the $5,250 restructuring charge incurred in the second quarter
of 1999 are $4,675 of cash costs and $575 in non-cash related costs. The
following table is a detailed reconciliation of the restructuring reserve
balance reflecting the accruals recorded and payments applied:

<TABLE>
<CAPTION>
                                                         Lease
                                               Severance Costs   Total
                                               --------- -----  -------
       <S>                                     <C>       <C>    <C>
       Restructuring accruals recorded in 1999  $ 4,430  $ 245  $ 4,675
       Payments...............................   (4,173)  (183)  (4,356)
                                                -------  -----  -------
       Balance at December 31, 1999...........      257     62      319
       Payments...............................     (257)   (62)    (319)
                                                -------  -----  -------
       Balance at December 31, 2000...........  $    --  $  --  $    --
                                                =======  =====  =======
</TABLE>

13. OPERATING SEGMENTS

   The Company modified its internal organizational structure during fiscal
2001, combining the Electrical Technologies, Mechanical Services and Industrial
Services businesses into one Commercial/Industrial business aligned
geographically. The corresponding segment information for 2000 and 1999 has
been restated to conform to the new business segment presentation. The
Company's reportable segments are strategic business units that, for the most
part, offer products and services to distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies. Intersegment transactions are established based on negotiations
among the parties at rates generally consistent with those charged to third
parties. Intersegment revenues in 1999 were not significant.

                                      40

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   After discontinuing the Global Technologies segment as discussed in Note 16,
the Company has three reportable segments: Commercial/ Industrial Services,
Residential Services and Cleaning Systems. The Commercial/Industrial Services
Group provides installation and repair services to the electrical, heating,
ventilation and air conditioning ("HVAC"), plumbing, control and monitoring and
process piping systems of commercial and industrial facilities. The Residential
Services Group provides mechanical, plumbing and other contracting services
primarily in single family and low-rise multifamily housing units. The Cleaning
Systems Group provides a wide variety of facility cleaning and maintenance
management services nationwide. From time to time, management may move business
units from one segment to another for management reporting and evaluation
purposes.

   The Company evaluates performance based on income from operations before
amortization of goodwill and other intangibles, unallocated corporate expenses,
merger and related charges, costs to exit certain activities and related costs
and restructuring and recapitalization charges. While amortization of goodwill
is not considered in evaluating segment performance, the goodwill associated
with each segment is included in the total assets of each segment.

   Unallocated corporate expenses primarily include corporate overhead and
savings from national purchase agreements relating to materials and
property/casualty insurance. Costs related to group and regional management,
operational, sales and marketing, accounting and administrative support are
included in the operating costs of each segment. Corporate assets primarily
include cash, deferred tax assets, deferred debt issuance costs and other
intangible assets, certain computer hardware and software, fixed assets related
to the Company's corporate office, cost-based investments and miscellaneous
non-trade accounts receivable.

                                      41

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


   Segment information is as follows:

<TABLE>
<CAPTION>
                                                                    Commercial/ Residential Cleaning  Corporate/
                                                                    Industrial   Services   Systems  Eliminations   Total
                                                                    ----------- ----------- -------- ------------ ----------
<S>                                                                 <C>         <C>         <C>      <C>          <C>
YEAR ENDED DECEMBER 31, 2001:
Third-party revenues............................................... $3,200,967   $331,166   $293,135   $     --   $3,825,268
Intersegment revenues..............................................     17,385         18         21    (17,424)          --
                                                                    ----------   --------   --------   --------   ----------
Total revenues.....................................................  3,218,352    331,184    293,156    (17,424)   3,825,268
Operating costs....................................................  3,132,059    300,913    275,446     (6,142)   3,702,276
                                                                    ----------   --------   --------   --------   ----------
Segment operating earnings......................................... $   86,293   $ 30,271   $ 17,710   $(11,282)     122,992
                                                                    ==========   ========   ========   ========
Amortization of goodwill and other intangible assets...............                                                   36,274
                                                                                                                  ----------
Operating income...................................................                                               $   86,718
                                                                                                                  ==========
Capital expenditures............................................... $   26,400   $  1,115   $  9,536   $  4,499   $   41,550
Depreciation expense...............................................     25,634      2,262      5,152      2,900       35,948

YEAR ENDED DECEMBER 31, 2000:
Third-party revenues............................................... $3,350,097   $287,477   $265,160   $     --   $3,902,734
Intersegment revenues..............................................     12,397        151         52    (12,600)          --
                                                                    ----------   --------   --------   --------   ----------
Total revenues.....................................................  3,362,494    287,628    265,212    (12,600)   3,902,734
Operating costs....................................................  3,143,258    257,308    248,615     (3,218)   3,645,963
                                                                    ----------   --------   --------   --------   ----------
Segment operating earnings......................................... $  219,236   $ 30,320   $ 16,597   $ (9,382)     256,771
                                                                    ==========   ========   ========   ========
Amortization of goodwill and other intangible assets...............                                                   32,724
Merger and related charges and costs to exit certain activities and
 related costs.....................................................                                                   20,000
                                                                                                                  ----------
Operating income...................................................                                               $  204,047
                                                                                                                  ==========
Capital expenditures............................................... $   34,890   $  1,632   $  4,976   $    641   $   42,139
Depreciation expense...............................................     22,013      2,209      4,564      1,007       29,793

YEAR ENDED DECEMBER 31, 1999:
Third-party revenues............................................... $1,491,794   $     --   $245,790   $ (5,935)  $1,731,649
Operating costs....................................................  1,358,906         --    227,116       (701)   1,585,321
                                                                    ----------   --------   --------   --------   ----------
Segment operating earnings......................................... $  132,888   $     --   $ 18,674   $ (5,234)     146,328
                                                                    ==========   ========   ========   ========
Amortization of goodwill and other intangible assets...............                                                   15,620
Restructuring and recapitalization charges.........................                                                    8,020
                                                                                                                  ----------
Operating income...................................................                                               $  122,688
                                                                                                                  ==========
Capital expenditures............................................... $   15,099   $     --   $ 10,585   $  1,580   $   27,264
Depreciation expense...............................................      9,237         --      3,329      2,672       15,238

TOTAL ASSETS:
As of December 31, 2001............................................ $1,980,868   $148,394   $148,740   $123,324   $2,401,326
As of December 31, 2000............................................  2,255,065    153,813    146,092    142,912    2,697,882
As of December 31, 1999............................................  1,111,341         --    152,614     49,799    1,313,754
</TABLE>


                                      42

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


14. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)

<TABLE>
<CAPTION>
                                                         First (a) Second (b)     Third    Fourth (c)  Full Year (d)
                                                         --------- ----------  ----------  ----------  -------------
<S>                                                      <C>       <C>         <C>         <C>         <C>
2001:
Revenues................................................ $992,901  $  996,551  $  921,624  $  914,192   $3,825,268
Operating income (loss).................................   45,670      49,532       2,416     (10,900)      86,718
Income (loss) from continuing operations................   12,416      15,877     (18,986)    (23,720)     (14,413)
Income (loss) from discontinued operations..............    1,380      (7,082)     (3,931)       (589)     (10,222)
Loss on disposal of discontinued operations.............       --          --     (23,055)     (3,436)     (26,491)
Income (loss) before extraordinary loss.................   13,796       8,795     (45,972)    (27,745)     (51,126)
Net income (loss).......................................   13,796       8,795     (45,972)    (27,745)     (51,126)
Net income (loss) available to common shareholders......    8,779       3,688     (51,170)    (33,035)     (71,738)

Earnings per share:
    Basic
       Income (loss) from continuing operations......... $   0.12  $     0.17  $    (0.38) $    (0.46)  $    (0.55)
       Income (loss) from discontinued operations.......     0.02       (0.11)      (0.06)         --        (0.16)
       Loss on disposal of discontinued operations......       --          --       (0.36)      (0.06)       (0.41)
       Net income (loss)................................     0.14        0.06       (0.80)      (0.52)       (1.12)
    Diluted
       Income (loss) from continuing operations......... $   0.12  $     0.17  $    (0.38) $    (0.46)  $    (0.55)
       Income (loss) from discontinued operations.......     0.02       (0.11)      (0.06)         --        (0.16)
       Loss on disposal of discontinued operations......       --          --       (0.36)      (0.06)       (0.41)
       Net income (loss)................................     0.14        0.06       (0.80)      (0.52)       (1.12)

2000:
Revenues................................................ $654,472  $1,036,106  $1,110,148  $1,102,008   $3,902,734
Operating income........................................   15,542      71,023      53,342      64,140      204,047
Income (loss) from continuing operations................   (2,197)     26,679      13,976      20,799       59,257
Income from discontinued operations.....................      680       1,736       1,045         635        4,096
Income (loss) before extraordinary loss.................   (1,517)     28,415      15,021      21,434       63,353
Net income (loss).......................................   (9,574)     28,415      15,021      21,434       55,296
Net income (loss) available to common shareholders......  (11,612)     23,657      10,178      16,505       38,728

Earnings per share:
    Basic
       Income (loss) from continuing operations......... $  (0.09) $     0.35  $     0.14  $     0.24   $     0.72
       Income from discontinued operations..............     0.01        0.02        0.02        0.01         0.07
       Income (loss) before extraordinary loss..........    (0.08)       0.37        0.16        0.25         0.79
       Net income (loss)................................    (0.26)       0.37        0.16        0.25         0.65
    Diluted
       Income (loss) from continuing operations......... $  (0.09) $     0.33  $     0.14  $     0.24   $     0.70
       Income from discontinued operations..............     0.01        0.02        0.02        0.01         0.07
       Income (loss) before extraordinary loss..........    (0.08)       0.35        0.16        0.25         0.77
       Net income (loss)................................    (0.26)       0.35        0.16        0.25         0.63
</TABLE>
--------
(a) The first quarter of 2000 includes merger and related charges and costs to
    exit certain activities and related costs discussed in Note 3 totaling
    $20,000 or $0.28 per basic and diluted share for the first quarter, and
    $0.21 and $0.20 per basic and diluted share, respectively, for the full
    year.
(b) Continuing operations in the second quarter of 2001 includes a provision
    for doubtful accounts receivable from telecommunication customers of
    $9,800, or $0.09 per basic and diluted share.
(c) Continuing operations in the fourth quarter of 2001 includes a provision
    for doubtful accounts receivable from telecommunication customers of
    $18,000, or $0.18 per basic and diluted share.
(d) The arithmetic total of the individual quarterly net income per share
    amounts does not reconcile to the annual amount of net income per share in
    all instances due to the timing of net income in relation to the issuance
    of common shres during the course of the year.

                                      43

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


15. EARNINGS PER SHARE

   The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations for the years ended December 31,
2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                                                        Year Ended December 31,
                                                                                                      ---------------------------
                                                                                                        2001      2000     1999
                                                                                                      --------  --------  -------
<S>                                                                                                   <C>       <C>       <C>
Basic earnings per share:
   Income (loss) from continuing operations.......................................................... $(14,413) $ 59,257  $51,951
   Less: convertible preferred stock dividends.......................................................  (20,612)  (16,568)      --
                                                                                                      --------  --------  -------
   Income (loss) from continuing operations available to common shareholders.........................  (35,025)   42,689   51,951
   Income (loss) from discontinued operations........................................................  (10,222)    4,096    1,111
   Loss on disposal of discontinued operations.......................................................  (26,491)       --       --
   Extraordinary loss on debt settlement.............................................................       --    (8,057)      --
                                                                                                      --------  --------  -------
   Net income (loss) available to common shareholders................................................ $(71,738) $ 38,728  $53,062
                                                                                                      ========  ========  =======
   Weighted average shares outstanding--Basic........................................................   63,845    59,234   41,538
                                                                                                      ========  ========  =======
   Income (loss) from continuing operations.......................................................... $   (.55) $    .72  $  1.25
   Income (loss) from discontinued operations........................................................     (.16)      .07      .03
   Loss on disposal of discontinued operations.......................................................     (.41)       --       --
   Extraordinary loss on debt settlement.............................................................       --      (.14)      --
                                                                                                      --------  --------  -------
   Net income (loss) per share--Basic................................................................ $  (1.12) $    .65  $  1.28
                                                                                                      ========  ========  =======
Diluted earnings per share:
   Income (loss) from continuing operations available to common shareholders......................... $(35,025) $ 42,689  $51,951
   Income (loss) from discontinued operations........................................................  (10,222)    4,096    1,111
   Loss on disposal of discontinued operations.......................................................  (26,491)       --       --
   Extraordinary loss on debt settlement.............................................................       --    (8,057)      --
                                                                                                      --------  --------  -------
   Net income (loss) available to common shareholders................................................  (71,738)   38,728   53,062
   Plus: interest expense on convertible junior subordinated debentures and related amortization of
    debt issuance costs..............................................................................       --        --    3,205
                                                                                                      --------  --------  -------
   Net income (loss) on an as-if converted basis..................................................... $(71,738) $ 38,728  $56,267
                                                                                                      ========  ========  =======
   Weighted average shares outstanding--Diluted......................................................   63,845    61,089   46,406
                                                                                                      ========  ========  =======
   Income (loss) from continuing operations.......................................................... $   (.55) $    .70  $  1.19
   Income (loss) from discontinued operations........................................................     (.16)      .07      .02
   Loss on disposal of discontinued operations.......................................................     (.41)       --       --
   Extraordinary loss on debt settlement.............................................................       --      (.14)      --
                                                                                                      --------  --------  -------
   Net income (loss) per share--Diluted.............................................................. $  (1.12) $    .63  $  1.21
                                                                                                      ========  ========  =======
Weighted average shares (in thousands):
   Weighted average shares outstanding--Basic........................................................   63,845    59,234   41,538
   Common stock equivalents from stock options and warrants..........................................       --       181      160
   Contingently issuable shares......................................................................       --     1,674      932
   Convertible junior subordinated debentures, on an as-if converted basis...........................       --        --    3,776
                                                                                                      --------  --------  -------
   Weighted average shares outstanding--Diluted......................................................   63,845    61,089   46,406
                                                                                                      ========  ========  =======
Common stock equivalents excluded from the computation of diluted earnings per share due to their
 anti-dilutive effect:
   Convertible Preferred Stock.......................................................................   20,914    19,464       --
   Stock options and warrants........................................................................   15,213    12,464    8,970
</TABLE>

                                      44

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)


16. DISCONTINUED OPERATIONS

   On September 25, 2001, the Company announced its decision to cease
operations of its Global Technologies segment effective September 30, 2001.
With the exception of some minor job wrap-up and receivables collection,
substantially all of these operations were terminated as of December 31, 2001.
The shutdown of these operations represents the disposal of a business segment
under APB No. 30. Accordingly, the consolidated statements of operations have
been restated to reflect the historical, after-tax results of these operations
as "Income (loss) from discontinued operations, net of tax".

   Revenues from the discontinued Global Technologies segment were $75,750,
$117,168 and zero in the years ended December 31, 2001, 2000 and 1999,
respectively. Assets and liabilities attributable to the Global Technologies
operations were as follows:

<TABLE>
<CAPTION>
                                                      December 31,
                                                     ---------------
                                                      2001    2000
                                                     ------- -------
            <S>                                      <C>     <C>
            Current assets.......................... $ 4,394 $48,827
            Goodwill and other long-term assets, net     468  14,428
            Current liabilities.....................  15,166  39,042
            Long-term liabilities...................  10,440      --
</TABLE>

   In connection with the decision to discontinue these operations, a charge of
$26,491, net of the related income tax benefit of $7,819, was recorded in 2001
to provide for the estimated costs of disposal of these operations. This charge
is reported under the caption "Loss on disposal of discontinued operations, net
of tax" in the consolidated statements of operations. The loss on disposal of
discontinued operations primarily consists of the write-off of non-deductible,
unamortized goodwill of $11,972, net facility and equipment lease obligations
of $12,449, net asset writedowns of $3,779 and estimated net operating losses
and severance costs incurred subsequent to September 30, 2001 of $6,110.

17. SUBSEQUENT EVENT--DISCONTINUED OPERATIONS

   During the three months ended March 31, 2002, the Company sold three
business units in the Northeast region of the Company's Commercial/Industrial
Services Group for aggregate cash proceeds of $9,592, resulting in a loss on
sale of $1,132, net of tax benefit. In accordance with the provisions of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
which was adopted effective January 1, 2002, these business units are
classified as discontinued operations. Accordingly, the accompanying
consolidated statements of operations and other amounts disclosed herein have
been restated to classify these business units as discontinued operations and,
therefore, to reflect after-tax results of these operations as "Income (loss)
from discontinued operations, net of tax". These businesses generated aggregate
revenues in 2001, 2000 and 1999 of $79,467, $79,532 and $40,935, respectively.

18. SUBSEQUENT EVENT--ADOPTION OF SFAS NO. 142

   Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets," which establish new accounting and
reporting requirements for goodwill and other intangible assets. Under the new
standard, goodwill and intangible assets with indefinite useful lives are no
longer amortized to expense, but instead are tested for impairment at least
annually. At January 1, 2002, net goodwill balances attributable to each of the
Company's reporting units were tested for impairment by comparing the fair

                                      45

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                     (In thousands, except per share data)

value of each reporting unit to its carrying value. Fair value was determined
using capitalization of earnings estimates and market multiples of earnings
estimates. Significant estimates used in the methodologies included estimates
of future earnings, future growth rates, weighted average cost of capital and
market valuation multiples for each reporting unit.

   Based upon these impairment tests performed upon adoption of SFAS No. 142,
the Company recognized a charge of $451,858, or $7.06 per share, net of tax
benefit of $48,218, at January 1, 2002, which is shown as a cumulative effect
of a change in accounting principle in the 2002 consolidated statement of
operations. This non-cash impairment charge has no impact on the calculation of
financial covenants under the Company's debt agreements.

   Also as prescribed by SFAS No. 142, the Company reclassified the unamortized
balance of its acquired dedicated workforce, which was $5,623 at January 1,
2002, from intangible assets to goodwill.

   The carrying amount of goodwill attributable to each reportable operating
segment was as follows:

<TABLE>
<CAPTION>
                                                        Commercial/     Residential Cleaning
                                                    Industrial Services  Services   Systems      Total
                                                    ------------------- ----------- --------  ----------
<S>                                                 <C>                 <C>         <C>       <C>
Balance at December 31, 2001.......................     $1,101,394       $ 99,126   $ 85,105  $1,285,625
Reclassification of value of dedicated workforce to
  goodwill.........................................          4,430          1,193         --       5,623
Impairment charge..................................       (448,235)            --    (51,841)   (500,076)
                                                        ----------       --------   --------  ----------
Balance at January 1, 2002.........................     $  657,589       $100,319   $ 33,264  $  791,172
                                                        ==========       ========   ========  ==========
</TABLE>

   Income (loss) before extraordinary loss, net income (loss) and basic and
diluted earnings (loss) per share, adjusted to exclude amortization of
goodwill, net of tax effect, was as follows:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                               -------------------------
                                                 2001     2000    1999
                                               --------  ------- -------
       <S>                                     <C>       <C>     <C>
       Income (loss) before extraordinary loss $(17,441) $93,919 $67,880
       Net income (loss)......................  (17,441)  85,862  67,880
       Basic earnings (loss) per share........ $  (0.60) $  1.17 $  1.63
       Diluted earnings (loss) per share......    (0.60)    1.17    1.53
</TABLE>

   A reconciliation of net income (loss) as reported to the adjusted net income
(loss) follows:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                           --------------------------
                                                             2001      2000     1999
                                                           --------  -------  -------
<S>                                                        <C>       <C>      <C>
Net income (loss) as reported............................. $(51,126) $55,296  $53,062
Add: goodwill amortization................................   33,898   30,744   15,620
Add: amortization of acquired asset for value of dedicated
  workforce...............................................    1,776    1,480       --
Less: tax benefit of deductible goodwill amortization.....   (1,989)  (1,658)    (802)
                                                           --------  -------  -------
Adjusted net income (loss)................................ $(17,441) $85,862  $67,880
                                                           ========  =======  =======
</TABLE>


                                      46

<PAGE>

19. SUBSEQUENT EVENT (UNAUDITED)--AMENDMENT TO CREDIT FACILITY AND RIGHTS
    OFFERING

   Effective June 26, 2002, the Company entered into the Amended Facility,
which provides long-term financial covenant modification through February 2005.
On June 27, 2002, the Company entered into a Securities Purchase Agreement with
affiliates of Apollo, whereby Apollo agreed to purchase $35,000 of equity
securities of the Company (the "Apollo Investment"). The Apollo Investment is
subject to shareholder approval.

   The Amended Facility provides for term loans totaling approximately $400,000
and a revolving credit facility of $300,000, temporarily limited to $250,000
until funding of the Apollo Investment. In the event the Apollo Investment is
not received by October 15, 2002, the Company will be in immediate default
under the Amended Facility. The $35,000 of proceeds from the Apollo Investment,
net of up to $4,000 of certain permitted expenses, are required to be applied
against the term loans. Borrowings under the Amended Facility bear interest at
variable rates, ranging from 2.0% to 4.25% over the Eurodollar Rate (as defined
in the Amended Facility) and from 0.50% to 2.75% over the Alternate Base Rate
(as defined in the Amended Facility), depending, in each case, on the Company's
total debt-to-EBITDA ratio. In addition, the Amended Facility places
restrictions upon the Company's ability to pay dividends, make acquisitions,
capital expenditures and investments and requires debt prepayment with future
issuances of debt or equity, assets sales and excess cash flow, as defined in
the Amended Facility.

   The Amended Facility prohibits the payment of dividends on the Convertible
Preferred Stock, which the Convertible Preferred Stock agreement requires
beginning in April 2003. As a result, beginning in April 2003, the Convertible
Preferred Stock will accrue dividends at an annual rate of 9.25%. However, such
event does not trigger a right of acceleration of the Company's redemption
obligation.
   The Company plans to enter into a rights offering in order to effect the
Apollo Investment, whereby holders of common stock, certain options and
warrants, and the Convertible Preferred Stock will receive rights to purchase
up to $50,000 of Company equity securities. If the rights offering is fully
subscribed, the total amount raised, including the Apollo Investment, will be
$72,500. Pursuant to the Amended Facility, 50 percent of the proceeds received
from the rights offering in excess of the $35,000 Apollo Investment, less
certain permitted expenses, will be applied toward permanent reduction of the
revolving credit facility and the term loans on a pro-rata basis. The rights
offering is conditioned upon shareholder approval of the Apollo Investment and
customary regulatory approvals.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has appointed three members of the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a total debt leverage ratio (total debt to EBITDA, as defined) of 4.00
to 1. This debt leverage covenant differs from the similar covenant included in
the Amended Facility and is not as clearly defined. The Company believes that
it did not maintain a leverage ratio less than 4.00 to 1 during the second
quarter of 2002. If such event is deemed both material and intentional, and so
long as the requirements of the covenant are not met, Apollo would be entitled
to appoint additional directors to the Company's Board of Directors, such that
the Apollo-appointed directors would constitute a majority of the Board of
Directors. Not meeting the total debt leverage covenant does not trigger a
right of acceleration of the Company's obligations under any of its debt or
outstanding participating preferred stock instruments.

                                      47

<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

   (a) The following documents are filed as part of this report:

   1. Financial statements

      Independent Auditors' Report

      Report of Independent Accountants

      Consolidated Balance Sheets

      Consolidated Statements of Operations

      Consolidated Statements of Shareholders' Equity and Other Comprehensive
   Income

      Consolidated Statements of Cash Flows

      Notes to Consolidated Financial Statements

   2. Financial statement schedules

      None.

   3. Exhibits.

<TABLE>
<CAPTION>
                Exhibit
                  No.   Description of Exhibit
                  ---   ----------------------
                <C>     <S>

                  23.1  --Consent of KPMG LLP.
                 23.2   --Consent of PricewaterhouseCoopers LLP.
</TABLE>

   (b) Reports on Form 8-K

   On June 28, 2002, Encompass filed a Current Report on Form 8-K with respect
to its announcement of, among other things, a $50 million rights offering in
which two affiliates of Apollo have committed to purchase $35 million of the
Company's securities and an amendment to the Company's Credit Facility. The
Current Report included the Company's press release, the agreement with Apollo
and the amendment to the Credit Facility.

   (c) None.

   (d) None.

                                      48

<PAGE>

                                   SIGNATURE

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

                                          ENCOMPASS SERVICES CORPORATION

                                                  /S/ DARREN B. MILLER
                                          By:
                                            -----------------------------------
                                          Name: Darren B. Miller
                                          Title: Senior Vice President and
                                          Chief Financial Officer

Dated: July 1, 2002



                                      49

<PAGE>

                               INDEX OF EXHIBITS

   Exhibits not incorporated by reference to a prior filing are designated by
an asterisk; all exhibits not so designated are incorporated to a prior filing
as indicated.

<TABLE>
<CAPTION>
                Exhibit
                Number                Description
                ------                -----------
                <C>     <S>

                 23.1*  --Consent of KPMG LLP.

                 23.2*  --Consent of PricewaterhouseCoopers LLP.
</TABLE>

                                      50

<PAGE>

                                  EXHIBIT B-4

 Encompass Service Corporation's Form 10-Q for the quarter ended June 30, 2002

                                 Exhibit B-4-1

<PAGE>

================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-Q

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

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

                 For the quarterly period ended June 30, 2002

                                      or

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

          For the transition period from              to

                          Commission File No. 1-13565

                        Encompass Services Corporation
            (Exact name of registrant as specified in its charter)

                       Texas                   76-0535259
                  (State or other
                  jurisdiction of           (I.R.S. Employer
                 incorporation or
                   organization)         Identification Number)

                         3 Greenway Plaza, Suite 2000
                             Houston, Texas 77046
         (Address of principal executive offices, including Zip Code)

                                (713) 860-0100
             (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 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]   No [_]

   Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.

   Common Stock, par value $0.001 per share: 64,998,700 shares outstanding as
of August 12, 2002.

================================================================================

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<C>     <S>                                                                                      <C>
Part I Financial Information

Item 1. Financial Statements....................................................................   3
           Consolidated Condensed Balance Sheets................................................   3
           Consolidated Condensed Statements of Operations......................................   4
           Consolidated Condensed Statement of Shareholders' Equity.............................   5
           Consolidated Condensed Statements of Cash Flows......................................   6
           Notes to Consolidated Condensed Financial Statements.................................   7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...  14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................  25

Part II Other Information

Item 1. Legal Proceedings.......................................................................   *
Item 2. Changes in Securities and Use of Proceeds...............................................   *
Item 3. Defaults Upon Senior Securities.........................................................   *
Item 4. Submission of Matters to a Vote of Security Holders.....................................  26
Item 5. Other Information.......................................................................   *
Item 6. Exhibits and Reports on Form 8-K........................................................  26
</TABLE>
--------
*  No response to this item is included herein for the reason that it is
   inapplicable or the answer to such item is negative.

                                      2

<PAGE>

                                    PART I

                             FINANCIAL INFORMATION

Item 1.  Financial Statements.

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED CONDENSED BALANCE SHEETS

                       (In thousands, except par value)

<TABLE>
<CAPTION>
                                                                                    June 30,   December 31,
                                                                                      2002         2001
                                                                                   ----------- ------------
                                                                                   (Unaudited)
                                      ASSETS
<S>                                                                                <C>         <C>
Current assets:
   Cash and cash equivalents...................................................... $   14,575   $   20,572
   Accounts receivable, net of allowance of $31,161 and $45,344, respectively.....    667,300      728,203
   Inventories....................................................................     23,805       26,128
   Costs and estimated earnings in excess of billings on uncompleted contracts....    104,381      101,719
   Deferred tax assets............................................................     19,219       19,219
   Prepaid expenses and other current assets......................................     20,147       25,880
                                                                                   ----------   ----------
       Total current assets.......................................................    849,427      921,721
Property and equipment, net.......................................................    110,969      124,548
Goodwill, net.....................................................................    791,172    1,285,625
Other intangible assets, net......................................................      7,606       13,529
Deferred tax assets...............................................................     40,759           --
Deferred debt issuance costs, net.................................................     20,852       19,577
Other long-term assets............................................................     30,865       36,326
                                                                                   ----------   ----------
       Total assets............................................................... $1,851,650   $2,401,326
                                                                                   ==========   ==========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Short-term borrowings and current maturities of long-term debt................. $    4,494   $    4,551
   Accounts payable...............................................................    242,490      269,226
   Billings in excess of costs and estimated earnings on uncompleted contracts....    144,968      159,226
   Accrued compensation...........................................................     67,025       88,578
   Other accrued liabilities......................................................     63,856       75,904
                                                                                   ----------   ----------
       Total current liabilities..................................................    522,833      597,485
Long-term debt, net of current portion............................................    798,692      810,263
Deferred tax liabilities..........................................................         --        7,384
Other liabilities.................................................................     19,818       20,461

Commitments and contingencies
Mandatorily redeemable convertible preferred stock, $.001 par value, 50,000 shares
  authorized, 256 shares issued and outstanding...................................    300,487      289,621
Shareholders' equity:
   Common stock, $.001 par value, 200,000 shares authorized, 64,999 and 63,793
     shares outstanding, respectively.............................................         67           65
   Additional paid-in capital.....................................................    624,077      622,783
   Retained earnings (accumulated deficit)........................................   (400,424)      67,307
   Treasury stock, 1,643 shares at cost...........................................    (10,425)     (10,425)
   Accumulated other comprehensive loss...........................................     (3,475)      (3,618)
                                                                                   ----------   ----------
       Total shareholders' equity.................................................    209,820      676,112
                                                                                   ----------   ----------
       Total liabilities and shareholders' equity................................. $1,851,650   $2,401,326
                                                                                   ==========   ==========
</TABLE>

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

                                      3

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

                   (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                            Three Months Ended     Six Months Ended
                                                                                 June 30,              June 30,
                                                                            ------------------  ----------------------
                                                                              2002      2001       2002        2001
                                                                            --------  --------  ----------  ----------
<S>                                                                         <C>       <C>       <C>         <C>
Revenues................................................................... $866,868  $996,551  $1,729,857  $1,989,452
Cost of services...........................................................  759,329   820,528   1,502,021   1,636,734
                                                                            --------  --------  ----------  ----------
    Gross profit...........................................................  107,539   176,023     227,836     352,718
Selling, general and administrative expenses...............................   98,915   107,447     195,007     227,059
Provision for doubtful accounts, net of recoveries.........................     (370)    9,999       2,067      12,313
Amortization of goodwill...................................................       --     9,044          --      18,144
                                                                            --------  --------  ----------  ----------
    Operating income.......................................................    8,994    49,533      30,762      95,202
Other income (expense):
    Interest income........................................................      520       221         657         437
    Interest expense.......................................................  (20,159)  (19,883)    (38,506)    (42,555)
    Other, net.............................................................      292      (278)      1,357        (138)
                                                                            --------  --------  ----------  ----------
Income (loss) from continuing operations before income tax provision
 and cumulative effect of change in accounting principle...................  (10,353)   29,593      (5,730)     52,946
Income tax provision (benefit).............................................   (4,922)   13,716      (2,980)     24,653
                                                                            --------  --------  ----------  ----------
Income (loss) from continuing operations before cumulative effect of
 change in accounting principle............................................   (5,431)   15,877      (2,750)     28,293
Loss from discontinued operations, net of tax..............................     (554)   (7,082)     (1,125)     (5,702)
Loss on disposal of discontinued operations, net of tax....................       --        --      (1,132)         --
                                                                            --------  --------  ----------  ----------
Income (loss) before cumulative effect of change in accounting
 principle.................................................................   (5,985)    8,795      (5,007)     22,591
Cumulative effect of change in accounting principle, net of tax............       --        --    (451,858)         --
                                                                            --------  --------  ----------  ----------
Net income (loss)..........................................................   (5,985)    8,795    (456,865)     22,591
Less convertible preferred stock dividends.................................   (5,481)   (5,107)    (10,866)    (10,124)
                                                                            --------  --------  ----------  ----------
Net income (loss) available to common shareholders......................... $(11,466) $  3,688  $ (467,731) $   12,467
                                                                            ========  ========  ==========  ==========
Basic earnings per share:
    Income (loss) from continuing operations before cumulative effect of
     change in accounting principle........................................ $  (0.17) $   0.17  $    (0.21) $     0.28
    Loss from discontinued operations, net of tax..........................    (0.01)    (0.11)      (0.02)      (0.09)
    Loss on disposal of discontinued operations, net of tax................       --        --       (0.02)         --
                                                                            --------  --------  ----------  ----------
    Income (loss) before cumulative effect of change in accounting
     principle.............................................................    (0.18)     0.06       (0.25)       0.19
    Cumulative effect of change in accounting principle, net of tax........       --        --       (7.04)         --
                                                                            --------  --------  ----------  ----------
    Net income (loss)...................................................... $  (0.18) $   0.06  $    (7.29) $     0.19
                                                                            ========  ========  ==========  ==========
    Weighted average shares outstanding....................................   64,311    64,643      64,175      64,317
                                                                            ========  ========  ==========  ==========
Diluted earnings per share:
    Income (loss) from continuing operations before cumulative effect of
     change in accounting principle........................................ $  (0.17) $   0.17  $    (0.21) $     0.28
    Loss from discontinued operations, net of tax..........................    (0.01)    (0.11)      (0.02)      (0.09)
    Loss on disposal of discontinued operations, net of tax................       --        --       (0.02)         --
                                                                            --------  --------  ----------  ----------
    Income (loss) before cumulative effect of change in accounting
     principle.............................................................    (0.18)     0.06       (0.25)       0.19
    Cumulative effect of change in accounting principle, net of tax........       --        --       (7.04)         --
                                                                            --------  --------  ----------  ----------
    Net income (loss)...................................................... $  (0.18) $   0.06  $    (7.29) $     0.19
                                                                            ========  ========  ==========  ==========
    Weighted average shares outstanding....................................   64,311    64,860      64,175      64,495
                                                                            ========  ========  ==========  ==========
</TABLE>

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

                                      4

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

           CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY

                    For the Six Months Ended June 30, 2002
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                     Common Stock                 Retained              Accumulated
                                  ------------------ Additional   Earnings                 Other         Total
                                    Shares            Paid-in-  (Accumulated Treasury  Comprehensive Shareholders'
                                  Outstanding Amount  Capital     Deficit)    Stock        Loss         Equity
                                  ----------- ------ ---------- ------------ --------  ------------- -------------
<S>                               <C>         <C>    <C>        <C>          <C>       <C>           <C>
BALANCE, December 31, 2001.......   63,793     $65    $622,783   $  67,307   $(10,425)    $(3,618)     $ 676,112
Shares purchased under stock
  purchase plans.................    1,206       2       1,294          --         --          --          1,296
Net losses on interest rate swaps       --      --          --          --         --      (1,214)        (1,214)
Reclassification adjustments.....       --      --          --          --         --       1,357          1,357
Net loss.........................       --      --          --    (456,865)        --          --       (456,865)
Convertible preferred stock
  dividends......................       --      --          --     (10,866)        --          --        (10,866)
                                    ------     ---    --------   ---------   --------     -------      ---------
BALANCE, June 30, 2002...........   64,999     $67    $624,077   $(400,424)  $(10,425)    $(3,475)     $ 209,820
                                    ======     ===    ========   =========   ========     =======      =========
</TABLE>



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


                                      5

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Six Months Ended
                                                                                          June 30,
                                                                                    --------------------
                                                                                       2002       2001
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Cash flows from operating activities:
   Net income (loss)............................................................... $(456,865) $  22,591
   Adjustments to reconcile net income (loss) to net cash provided by operating
     activities:
       Cumulative effect of change in accounting principle, net of tax.............   451,858         --
       Loss from discontinued operations, net of tax...............................     1,125      5,702
       Loss on disposal of discontinued operations, net of tax.....................     1,132         --
       Depreciation and amortization...............................................    18,808     35,560
       Provision for doubtful accounts, net of recoveries..........................     2,067     12,313
       Other non-cash charges......................................................     2,614      1,712
       Changes in operating assets and liabilities:
          Accounts receivable......................................................    40,665     80,269
          Costs and estimated earnings in excess of billings on uncompleted
            contracts..............................................................    (3,897)    (3,911)
          Prepaid expenses and other current assets................................       319     (5,296)
          Billings in excess of costs and estimated earnings on uncompleted
            contracts..............................................................   (13,042)   (30,985)
          Accounts payable and accrued liabilities.................................   (42,264)   (40,065)
          Change in other assets and liabilities...................................     4,168    (22,502)
                                                                                    ---------  ---------
              Net cash provided by operating activities............................     6,688     55,388
                                                                                    ---------  ---------
Cash flows from investing activities:
   Cash paid for acquisitions, net of cash acquired................................      (176)   (10,956)
   Purchases of property and equipment.............................................    (7,800)   (16,378)
   Proceeds from sales of businesses, property and equipment.......................    11,537      4,524
                                                                                    ---------  ---------
              Net cash provided by (used in) investing activities..................     3,561    (22,810)
                                                                                    ---------  ---------
Cash flows from financing activities:
   Net payments on short-term debt.................................................       (52)      (774)
   Payments on long-term debt......................................................  (315,651)  (447,269)
   Proceeds from long-term debt borrowings.........................................   303,600    417,750
   Payment of debt issuance costs..................................................    (4,000)    (4,813)
   Purchase of treasury stock......................................................        --     (2,841)
   Issuance of stock under employee stock purchase and stock option plans..........     1,273      1,798
                                                                                    ---------  ---------
              Net cash used in financing activities................................   (14,830)   (36,149)
                                                                                    ---------  ---------
Net cash flows from discontinued operations........................................    (1,416)    (5,468)
                                                                                    ---------  ---------
Net decrease in cash and cash equivalents..........................................    (5,997)    (9,039)
Cash and cash equivalents, beginning of period.....................................    20,572     10,094
                                                                                    ---------  ---------
Cash and cash equivalents, end of period........................................... $  14,575  $   1,055
                                                                                    =========  =========
Supplemental disclosure of cash flow information:
   Interest paid................................................................... $  34,089  $  43,705
   Income taxes paid (refunded), net...............................................   (10,155)    11,220
</TABLE>

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


                                      6

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                                  (Unaudited)

1.  BUSINESS AND ORGANIZATION

   Encompass Services Corporation ("Encompass", or the "Company"), a Texas
corporation, provides electrical, mechanical and cleaning systems services to
commercial, industrial and residential customers nationwide, including
construction, installation and maintenance.

   The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the separate audited consolidated financial statements and
notes thereto of the Company for the year ended December 31, 2001 as filed in
the Company's Annual Report on Form 10-K/A dated July 1, 2002.

   Certain prior year amounts have been reclassified to conform to the current
year presentation.

2.  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

   Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which established new accounting and reporting requirements
for goodwill and other intangible assets. Under the new standard, goodwill and
intangible assets with indefinite useful lives are no longer amortized to
expense, but instead are tested for impairment at least annually. At January 1,
2002, net goodwill balances attributable to each of the Company's reporting
units were tested for impairment by comparing the fair value of each reporting
unit to its carrying value. Fair value was determined using capitalization of
earnings estimates and market multiples of earnings estimates. Significant
estimates used in the methodologies included estimates of future earnings,
future growth rates, weighted average cost of capital and market valuation
multiples for each reporting unit.

   Based upon these impairment tests performed upon adoption of SFAS No. 142,
the Company recognized a charge of $451.9 million, or $7.04 per share, net of
tax benefit of $48.2 million, at January 1, 2002, which is shown as a
cumulative effect of a change in accounting principle in the consolidated
condensed statement of operations. This non-cash impairment charge has no
impact on the calculation of financial covenants under the Company's debt
agreements.

   Also as prescribed by SFAS No. 142, the Company reclassified the unamortized
balance of its acquired dedicated workforce, which was $5.6 million at January
1, 2002, from intangible assets to goodwill.

   The carrying amount of goodwill attributable to each reportable operating
segment was as follows (in thousands):

<TABLE>
<CAPTION>
                                                        Commercial/     Residential Cleaning
                                                    Industrial Services  Services   Systems      Total
                                                    ------------------- ----------- --------  ----------
<S>                                                 <C>                 <C>         <C>       <C>
Balance at December 31, 2001.......................     $1,101,394       $ 99,126   $ 85,105  $1,285,625
Reclassification of value of dedicated workforce to
  goodwill.........................................          4,430          1,193         --       5,623
Impairment charge..................................       (448,235)            --    (51,841)   (500,076)
                                                        ----------       --------   --------  ----------
Balance at January 1, 2002.........................     $  657,589       $100,319   $ 33,264  $  791,172
                                                        ==========       ========   ========  ==========
</TABLE>

                                      7

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   The following unaudited pro forma results of operations data for the three
months and six months ended June 30, 2002 and 2001 are presented as if the
provisions of SFAS No. 142 had been in effect for all periods presented:

<TABLE>
<CAPTION>
                                                                     Three Months Ended   Six Months Ended
                                                                         June 30,             June 30,
                                                                     ----------------    ------------------
                                                                       2002       2001      2002      2001
                                                                     -------    -------  ---------  -------
                                                                     (in thousands, except per share amounts
<S>                                                                  <C>        <C>      <C>        <C>
Net income (loss) as reported....................................... $(5,985)   $ 8,795  $(456,865) $22,591
Add: cumulative effect of change in accounting principle, net of
  tax...............................................................      --         --    451,858       --
Add: goodwill amortization..........................................      --      8,450         --   16,956
Add: amortization of acquired dedicated workforce...................      --        444         --      888
Less: tax benefit of deductible goodwill amortization...............      --       (497)        --     (994)
                                                                     -------    -------  ---------  -------
   Adjusted net income (loss)....................................... $(5,985)   $17,192  $  (5,007) $39,441
                                                                     =======    =======  =========  =======
Basic EPS:
   Net income (loss) as reported.................................... $ (0.18)   $  0.06  $   (7.29) $  0.19
   Add: cumulative effect of change in accounting principle, net of
     tax............................................................      --         --       7.04       --
   Add: goodwill amortization.......................................      --       0.13         --     0.26
   Add: amortization of acquired dedicated workforce................      --       0.01         --     0.01
   Less: tax benefit of deductible goodwill amortization............      --      (0.01)        --    (0.01)
                                                                     -------    -------  ---------  -------
       Adjusted net income (loss)................................... $ (0.18)   $  0.19  $   (0.25) $  0.45
                                                                     =======    =======  =========  =======
Diluted EPS:
   Net income (loss) as reported.................................... $ (0.18)   $  0.06  $   (7.29) $  0.19
   Add: cumulative effect of change in accounting principle, net of
     tax............................................................      --         --       7.04       --
   Add: goodwill amortization.......................................      --       0.13         --     0.26
   Add: amortization of acquired dedicated workforce................      --       0.01         --     0.01
   Less: tax benefit of deductible goodwill amortization............      --      (0.01)        --    (0.01)
                                                                     -------    -------  ---------  -------
       Adjusted net income (loss)................................... $ (0.18)   $  0.19  $   (0.25) $  0.45
                                                                     =======    =======  =========  =======
</TABLE>

3.  DISCONTINUED OPERATIONS

   In late 2001, the Company decided to exit certain small non-core markets
with limited growth potential. Accordingly, during the three months ended March
31, 2002, the Company sold three relatively small, marginally profitable
business units in the Northeast region of the Company's Commercial/Industrial
Services Group for aggregate cash proceeds of $9.6 million, resulting in a loss
on sale of approximately $1.1 million, net of tax benefit. In accordance with
the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which was adopted effective January 1, 2002, these business
units are classified as discontinued operations. Accordingly, the accompanying
consolidated condensed statements of operations reflect the historical,
after-tax results of these operations as "Loss from discontinued operations,
net of tax". These businesses generated aggregate revenues and operating income
in 2001 of $80.0 million and $1.1 million, respectively.

                                      8

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   In September 2001, the Company discontinued its Global Technologies segment.
Aggregate revenues from the discontinued Global Technologies segment and the
businesses sold in 2002 were $6.4 million and $105.7 million for the six months
ended June 30, 2002 and 2001, respectively.

4.  DEBT AND RIGHTS OFFERING

   Short- and long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                         June 30,  December 31,
                                                           2002        2001
                                                         --------  ------------
<S>                                                      <C>       <C>
Revolving Credit Facility (8.3% and 7.4%, respectively). $ 83,800    $ 90,000
Term loans (6.6% and 6.1%, respectively)................  289,613     294,000
Institutional term loan (6.5% and 7.0%, respectively)...   96,785      98,250
101/2% Senior Subordinated Notes........................  335,000     335,000
Unamortized discount on 101/2% Senior Subordinated Notes   (6,619)     (7,100)
Other borrowings........................................    4,607       4,664
                                                         --------    --------
                                                          803,186     814,814
Less: short-term borrowings and current maturities......   (4,494)     (4,551)
                                                         --------    --------
   Total long-term debt................................. $798,692    $810,263
                                                         ========    ========
</TABLE>

   Effective June 26, 2002, the Company entered into an amended credit facility
(the "Amended Facility"), which provides financial covenant modification
through February 2005. On June 27, 2002, the Company entered into a Securities
Purchase Agreement with affiliates of Apollo Management IV, L.P. ("Apollo"),
whereby Apollo agreed to purchase $35 million of equity securities of the
Company (the "Apollo Investment"). The Apollo Investment is subject to
shareholder approval and the terms and conditions of the Securities Purchase
Agreement.

   The Amended Facility provides for term loans totaling approximately $400
million and a revolving credit facility of $300 million, temporarily limited to
$250 million until funding of the Apollo Investment. In the event the Apollo
Investment is not received by October 15, 2002, the Company will be in
immediate default under the Amended Facility. The $35 million of proceeds from
the Apollo Investment, net of up to $4 million of certain permitted expenses,
are required to be applied against term loans. Borrowings under the Amended
Facility bear interest at variable rates, ranging from 2.0% to 4.25% over the
Eurodollar Rate (as defined in the Amended Facility), and from 0.50% to 2.75%
over the Alternate Base Rate (as defined in the Amended Facility) depending, in
each case, on the Company's total debt-to-EBITDA ratio. In addition, the
Amended Facility places restrictions upon the Company's ability to pay
dividends, make acquisitions and investments and incur capital expenditures and
requires debt prepayment with proceeds from future issuances of debt or equity,
asset sales and excess cash flow, as defined in the Amended Facility.

   The Amended Facility prohibits the payment of cash dividends, which the
Convertible Preferred Stock Agreement requires beginning in April 2003. As a
result, the Company will, in all likelihood, not make its cash dividend payment
in April 2003. If the Company does not make its cash dividend payment in April
2003, the dividend rate on the Convertible Preferred Stock will increase to an
annual rate of 9.25%, and Apollo will have the right to appoint additional
directors to the Company's Board of Directors such that the Apollo-appointed
directors would constitute a majority of the Board of Directors. However, such
events will not trigger a right of acceleration of the Company's redemption
obligation under the Convertible Preferred Stock or any of the Company's debt
instruments.

                                      9

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   The Company plans to enter into a rights offering in order to effect the
Apollo Investment, whereby holders of common stock, certain options and
warrants, and the Convertible Preferred Stock will receive rights to purchase
up to 75 million shares of common stock at a cash subscription price of $0.55
per share. If the rights offering is fully subscribed, the total amount raised,
including the Apollo Investment, will be $72.4 million. Pursuant to the Amended
Facility, 50 percent of any proceeds received from the rights offering in
excess of the $35 million Apollo Investment, less certain permitted expenses,
will be applied toward permanent reduction of the revolving credit facility and
the term loans on a pro-rata basis. The rights offering is conditioned upon
shareholder approval of the Apollo Investment and customary regulatory
approvals. In the event the shareholders do not approve the Apollo Investment,
or if the Apollo Investment is not received on or before October 15, 2002, the
Company will be in immediate default under the Amended Facility. On August 13,
2002, the closing sale price of the Company's common stock was $0.23 per share.
To the extent that shares continue to be available on the open market at prices
below $0.55 per share, participation in the rights offering, other than the
Apollo Investment, is unlikely. Subject to Apollo's consent, the Company can
elect to terminate the rights offering at any time and have Apollo fund the
Apollo Investment by a different form of investment.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has elected three members to the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a debt leverage ratio (total debt to EBITDA, as defined) less than
4.00 to 1. The Company did not maintain a leverage ratio less than 4.00 to 1
during the second quarter of 2002. If such event is deemed both material and
intentional, and so long as the requirements of the covenant are not met,
Apollo is entitled to appoint additional directors to the Company's Board of
Directors such that the Apollo-appointed directors would constitute a majority
of the Board of Directors. Not meeting the total debt leverage covenant does
not trigger a right of acceleration of the Company's obligations under any of
its debt or outstanding preferred stock instruments.

5.  OPERATING SEGMENTS

   The Company has three reportable segments: Commercial/ Industrial Services,
Residential Services and Cleaning Systems. The Company's reportable segments
are strategic business units that, for the most part, offer products and
services to distinct customer groups. They are managed separately because each
segment requires different operating and marketing strategies. Intersegment
transactions are not material.

   The Commercial/Industrial Services Group, which is an aggregation of four
operating segments organized geographically, provides installation and repair
services to the electrical, heating, ventilation and air conditioning ("HVAC"),
plumbing, control and monitoring and process piping systems of commercial and
industrial facilities. The Residential Services Group provides mechanical,
plumbing and other contracting services primarily in single family and low-rise
multifamily housing units. The Cleaning Systems Group provides a wide variety
of facility cleaning and maintenance management services nationwide. From time
to time, management may move business units from one segment to another for
management reporting and evaluation purposes.

   The Company evaluates performance based on income from operations before
amortization of goodwill (applicable to periods prior to January 1, 2002) and
unallocated corporate expenses. While amortization of goodwill was not
considered in evaluating segment performance, the goodwill associated with each
segment is included in the total assets of each segment.

                                      10

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   Unallocated corporate expenses primarily include corporate overhead and
savings from national purchase agreements relating to materials and
property/casualty insurance. Costs related to group and regional management,
and related operational, sales and marketing, accounting and administrative
support are included in the operating costs of each segment. Corporate assets
primarily include cash, deferred tax assets, deferred debt issuance costs and
other intangible assets, certain computer hardware and software, fixed assets
related to the Company's corporate office, cost-based investments and
miscellaneous non-trade accounts receivable.

<TABLE>
<CAPTION>
                                        Commercial/
                                        Industrial  Residential Cleaning
                                         Services    Services   Systems   Corporate   Total
                                        ----------- ----------- --------  --------- ----------
                                                            (in thousands)
<S>                                     <C>         <C>         <C>       <C>       <C>
THREE MONTHS ENDED JUNE 30, 2002:
   Total revenues...................... $  698,858   $ 91,092   $ 76,918  $     --  $  866,868
   Operating costs.....................    696,572     79,940     79,595     1,767     857,874
                                        ----------   --------   --------  --------  ----------
   Operating income.................... $    2,286   $ 11,152   $ (2,677) $ (1,767) $    8,994
                                        ==========   ========   ========  ========  ==========
   Capital expenditures................ $      738   $    274   $    989  $    129  $    2,130
   Depreciation and amortization.......      6,026        543      1,492     1,474       9,535

THREE MONTHS ENDED JUNE 30, 2001:
   Total revenues...................... $  834,232   $ 90,272   $ 72,047  $     --  $  996,551
   Operating costs.....................    784,711     80,061     68,382     4,820     937,974
                                        ----------   --------   --------  --------  ----------
   Segment operating earnings.......... $   49,521   $ 10,211   $  3,665  $ (4,820)     58,577
                                        ==========   ========   ========  ========
   Amortization of goodwill............                                                  9,044
                                                                                    ----------
   Operating income....................                                             $   49,533
                                                                                    ==========
   Capital expenditures................ $    4,434   $    163   $  1,340  $     41  $    5,978
   Depreciation and other amortization.      6,248        593      1,224       716       8,781

SIX MONTHS ENDED JUNE 30, 2002:
   Total revenues...................... $1,415,609   $165,545   $148,703  $     --  $1,729,857
   Operating costs.....................  1,394,535    150,034    150,816     3,710   1,699,095
                                        ----------   --------   --------  --------  ----------
   Operating income.................... $   21,074   $ 15,511   $ (2,113) $ (3,710) $   30,762
                                        ==========   ========   ========  ========  ==========
   Capital expenditures................ $    1,844   $  2,841   $  2,555  $    560  $    7,800
   Depreciation and amortization.......     11,972      1,117      2,922     2,797      18,808

SIX MONTHS ENDED JUNE 30, 2001:
   Total revenues...................... $1,686,388   $164,189   $138,875  $     --  $1,989,452
   Operating costs.....................  1,587,605    149,928    131,708     6,865   1,876,106
                                        ----------   --------   --------  --------  ----------
   Segment operating earnings.......... $   98,783   $ 14,261   $  7,167  $ (6,865)    113,346
                                        ==========   ========   ========  ========
   Amortization of goodwill............                                                 18,144
                                                                                    ----------
   Operating income....................                                             $   95,202
                                                                                    ==========
   Capital expenditures................ $   12,067   $    778   $  2,249  $  1,284  $   16,378
   Depreciation and other amortization.     12,563      1,186      2,420     1,247      17,416

TOTAL ASSETS:
   As of June 30, 2002................. $1,465,880   $156,483   $ 91,169  $138,118  $1,851,650
   As of December 31, 2001.............  1,980,868    148,394    148,740   123,324   2,401,326
</TABLE>

                                      11

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


6.  EARNINGS PER SHARE

   The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations for the three-month and six-month
periods ended June 30, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                  Three Months Ended    Six Months Ended
                                                                       June 30,             June 30,
                                                                  -----------------   -------------------
                                                                    2002       2001      2002      2001
                                                                  --------   -------  ---------  --------
                                                                  (in thousands, except per share amounts)
<S>                                                               <C>        <C>      <C>        <C>
Income (loss) from continuing operations before cumulative effect
  of change in accounting principle.............................. $ (5,431)  $15,877  $  (2,750) $ 28,293
Less: convertible preferred stock dividends......................   (5,481)   (5,107)   (10,866)  (10,124)
                                                                  --------   -------  ---------  --------
Income (loss) from continuing operations before cumulative effect
  of change in accounting principle available to common
  shareholders...................................................  (10,912)   10,770    (13,616)   18,169
Loss from discontinued operations................................     (554)   (7,082)    (1,125)   (5,702)
Loss on disposal of discontinued operations......................       --        --     (1,132)       --
Cumulative effect of change in accounting principle..............       --        --   (451,858)       --
                                                                  --------   -------  ---------  --------
Net income (loss) available to common shareholders............... $(11,466)  $ 3,688  $(467,731) $ 12,467
                                                                  ========   =======  =========  ========
Basic earnings per share:
   Income (loss) from continuing operations before cumulative
     effect of change in accounting principle.................... $  (0.17)  $  0.17  $   (0.21) $   0.28
   Loss from discontinued operations.............................    (0.01)    (0.11)     (0.02)    (0.09)
   Loss on disposal of discontinued operations...................       --        --      (0.02)       --
   Cumulative effect of change in accounting principle...........       --        --      (7.04)       --
                                                                  --------   -------  ---------  --------
   Net income (loss) per share--Basic............................ $  (0.18)  $  0.06  $   (7.29) $   0.19
                                                                  ========   =======  =========  ========
   Weighted average shares outstanding--Basic....................   64,311    64,643     64,175    64,317
                                                                  ========   =======  =========  ========
Diluted earnings per share:
   Income (loss) from continuing operations before cumulaive
     effect of change in accounting principle.................... $  (0.17)  $  0.17  $   (0.21) $   0.28
   Loss from discontinued operations.............................    (0.01)    (0.11)     (0.02)    (0.09)
   Loss on disposal of discontinued operations...................       --        --      (0.02)       --
   Cumulative effect of change in accounting principle...........       --        --      (7.04)       --
                                                                  --------   -------  ---------  --------
   Net income (loss) per share--Diluted.......................... $  (0.18)  $  0.06  $   (7.29) $   0.19
                                                                  ========   =======  =========  ========
   Weighted average shares outstanding--Diluted..................   64,311    64,860     64,175    64,495
                                                                  ========   =======  =========  ========
Weighted average shares:
   Weighted average shares outstanding--Basic....................   64,311    64,643     64,175    64,317
   Common stock equivalents from stock options and
     warrants....................................................       --       217         --       178
                                                                  --------   -------  ---------  --------
   Weighted average shares outstanding--Diluted..................   64,311    64,860     64,175    64,495
                                                                  ========   =======  =========  ========
</TABLE>

                                      12

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


7.  COMPREHENSIVE INCOME

   The following table reconciles net income (loss) to comprehensive income
(loss) for the three-month and six-month periods ended June 30, 2002 and 2001
(in thousands):


<TABLE>
<CAPTION>
                                                           Three Months       Six Months
                                                          Ended June 30,    Ended June 30,
                                                         ---------------  ------------------
                                                           2002    2001      2002      2001
                                                         -------  ------  ---------  -------
<S>                                                      <C>      <C>     <C>        <C>
Net income (loss)....................................... $(5,985) $8,795  $(456,865) $22,591
Other comprehensive income (loss):
   Cumulative effect attributed to adoption of SFAS 133.      --      --         --   (1,488)
   Net losses on interest rate swaps....................    (999)   (179)    (1,214)  (1,634)
   Reclassification adjustments.........................     549     402      1,357      508
                                                         -------  ------  ---------  -------
Total comprehensive income (loss)....................... $(6,435) $9,018  $(456,722) $19,977
                                                         =======  ======  =========  =======
</TABLE>

                                      13

<PAGE>

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

                                 INTRODUCTION

   Encompass Services Corporation ("Encompass," or the "Company") is one of the
largest providers of facilities services in the United States. The Company
provides electrical and mechanical contracting services and cleaning and
maintenance management services to commercial, industrial and residential
customers nationwide, including construction, installation and maintenance.
Encompass operates in three reportable segments: Commercial/Industrial
Services, Residential Services and Cleaning Systems. See Note 5 of Notes to
Consolidated Condensed Financial Statements for a description of each of these
reportable segments.

   A significant portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial, industrial
and residential facilities. Historically, the construction industry has been
highly cyclical, and is in the midst of a downturn, along with the general
economy. The U.S. Department of Commerce construction reports indicate that
private non-residential construction has declined approximately 20% (seasonally
adjusted annual rate) from June 2001 to June 2002, with the largest declines in
the industrial, office building and hotel sectors. Overcapacity in the industry
has resulted in a very competitive pricing environment in many markets,
resulting in downward pressure on profit margins. The Company's profitability
and profit margins have declined accordingly. Operating income margins for the
years ended December 31, 2000 and 2001, and for the six-month period ended June
30, 2002 were 5.2%, 2.3% and 1.8%, respectively. Backlog was approximately $1.4
billion at June 30, 2002, compared to $1.6 billion at December 31, 2001 and
June 30, 2001. The estimated gross profit margin in backlog is approximately 15
basis points lower than at December 31, 2001. Many industry analysts, however,
including F.W. Dodge and FMI, predict increases in non-residential construction
spending in 2003 and 2004 ranging from 4% to 7% per annum. Consequently, the
Company believes that the negative trend in operating margin has stabilized and
that operating margins should improve as demand for the Company's services
increases. In the meantime, the Company is focused on improving profitability
by curbing discretionary spending, while continuing to enhance its sales,
service and project management processes.

Critical Accounting Policies

   Management believes that the Company's most critical accounting policy is in
accounting for long-term construction contracts. Determining the points at
which revenue should be recognized as earned and costs should be recognized as
expenses is a major accounting issue common to all businesses engaged in the
performance of long-term construction contracts. The Company uses the
percentage-of-completion accounting method for construction contracts in
accordance with the American Institute of Certified Public Accountants
Statement of Position 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts". Each of the Company's business units
calculates the percentage-of-completion of each contract by dividing the costs
incurred to date by the estimated total contract costs at completion (the
"cost-to-cost" method). This percentage is then applied to the estimated total
contract value (the total amount of revenue expected to be realized from the
contract) in order to calculate the amount of revenue to be recognized to date
on each contract. Provisions are recognized in the statement of operations for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total contract value.

   Percentage-of-completion accounting requires considerable reliance on
estimates in determining revenues, costs, profit margins and the extent of
progress toward completion on a contract-by-contract basis. Uncertainties
inherent in the performance of contracts generally include labor availability
and productivity, job conditions, material cost, change order scope and
pricing, final contract settlements and other factors. These uncertainties are
evaluated continually for each contract, and the impact of changes in estimates
of total contract costs, total contract value, and other factors are reflected
in the consolidated financial statements in the period in which the revisions
are determined.

   Company business units enter into contracts primarily through competitive
bids, with the final terms and prices often negotiated with the customer.
Although the pricing terms and conditions of contracts vary

                                      14

<PAGE>

considerably, most of these contracts are known as "fixed-price" (or
"lump-sum") contracts, in which the business unit essentially agrees to perform
all acts under the contract for a stated price. Company business units also
enter into "cost-plus" contracts (costs incurred plus a stated mark-up
percentage or a stated fee) and "time-and-materials" contracts (stated hourly
labor rate plus the cost of materials). Fixed-price contracts inherently
contain higher risk of loss than the other contract types, but management
believes that the Company is generally able to achieve higher gross profit
margins on fixed-price contracts as a result of the expertise and experience of
its business units in bidding and job performance. No assurance can be given,
however, that the Company will not incur significant job losses on contracts in
the future.

   Included in costs and estimated earnings on uncompleted contracts are
amounts the Company seeks or will seek to collect from customers or others for
errors on or changes in contract specifications or design, contract change
orders in dispute or unapproved as to both scope and price, or other
customer-related causes of unanticipated additional contract costs
(collectively referred to as unapproved change orders and claims). These
amounts are recorded at their estimated net realizable value when the amounts
of additional contract revenue are probable and can be reliably estimated.
Claims made by the Company involve negotiation and, in certain cases,
litigation. The Company expenses litigation costs as incurred, although it may
seek to recover these costs as part of its claim. The Company believes that it
has a reasonable legal basis for pursuing recovery of recorded claims, and the
Company intends to pursue and litigate these claims, if necessary, until a
decision or settlement is reached. Unapproved change orders and claims involve
the use of estimates, and it is possible that revisions to recorded amounts may
be made as more information becomes available. Claims against the Company are
recognized when a loss is considered probable and amounts are reasonably
determinable.

   The Company recognizes maintenance, repair and replacement revenues,
including cleaning and maintenance management services, as services are
performed. Service contract revenue is recognized ratably over the life of the
service contract. The Company accounts for revenues from fixed price
installation and retrofit contracts on a percentage-of-completion basis using
the cost-to-cost method.

   Cost of services consists primarily of salaries, wages, benefits and
insurance of service and installation technicians, project managers and other
field support employees; materials, components, parts and supplies; engineered
equipment; subcontracted services; depreciation; fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for management,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.

   Accounts receivable collectibility represents another significant accounting
policy. Company business units grant credit, generally without collateral, to
their customers, which primarily include general contractors, property owners
and developers, governmental agencies, educational and medical institutions,
and commercial and industrial companies in a variety of industries. The Company
is subject to potential credit risk related to changes in business and economic
factors throughout the United States. However, the Company is entitled to
payment for work performed and often has certain lien rights that can be
attached to the work performed. Additionally, management continually monitors
the financial condition of its customers to reduce risk of loss. The Company
provides an allowance for doubtful accounts when future collection is
considered doubtful. Historically, receivables collectibility has not been a
significant issue in the facilities services industry, particularly with
respect to new construction. However, the Company recorded provisions for bad
debts totaling $12.3 million from continuing operations during the first six
months of 2001, compared to $2.1 million in the first six months of 2002. The
significant provision in 2001 is primarily attributable to the collapse of the
telecommunications industry discussed below and, to a lesser extent, the
general economic downturn which contributed to financial difficulties of
certain customers outside the technology sector.

                                      15

<PAGE>

                             RESULTS OF OPERATIONS

Three months ended June 30, 2002 compared to three months ended June 30, 2001

   Operating results for the three months ended June 30, 2002 and 2001 are
summarized as follows (in millions):

<TABLE>
<CAPTION>
                                     Three Months Ended Three Months Ended
                                       June 30, 2002      June 30, 2001
                                     -----------------  -----------------
                                              Operating          Operating
                                     Revenues  Income   Revenues  Income
                                     -------- --------- -------- ---------
      <S>                            <C>      <C>       <C>      <C>
      Commercial/Industrial Services  $698.9    $ 2.3    $834.2    $49.5
      Residential Services..........    91.1     11.2      90.3     10.2
      Cleaning Systems..............    76.9     (2.7)     72.1      3.6
      Corporate.....................      --     (1.8)       --     (4.8)
      Amortization of goodwill......      --       --        --     (9.0)
                                      ------    -----    ------    -----
         Total......................  $866.9    $ 9.0    $996.6    $49.5
                                      ======    =====    ======    =====
</TABLE>

   Segment Results. Commercial/Industrial Services Group revenues decreased 16%
to $698.9 million for the three months ended June 30, 2002 compared to the
comparable period in 2001 primarily as a result of the decline in revenues from
the technology and telecommunications sector and the general economic slowdown.
Commercial/Industrial Services operating income decreased 95% to $2.3 million
in the three months ended June 30, 2002 period compared to income of $49.5
million in the comparable period in 2001, primarily as a result of increased
pricing pressures on projects as a result of deteriorating economic conditions,
reduced levels of work done for customers in the higher margin technology and
telecommunications sector, and job losses totaling $13.3 million on two
specific large fixed-price contracts. Residential Services Group revenues
increased 1% to $91.1 million and operating income increased 9% to $11.2
million, reflecting continued growth in market conditions in key housing
markets and increased penetration of certain markets. Cleaning Systems Group
revenues increased 7% to $76.9 million primarily as a result of an increased
volume of national service contracts. Cleaning Systems operating income
declined to a loss of $2.7 million due primarily to bad debt provisions of $2.8
million on financially struggling retail accounts, service disruption caused by
the bankruptcy filing of a significant retail customer and weak performance in
the group's West Coast contract management operations.

   Revenues. Revenues decreased $129.7 million, or 13%, to $866.9 million for
the three months ended June 30, 2002 from $996.6 million for the three months
ended June 30, 2001. The decrease is primarily attributable to decreases in
revenues from technology and telecommunications customers in the West and
Southwest regions of the Company's Commercial/Industrial Services Group and the
general deterioration in the overall economic environment. The U.S. Department
of Commerce construction reports indicate that private non-residential
construction declined approximately 20% (seasonally adjusted annual rate) from
June 2001 to June 2002.

   Gross profit. Gross profit decreased $68.5 million, or 39%, to $107.5
million for the three months ended June 30, 2002 from $176.0 million for the
three months ended June 30, 2001. This decrease in gross profit is primarily
due to increased pricing pressures on projects as a result of weaker economic
conditions, reduced levels of work done for customers in the higher margin
technology and telecommunications sector, and job losses totaling $13.3 million
on two specific large jobs. Gross profit margin decreased to 12.4% for the
three months ended June 30, 2002 compared to 17.7% for the three months ended
June 30, 2001 for the same reasons.

   Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $8.5 million, or 8%, to $98.9 million for the
three months ended June 30, 2002 from $107.4 million for the three months ended
June 30, 2001. The decrease in these expenses is primarily attributable to
lower volumes of work than in the prior year period, integration-related cost
savings and cost-reduction initiatives. As a percentage of revenues, selling,
general and administrative expenses increased to 11.4% for the three months
ended June 30,

                                      16

<PAGE>

2002 from 10.8% for the three months ended June 30, 2001. This increased
percentage is primarily due to a lower revenue base across which to spread
fixed overhead costs.

   Provision for doubtful accounts, net of recoveries. Provision for doubtful
accounts decreased from a provision of $10.0 million for the three months ended
June 30, 2001 to net bad debt recoveries of $0.4 million in the three months
ended June 30, 2002. The prior year provision is primarily attributable to a
$9.8 million charge recorded in the second quarter of 2001 to reserve certain
accounts receivable from customers in the telecommunications industry.

   Amortization of goodwill. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142 effective January 1, 2002, the
Company recorded no goodwill amortization in 2002. See Note 2 of Notes to
Consolidated Condensed Financial Statements for further discussion. Goodwill
amortization for the three months ended June 30, 2001 was $9.0 million.

   Other income (expense). Other income (expense) primarily includes net
interest expense of $19.6 million for the three months ended June 30, 2002,
reflecting a $0.1 million decrease from the three months ended June 30, 2001.
Net interest expense was lower in 2002 primarily as a result of lower average
debt balances and higher interest income, partially offset by the impact of
higher interest rates on debt.

   Income tax provision (benefit). As a result of lower earnings before taxes,
the income tax provision decreased $18.6 million to a $4.9 million benefit for
the three months ended June 30, 2002, compared to a $13.7 million provision for
the three months ended June 30, 2001. The effective tax rate for the three
months ended June 30, 2002 was 47.5% compared to 46.3% for the three months
ended June 30, 2001.

   Loss from discontinued operations, net of tax. During the three months ended
June 30, 2002, the Company recorded a loss, net of tax, of $0.6 million related
to the transition and wind-down of the three business units sold during the
first quarter of 2002, compared to a loss, net of tax, from these discontinued
operations as well as those of the discontinued Global Technologies segment of
$7.1 million for the three months ended June 30, 2001. See Note 3 of Notes to
Consolidated Condensed Financial Statements for further discussion.

Six months ended June 30, 2002 compared to six months ended June 30, 2001

   Operating results for the six months ended June 30, 2002 and 2001 are
summarized as follows (in millions):

<TABLE>
<CAPTION>
                                         Six Months          Six Months
                                     Ended June 30, 2002 Ended June 30, 2001
                                     -----------------   -----------------
                                               Operating           Operating
                                     Revenues   Income   Revenues   Income
                                     --------  --------- --------  ---------
      <S>                            <C>       <C>       <C>       <C>
      Commercial/Industrial Services $1,415.6    $21.1   $1,686.4   $ 98.8
      Residential Services..........    165.6     15.5      164.2     14.2
      Cleaning Systems..............    148.7     (2.1)     138.9      7.2
      Corporate.....................       --     (3.7)        --     (6.9)
      Amortization of goodwill......       --       --         --    (18.1)
                                     --------    -----   --------   ------
         Total...................... $1,729.9    $30.8   $1,989.5   $ 95.2
                                     ========    =====   ========   ======
</TABLE>

   Segment Results. Commercial/Industrial Services Group revenues decreased 16%
to $1,415.6 million for the six months ended June 30, 2002 compared to the
comparable period in 2001 primarily as a result of the decline in revenues from
the technology and telecommunications sector and the general economic slowdown.
Commercial/Industrial Services operating income decreased 79% to $21.1 million
in the six months ended June 30, 2002 period compared to the comparable period
in 2001, primarily as a result of increased pricing pressures on projects as a
result of deteriorating economic conditions, reduced levels of work done for
customers in the higher margin technology and telecommunications sector, and
job losses totaling $13.3 million on two specific large

                                      17

<PAGE>

fixed-price contracts. Residential Services Group revenues increased 1% to
$165.6 million, and operating income increased 9% to $15.5 million, reflecting
improved market conditions in key housing markets and increased penetration of
certain markets. Cleaning Systems Group revenues increased 7% to $148.7 million
primarily as a result of an increased volume of national service contracts.
Cleaning Systems operating income declined to a loss of $2.1 million due
primarily to bad debt provisions of $2.8 million on financially struggling
retail accounts, service disruption caused by the bankruptcy filing of a
significant retail customer and weak performance in the group's West Coast
contract management operations.

   Revenues. Revenues decreased $259.6 million, or 13%, to $1,729.9 million for
the six months ended June 30, 2002 from $1,989.5 million for the six months
ended June 30, 2001. The decrease is primarily attributable to decreases in
revenues from technology and telecommunications customers in the West and
Southwest regions of the Company's Commercial/Industrial Services Group and as
a result of the general deterioration in the overall economic environment. The
U.S. Department of Commerce construction reports indicate that private
non-residential construction declined approximately 20% (seasonally adjusted
annual rate) from June 2001 to June 2002.

   Gross profit. Gross profit decreased $124.9 million, or 35%, to $227.8
million for the six months ended June 30, 2002 from $352.7 million for the six
months ended June 30, 2001. This decrease in gross profit is primarily due to
increased pricing pressures on projects as a result of weaker economic
conditions, reduced levels of work done for customers in the higher margin
technology and telecommunications sector and job losses totaling $13.3 million
on two specific large fixed-price contracts. Gross profit margin decreased to
13.2% for the six months ended June 30, 2002 compared to 17.7% for the six
months ended June 30, 2001, for the reasons mentioned above.

   Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $32.1 million, or 14%, to $195.0 million for
the six months ended June 30, 2002 from $227.1 million for the six months ended
June 30, 2001. The decrease in these expenses is primarily attributable to
lower volumes of work than in the prior year period, integration-related cost
savings and cost-reduction initiatives. As a percentage of revenues, selling,
general and administrative expenses decreased to 11.3% for the six months ended
June 30, 2002 from 11.4% for the six months ended June 30, 2001. This decreased
percentage is primarily due to integration-related cost savings and the
elimination of overhead positions from other cost-reduction initiatives.

   Provision for doubtful accounts, net of recoveries. Provision for doubtful
accounts decreased $10.2 million, or 83%, to $2.1 million in the first six
months of 2002, compared to $12.3 million in the same period of 2001. This
decrease is primarily attributable to a $9.8 million charge recorded in the
second quarter of 2001 to reserve certain accounts receivable from customers in
the telecommunications industry.

   Amortization of goodwill. In accordance with the provisions of SFAS No. 142
effective January 1, 2002, the Company recorded no goodwill amortization in
2002. See Note 2 of Notes to Consolidated Condensed Financial Statements for
further discussion. Goodwill amortization for the six months ended June 30,
2001 was $18.1 million.

   Other income (expense). Other income (expense) primarily includes net
interest expense of $37.8 million for the six months ended June 30, 2002,
reflecting a $4.3 million decrease from the six months ended June 30, 2001. Net
interest expense was lower in 2002 primarily as a result of lower average debt
balances outstanding.

   Income tax provision (benefit). As a result of lower earnings before taxes,
the income tax provision decreased $27.6 million to a $3.0 million benefit for
the six months ended June 30, 2002 from a $24.7 million expense for the six
months ended June 30, 2001. The effective tax rate for the six months ended
June 30, 2002 was 52.0% compared to 46.6% for the six months ended June 30,
2001. The increase in the effective tax rate is due to the effect of
non-deductible expenses making up a larger proportion of pre-tax income (loss)
in 2002 compared to 2001.

                                      18

<PAGE>

   Loss from discontinued operations, net of tax. The Company recorded a
combined loss, net of tax, from three business units sold during the first
quarter of 2002 of $1.1 million for the six months ended June 30, 2002 compared
to a loss, net of tax, from these discontinued operations as well as those of
the discontinued Global Technologies segment of $5.7 million for the six months
ended June 30, 2001. See Note 3 of Notes to Consolidated Condensed Financial
Statements for further discussion.

   Loss on disposal of discontinued operations, net of tax. The Company
recorded a loss on the sale of the three business units sold during the first
quarter of 2002 of $1.1 million, net of related income tax benefit of $0.8
million. These businesses were sold for aggregate net proceeds of $9.6 million.
See Note 3 of Notes to Consolidated Condensed Financial Statements for further
discussion.

   Cumulative effect of change in accounting principle, net of tax. The
cumulative effect of change in accounting principle, net of tax, represents a
non-cash charge for impairment of goodwill, in accordance with the adoption of
the provisions of SFAS No. 142 on January 1, 2002, of $451.9 million, net of
tax benefit of $48.2 million. This non-cash impairment charge has no impact on
the calculation of financial covenants under the Company's debt agreements. See
Note 2 of Notes to Consolidated Condensed Financial Statements for further
discussion.

                        LIQUIDITY AND CAPITAL RESOURCES

   The Company finances its operations and growth primarily with internally
generated funds and borrowings from commercial banks and other lenders. During
the second quarter of 2002, management anticipated that the Company might not
be able to remain in compliance with the financial covenants contained in its
primary bank credit facility (the "Credit Facility") as of June 30, 2002.
Accordingly, the Company entered into negotiations with its senior bank lenders
to amend the financial covenants to avoid a possible default as of the end of
the second quarter. Effective June 26, 2002, the Company entered into an
amended credit facility (the "Amended Facility"), which provides financial
covenant modifications through February 2005. Management anticipates that the
Company's cash flow from operations and existing borrowing capacity under the
Amended Facility will be adequate to fund the Company's normal working capital
needs, debt service requirements and planned capital expenditures for 2002.

   The Amended Facility consists of approximately $400 million in Term Loans
and a $300 million Revolving Credit Facility. Pursuant to the Amended Facility,
the Company is required to sell $35.0 million of voting stock to affiliates of
Apollo Management IV, L.P. ("Apollo") in a rights offering or other investment
(the "Apollo Investment") and to apply $31.0 million of the proceeds to
permanently reduce amounts outstanding under the Term Loans by October 15,
2002. The Revolving Credit Facility is temporarily limited to $250 million,
until the Apollo Investment has been funded. Availability under the Revolving
Credit Facility, after applying available cash and deducting letter of credit
commitments, was $110.6 million at July 31, 2002. The Company is currently in
compliance with all financial covenants under the Amended Facility. Although no
absolute assurance can be given, the Company's internal financial projections
for the balance of 2002 indicate that the Company will remain in compliance
with all financial covenants under the Amended Facility for the duration of the
year.

   On June 27, 2002, the Company entered into a Securities Purchase Agreement
with affiliates of Apollo, whereby Apollo agreed to purchase $35.0 million of
voting stock of the Company, subject to the terms and conditions of the
Securities Purchase Agreement. In connection therewith, the Company plans to
enter into a rights offering whereby holders of common stock, certain options
and warrants, and the Convertible Preferred Stock will receive rights to
purchase up to an aggregate of 75 million shares of Company common stock,
including the Apollo Investment, at a cash subscription price of $0.55 per
share. If the rights offering is fully subscribed, the total amount raised,
including the Apollo Investment, will be $72.4 million. Pursuant to the Amended
Facility, proceeds from the $35.0 million Apollo Investment, net of up to $4.0
million of certain permitted expenses, are required to be applied against the
Terms Loans, and 50 percent of the proceeds received

                                      19

<PAGE>

from the rights offering in excess of the Apollo Investment, net of certain
permitted expenses, will be applied toward permanent reduction of the Revolving
Credit Facility and the Term Loans, on a pro rata basis. The rights offering is
conditioned upon shareholder approval of the Apollo Investment and customary
regulatory approvals. In the event the shareholders do not approve the Apollo
Investment, or if the Apollo Investment is not received on or before October
15, 2002, the Company will be in immediate default under the Amended Facility.
On August 13, 2002, the closing sale price of the Company's common stock was
$0.23 per share. To the extent that shares continue to be available on the open
market at prices below $0.55 per share, participation in the rights offering,
other than the Apollo Investment, is unlikely. Subject to Apollo's consent, the
Company can elect to terminate the rights offering at any time and have Apollo
fund the Apollo Investment by a different form of investment.

   Under the Amended Facility, the Company is required to maintain compliance
with the following financial covenants, measured as of the end of each fiscal
quarter: (1) a minimum Fixed Charge Coverage Ratio (as defined); (2) a maximum
ratio of senior debt to pro forma EBITDA (as defined); (3) a maximum ratio of
Funded Debt (as defined) to pro forma EBITDA (as defined); (4) a minimum amount
of Consolidated Net Worth (as defined); and (5) a maximum amount of capital
expenditures. In addition, the Amended Facility restricts the Company's ability
to pay dividends, make acquisitions and investments and incur capital
expenditures and requires debt prepayment with proceeds from future issuances
of debt or equity, asset sales and excess cash flow (as defined in the Amended
Facility).

   The Company intends to sell certain under-performing or non-strategic
business units, provided that the Company is able to secure prices, terms and
conditions deemed acceptable by the Company. Including the anticipated tax
benefits associated with the sales of some of these businesses, the Company
believes that the aggregate cash benefit to be realized from sales of
businesses will exceed $50 million. Pursuant to the Amended Facility, the
proceeds of any such sales will be used to permanently reduce balances
outstanding under the Term Loans and the Revolving Credit Facility, on a
pro-rata basis. There can be no assurance that the Company will secure
satisfactory offers for any business unit or that some business units will not
be sold at a loss.

   For the six months ended June 30, 2002, the Company generated $6.7 million
of cash from operating activities, compared to $55.4 million for the six months
ended June 30, 2001. Operating cash flow before changes in working capital and
other operating accounts for the six months ended June 30, 2002 provided $20.7
million compared to $77.9 million for the six months ended June 30, 2001. The
decrease in 2002 compared to 2001 is primarily the result of lower
profitability levels in 2002. Net changes in working capital and other
operating accounts used $14.0 million in the six months ended June 30, 2002,
compared to $22.5 million for the same period in 2001. The decrease in working
capital usage in 2002 was primarily a result of management focus on working
capital management and a general business slowdown.

   For the six months ended June 30, 2002, the Company generated $3.6 million
of cash in investing activities, as the $11.5 million of proceeds from the
sales of three businesses and other assets more than offset capital
expenditures of $7.8 million. The Company used cash in investing activities of
$22.8 million during the six months ended June 30, 2001. Capital expenditures
in the six months ended June 30, 2002 totaled $7.8 million, compared to $16.4
million for the comparable period in 2001, as management continues to defer
discretionary capital spending in 2002.

   The Company used $14.8 million of cash for financing activities in the six
months ended June 30, 2002, primarily representing the net repayment of amounts
borrowed under the Revolving Credit Facility. Financing activities used cash of
$36.1 million in the first six months of 2001, which also primarily represented
net debt repayments.

   Borrowings under the Amended Facility bear interest at variable rates,
ranging from 2.0% to 4.25% over the Eurodollar Rate (as defined in the Amended
Facility) and from 0.50% to 2.75% over the Alternate Base Rate (as defined in
the Amended Facility), depending, in each case, on the Company's total
debt-to-EBITDA ratio. At June 30, 2002, the applicable margins for borrowings
under the Revolving Credit Agreement were 4.00% over the Eurodollar Rate and
2.50% over the Alternate Base Rate.

                                      20

<PAGE>

   The Company has entered into interest rate swap agreements in the aggregate
notional amount of $90 million to manage its mix of fixed and floating rate
debt to partially hedge its exposure to potential fluctuations in interest
rates. All such agreements are with large creditworthy financial institutions
and result in the Company paying a fixed rate of interest and receiving a
floating rate. At June 30, 2002, the Company's ratio of fixed rate debt to
total debt was 42% and the weighted average interest rate on its total debt was
9.0%, before considering the aforementioned interest rate swap agreements.
After giving effect to the interest rate swap agreements in effect at June 30,
2002, the ratio of fixed rate debt was 53% and the weighted average interest
rate on its total debt was 9.2%.

   The Company has outstanding $335.0 million of 10 1/2% senior subordinated
notes (the "Senior Subordinated Notes"). The Senior Subordinated Notes are
unsecured and guaranteed by the Company's subsidiaries, require interest to be
paid semi-annually on May 1 and November 1 of each year and mature on May 1,
2009.

   The Company may redeem the Senior Subordinated Notes, in whole or in part,
at any time on or after May 1, 2004 at specified redemption prices, plus
accrued interest. Upon a change of control of the Company (as defined in the
indenture for the Senior Subordinated Notes), the Company will be required to
offer to purchase all of the outstanding Senior Subordinated Notes at 101% of
the face amount plus accrued interest. Additionally, the indenture governing
the Senior Subordinated Notes contains certain covenants that restrict, among
other things, the Company's ability to incur indebtedness, pay dividends or
repurchase capital stock, incur liens, sell or otherwise dispose of a
substantial portion of assets or merge or consolidate with another entity.

   The Company has 256,191 shares of Convertible Preferred Stock outstanding,
which are held by Apollo. The Convertible Preferred Stock, if not otherwise
converted, is redeemable in 2012, and is entitled to receive an annual dividend
of 7.25% payable quarterly. Under the terms of the Convertible Preferred Stock
Agreement, until February 22, 2003, dividends on the Convertible Preferred
Stock may be paid in cash on a current basis or accumulated, at the option of
the Company. However, the Amended Facility prohibits the payment of cash
dividends, which the Convertible Preferred Stock Agreement requires beginning
in April 2003. As a result, the Company will, in all likelihood, not make its
cash dividend payment in April 2003. If the Company does not make its cash
dividend payment in April 2003, the dividend rate on the Convertible Preferred
Stock will increase to an annual rate of 9.25%, and Apollo will have the right
to appoint additional directors to the Company's Board of Directors such that
the Apollo-appointed directors would constitute a majority of the Board of
Directors. However, such events will not trigger a right of acceleration of the
Company's redemption obligation under the Convertible Preferred Stock or any of
its debt instruments. The Convertible Preferred Stock is convertible into
shares of the Company's common stock at any time by the holders at a conversion
price of $14 per common share, subject to adjustment under certain
circumstances.

Other Contractual Obligations and Commercial Commitments

   As is common in the facilities services industry, the Company enters into
certain off-balance sheet arrangements in the ordinary course of business,
including non-cancelable operating leases, letters of credit and surety
guarantees. The Company does not own any "special purpose" financing
subsidiaries.

   The Company enters into operating leases for many of its facility, vehicle
and equipment needs. Such lease arrangements enable the Company to conserve
cash by paying monthly lease rental fees for the applicable assets rather than
purchasing them. At the end of the lease period, the Company has no further
obligation to the lessor. If the Company decides to cancel or terminate a lease
prior to the end of its term, the Company is typically obligated to pay the
remaining lease payments over the term of the lease, and in certain cases may
be allowed to sublet the asset to another party.

   The Company is occasionally required to post letters of credit generally
issued by a bank as collateral under certain insurance programs or, on
occasion, to ensure performance under contracts. A letter of credit commits the
issuer to remit specified amounts to the holder, if the holder demonstrates
that the Company has failed to meet its

                                      21

<PAGE>

obligations under the letter of credit. If this were to occur, the Company
would be obligated to reimburse the issuer for any payments the issuer was
required to remit to the holder of the letter of credit. Generally, a letter of
credit is released when the Company has performed its obligations that the
letter of credit is securing. To date, the Company has not had a claim made
against a letter of credit that resulted in a payment made by an issuer or the
Company to the holder.

   Particularly in connection with larger construction contracts, the Company
is often required to post bid and/or performance bonds issued by a financial
institution known as a surety. Such bonds provide a guarantee to the customer
that the Company will perform under the terms of the contract and be able to
pay its subcontractors and vendors. If the Company was to fail to perform its
obligations under the contract, the customer would have the right to demand
payment or services from the surety under the bond. The Company would then be
obligated to reimburse the surety for any expenses or outlays that it incurred
in the matter.

Seasonality and Cyclicality

   A significant portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial, industrial
and residential facilities. The portion of the Company's business related to
new construction is subject to seasonal fluctuations. Specifically, the demand
for the Company's contracting services involving new construction is generally
lower during the winter months, when construction activities are reduced as a
result of inclement weather in many areas of the United States. In addition,
the demand for mechanical maintenance, repair and replacement services also
tends to be lower in the winter months due to lower air conditioning usage
during these months. Accordingly, the Company expects its revenues and
operating results generally will be lowest in the first fiscal quarter of the
year.

   Historically, the construction industry has also been highly cyclical. The
level of new construction in the commercial and industrial sectors is affected
by, among other things, local and national economic conditions, interest rates,
inflationary concerns, levels of corporate and government capital spending,
capital market activities and governmental activities at the regional and
national levels. Factors impacting the level of new residential construction
tend to be regional in nature, and include general employment and personal
income levels, the availability and cost of financing for new home buyers and
the general economic outlook for a given geographic region.

   The Company performs contracting services related to new construction in a
variety of industries including, among others, automotive, heavy industrial,
commercial real estate development, residential housing, retail, healthcare,
education, government/institutional, petrochemical refining, data and
telecommunications, and sports and entertainment. Consequently, management
believes that a temporary slowdown in new construction related to any one of
these industries would not likely have a significant impact on the Company's
financial condition. However, concurrent downturns in new construction in
multiple industries or geographic regions, or prolonged slowdowns (such as the
Company is currently experiencing) in specific industries or geographic
regions, could have (and have had) a negative impact on the Company's business,
including its financial condition, results of operations and liquidity.

New Accounting Pronouncements

   Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets," which establish new accounting and
reporting requirements for goodwill and other intangible assets. Under the new
standard, goodwill and intangible assets with indefinite useful lives are no
longer amortized to expense, but instead are tested for impairment at least
annually. At January 1, 2002, net goodwill balances attributable to each of the
Company's reporting units were tested for impairment by comparing the fair
value of each reporting unit to its carrying value. Fair value was determined
using capitalization of earnings estimates and market multiples of earnings
estimates. Significant estimates used in the methodologies included estimates
of future earnings, future growth rates, weighted average cost of capital and
market valuation multiples for each reporting unit.

                                      22

<PAGE>

   Based upon these impairment tests performed upon adoption of SFAS No. 142,
the Company recognized a charge of $451.9 million, or $7.04 per share, net of
tax benefit of $48.2 million, at January 1, 2002, which is shown as a
cumulative effect of a change in accounting principle in the consolidated
condensed statement of operations. This non-cash impairment charge has no
impact on the calculation of financial covenants under the Company's debt
agreements.

   Also as prescribed by SFAS No. 142, the Company reclassified the unamortized
balance of its acquired dedicated workforce, which was $5.6 million at January
1, 2002, from intangible assets to goodwill. See Note 2 of Notes to
Consolidated Condensed Financial Statements for further discussion.

   In August 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supersedes both SFAS No. 121 and the accounting and reporting provisions
of Accounting Principles Board Opinion ("APB") No. 30, for the disposal of a
business. SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the new rules change the criteria to be
met to classify an asset as held-for-sale. The new rules also broaden the
criteria regarding classification of a discontinued operation. The Company
adopted the provisions of SFAS No. 144, as required, effective January 1, 2002.
See Note 3 of the Notes to Consolidated Condensed Financial Statements for
further discussion.

   In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 amends existing authoritative pronouncements to make
various technical corrections, clarify meanings, and describe their
applicability under changed conditions. This statement requires that gains and
losses from the extinguishment of debt be classified as extraordinary items
only if they meet the criteria in APB No. 30. The Company must adopt the
provisions of SFAS No. 145 on January 1, 2003. Management does not believe that
the adoption of SFAS No. 145 will have a material impact on the Company's
financial position or results of operations.

   In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that exit or
disposal costs be recorded when they are "incurred." Commitment to a plan to
exit an activity or dispose of long-lived assets will no longer be sufficient
to record a one-time charge for most anticipated costs. The Company must adopt
the provisions of SFAS No. 146 on January 1, 2003. Management does not believe
that the adoption of SFAS No. 146 will have a material impact on the Company's
financial position or results of operations.

Risk Factors

   The Company has a significant amount of debt in relation to its current
level of operating income, which could limit the Company's flexibility with
respect to obtaining additional financing in the future to fund working capital
growth, debt service requirements or other purposes. This level of debt also
increases the Company's vulnerability to further adverse economic and industry
conditions and higher interest rates, and may place the Company at a
competitive disadvantage compared to competitors with relatively less
indebtedness.

   The Company's ability to satisfy its debt obligations and other cash needs
will depend on, among other things, the Company's future operating performance
and its ability to refinance or exchange debt when necessary, including the
potential issuance of additional common or preferred stock. These factors are,
to a large extent, dependent on economic, capital market, competitive and other
factors beyond the Company's control. The Company's future operating results
are difficult to project and may be affected by a number of factors, including
general economic conditions, the level of new construction of commercial and
industrial facilities, commercial demand for replacement of electrical, HVAC
and plumbing systems, new housing starts, the availability of qualified labor
and project management personnel and other factors in areas in which the
Company operates.

                                      23

<PAGE>

   Particularly in connection with larger construction contracts, the Company
is often required to post bid or performance bonds issued by a financial
institution known as a surety. The surety industry has become an unsettled and
volatile market in recent months, in the aftermath of certain notable corporate
bankruptcies with significant surety exposure, other recent loss exposures and
other factors. Collectively, these events have caused certain reinsurers and
sureties to reevaluate their committed levels of underwriting and required
returns. The ultimate impact of these developments, if any, on the surety
market in general, or the Company specifically, cannot be determined at this
time. Historically, as needed in the normal course of operations, the Company
has been able to secure bid and performance bonds. The Company continues to
seek opportunities to expand its surety relationships and monitors bonding
requests from its business units in order to manage the dollar volume and
optimize the value of outstanding surety bonds. Given the uncertainty in the
current surety market, there can be no assurance that the Company's available
bonding capacity will be sufficient to satisfy its future bonding requirements.

   The Company has grown substantially by acquiring other companies in its
industry. The Company's future success depends in part on its ability to
integrate the businesses it has acquired into one enterprise with a common
operating plan. Most of these acquired businesses have recently changed or, in
certain cases, are in the process of changing their past operating processes
and systems, such as accounting, employment, purchasing, sales, estimating and
project management. There can be no assurance that the Company will be able to
successfully complete the integration of these businesses.

   Included in our customer base are a number of companies involved in the
telecommunications industry, including fiber-optic network companies, wireless
phone companies and high-speed Internet providers. The telecommunications
industry has suffered a significant downturn during the past eighteen months,
resulting in numerous bankruptcies involving Company customers. During the six
months ended June 30, 2001, the Company recorded $9.8 million in continuing
operations and $9.0 million in the discontinued Global Technologies operations
to reserve certain accounts receivable from customers in the telecommunications
industry. The Company continues to perform services in the telecommunications
industry and total net receivables from identified telecommunications customers
as of June 30, 2002, were less than $25 million.

   As the holder of the Company's Convertible Preferred Stock, Apollo is able
to exert significant influence over the election of the Company's directors and
matters submitted to shareholders, as well as over the Company's business
operations. So long as Apollo beneficially owns at least 25% of the Company's
common stock underlying the Convertible Preferred Stock, Apollo has the right
to purchase for cash any common stock equivalent that the Company offers in a
private placement and the right to preclude the Company from entering into
various types of transactions or making certain changes in capital structure or
management without Apollo's consent.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has elected three members to the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a debt leverage ratio (total debt to EBITDA, as defined) less than
4.00 to 1. The Company did not maintain a leverage ratio less than 4.00 to 1
during the second quarter of 2002. If such event is deemed both material and
intentional, and so long as the requirements of the covenant are not met,
Apollo is entitled to appoint additional directors to the Company's Board of
Directors such that the Apollo-appointed directors would constitute a majority
of the Board of Directors. Not meeting the total debt leverage covenant does
not trigger a right of acceleration of the Company's obligations under any of
its debt or outstanding preferred stock instruments.

   Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should be
aware that the trading price of the Company's common stock may be subject to
wide fluctuations in response to quarterly variations in operating results,
general conditions in the construction industry, analyst recommendations and
earnings estimates, or other events.

                                      24

<PAGE>

Forward Looking Statements

   This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
the Company's current expectations and involve risks and uncertainties that
could cause the Company's actual results to differ materially from those set
forth in the statements. The Company can give no assurance that such
expectations will prove to be correct. Factors that could cause the Company's
results to differ materially from current expectations include: non-approval by
the Company's shareholders of the Apollo Investment; the level of demand for
the Company's services by multi-site customers; the level of interest rates,
which affects demand for the Company's services and its interest expense; the
potential impact of any acquisition, disposition, merger, joint venture or any
other significant financial transactions of material financial nature that
could occur in the future; working capital requirements; and general economic
conditions; as well as other factors listed in the Company's Annual Report on
Forms 10-K and 10-K/A for the year ended December 31, 2001.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

   The table below provides scheduled principal payment and fair value
information about the Company's market-sensitive financial instruments as of
June 30, 2002. The Company's major market risk exposure is interest rate
volatility. The Company has entered into interest rate swap agreements in the
aggregate notional amount of $90 million to manage its mix of fixed and
floating rate debt to partially hedge its exposure to potential fluctuations in
interest rates. All items described below are stated in thousands of U.S.
dollars. This information constitutes a "forward looking statement."

<TABLE>
<CAPTION>
                                                                                                    Fair Value at
         June 30, 2002             2002     2003     2004     2005     2006    Thereafter   Total   June 30, 2002
         -------------            ------  -------  -------  -------  --------  ---------- --------  -------------
<S>                               <C>     <C>      <C>      <C>      <C>       <C>        <C>       <C>
Debt:
   Revolving Credit Facility..... $   --  $    --  $    --  $83,800  $     --   $     --  $ 83,800    $ 83,800
      Average rate (a)...........                               8.3%                           8.3%
   Term Credit Facilities........ $2,000  $ 4,000  $ 4,000  $ 4,000  $280,113   $ 92,285  $386,398    $386,398
      Average rate (a)...........    6.5%     6.5%     6.5%     6.5%      6.5%       6.5%      6.5%
   Senior Subordinated Notes..... $   --  $    --  $    --  $    --  $     --   $335,000  $335,000    $190,950
      Average rate...............                                                   10.5%     10.5%
   Other Borrowings.............. $  494  $ 1,613  $ 2,500  $    --  $     --   $     --  $  4,607    $  4,607
      Average rate...............    9.5%     6.0%     7.5%
Interest Rate Swaps:
   Notional amounts-variable to
    fixed........................ $   --  $50,000  $40,000       --        --         --  $ 90,000    $ (6,491)
   Average pay rate..............     --      6.7%     6.7%      --        --         --       6.7%
   Average receive rate (a)......     --      1.9%     1.9%      --        --         --       1.9%
</TABLE>
--------
(a) Represents weighted average rate at June 30, 2002.

                                      25

<PAGE>

                                    PART II

                               OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders.

   Pursuant to the Investors' Rights Agreement relating to the 7.25%
Convertible Preferred Stock of the Company (the "Convertible Preferred Stock"),
Apollo Management IV, L.P. and certain of its affiliates ("Apollo"), as holders
of all the Convertible Preferred Stock outstanding, were entitled to elect
three of the ten directors to be elected to the Board of Directors of the
Company at the 2002 Annual Meeting of Shareholders. By written consent, Apollo
cast all of its 256,191 shares of Convertible Preferred Stock (21,293,269
shares of common stock equivalent) to elect Andrew Africk, Michael Gross and
Scott Kleinman as directors to serve for a term to expire at the 2003 Annual
Meeting of Shareholders.

   The Company held its Annual Meeting of Shareholders on June 26, 2002 (the
"Annual Meeting") for the purpose of electing seven additional directors for a
term expiring at the Company's 2003 Annual Meeting of Shareholders and
approving the appointment of independent public accountants for the year 2002.
The following summarizes the shareholder voting results.

      (a) Election of directors (in addition to those elected by Apollo) for a
   term to expire at the 2003 Annual Meeting of Shareholders:

<TABLE>
<CAPTION>
                                             For     Withheld
                                          ---------- ---------
                 <S>                      <C>        <C>
                 Vincent W. Eades........ 73,835,815 1,192,435
                 Joseph M. Ivey, Jr...... 73,753,153 1,275,097
                 Donald L. Luke.......... 73,763,478 1,264,772
                 J. Patrick Millinor, Jr. 68,326,923 6,701,327
                 Lucian L. Morrison...... 73,858,341 1,169,909
                 William M. Mounger, II.. 73,856,706 1,171,544
                 John M. Sullivan........ 73,836,529 1,191,721
</TABLE>

      (b) Approval of the appointment of KPMG LLP as independent accountants
   for Encompass for the year 2002:

<TABLE>
<CAPTION>
                              For     Against Abstain
                              ---     ------- -------
                           <S>        <C>     <C>
                           73,557,223 987,928 483,099
</TABLE>

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

   (a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
  No.                                        Description of Exhibit
  ---                                        ----------------------
<C>     <S>

 10.1   Fifth Amendment dated effective as of June 26, 2002 to Credit Agreement dated as of February 22,
        2000 among Encompass, the subsidiaries of Encompass named therein, JPMorgan Chase Bank,
        Wachovia Bank National Association, Bank of America, N.A. and the banks named therein.

 10.2   Securities Purchase Agreement dated as of June 27, 2002 between Encompass and the investors
        named therein.
</TABLE>

   (b) Reports on Form 8-K.

   A Report on Form 8-K was filed on June 28, 2002, whereby the Company filed
its press release, announcing, among other things, a stock rights offering and
an amendment to the Company's credit facility.

                                      26

<PAGE>

                                  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.


Date: August 14, 2002
                                              ENCOMPASS SERVICES CORPORATION

                                              By:     /s/ Darren B. Miller
                                                  -----------------------------
                                                        Darren B. Miller
                                                    Senior Vice President and
                                                     Chief Financial Officer
                                                  (principal financial officer)

Date: August 14, 2002

                                              By:       /s/ L. Scott Biar
                                                  ------------------------------
                                                    Vice President and Chief
                                                       Accounting Officer
                                                  (principal accounting officer)

                                      27

<PAGE>

                                   EXHIBIT C

                 Liquidation Analysis and Best Interests Test

                                  Exhibit C-1

<PAGE>

                                   EXHIBIT C

Best Interests Test

   With respect to each Impaired class of Claims and Equity Interests,
confirmation of the Plan requires that each holder of a Claim and Equity
Interest either (i) accept the Plan, or (ii) receive or retain under the Plan
property of a value, as of the Effective Date, that is not less than the value
such holder would receive or retain if the Debtors were liquidated under
Chapter 7 of the Bankruptcy Code. The table below summarizes the recovery
values for each class under the Plan and in a liquidation scenario.

<TABLE>
<CAPTION>
                                                                     Recovery % Under
                                                                   ---------------------
Class Description                                                  The Plan Liquidation
-----------------                                                  -------- ------------
<S>                                                                <C>      <C>
Administrative Expense Claims.....................................  100.0%        100.0%

Priority Tax Claims...............................................  100.0%        100.0%

Class 1 Other Priority Claims.....................................  100.0%          0.0%

Class 2 Intercompany Claims.......................................  100.0%          0.0%

Class 3 Subsidiary Interests......................................  100.0%          0.0%

Class 4 Secured Tax Claims........................................  100.0%        100.0%

Class 5 Other Secured Claims......................................  100.0%  59.0%-100.0%

Class 6 Existing Credit Agreement Claims..........................   90.3%   23.4%-28.9%

Class 7 Senior Subordinated Note Claims...........................   24.3%          0.0%

Class 8 Junior Subordinated Note Claims...........................    0.0%          0.0%

Class 9 General Unsecured Claims..................................  100.0%          0.0%

Class 10 Litigation Claims........................................    0.0%          0.0%

Class 11 Mandatorily Redeemable Convertible Preferred Stock.......    0.0%          0.0%

Class 12 Existing Encompass Common Stock and Section 510(b) Claims    0.0%          0.0%

Class 13 Existing Other Equity Interests..........................    0.0%          0.0%
</TABLE>

Liquidation Analysis

   In formulating this liquidation analysis, the Debtors estimated the cash
proceeds that would likely be realized from the liquidation of the Debtors'
assets and businesses. Such estimates are based on the assumption that the
Debtors' businesses would not be sold as going concerns during the period
commencing and ending on November 30, 2002. There can be no assurance that such
a liquidation process would be instantaneously completed, and accordingly, the
liquidation analysis assumes a best-case scenario in terms of the timing of the
completion of the liquidation. In the event that the actual liquidation were to
take longer (as is likely the case) the expenses of the liquidation would
likely rise and the ability of Encompass to get the tax benefits assumed in
this analysis would diminish. In addition to the timing of the liquidation, the
Debtors make no assurance that the recoveries assigned to the liquidated assets
would in fact be realized in a Chapter 7 liquidation.


                                      1

<PAGE>

Liquidation Analysis /(1)/

<TABLE>
<CAPTION>
                                 Estimated as of 11/30/2002
                            ------------------------------------



Asset Recovery Calculation:    Core    Divestitures Consolidated
--------------------------- ---------- ------------ ------------

<S>                         <C>        <C>          <C>
Cash and Cash Equivalents.. $    6,796   $      0    $    6,796
Restricted Cash (Cash
  Collateral)..............     40,000          0        40,000
Accounts Receivable........    479,859    159,995       639,854
Inventory..................     15,353      3,544        18,897
Costs in Excess of Billings     68,729     35,158       103,887
Prepaid Expenses and Other
  Current Assets...........     36,947      4,941        41,888
                            ----------   --------    ----------
   Total Current Assets.... $  647,685   $203,638    $  851,323

Property & Equipment, net.. $   68,005   $ 35,747    $  103,752
Net Intangible Assets......    640,210    148,309       788,519
Deferred Taxes.............     40,976          0        40,976
Deferred Debt Issuance
  Costs....................     18,801          0        18,801
Other Long-Term Assets.....     39,928          0        39,928
                            ----------   --------    ----------
   Total Other Assets...... $  807,920   $184,056    $  991,976
                            ----------   --------    ----------
   Total Assets............ $1,455,605   $387,694    $1,843,299
                            ==========   ========    ==========









</TABLE>
<TABLE>
<CAPTION>
                                        Adjustments
                            -----------------------------
                                                      P&E                       Estimated            Estimated
                            Billings in Bonded AR   Securing      Adjusted   Recovery Rate /(2)/ Liquidation Value
                              Excess     and Cash   Capital     Consolidated ------------------  -----------------
Asset Recovery Calculation:  of Costs   Collateral   Leases        Assets    Low End   High End  Low End  High End
--------------------------- ----------- ---------- --------     ------------ -------   --------  -------- --------

<S>                         <C>         <C>        <C>          <C>          <C>       <C>       <C>      <C>
Cash and Cash Equivalents..                                      $    6,796   100.0%    100.0%   $  6,796 $  6,796
Restricted Cash (Cash
  Collateral)..............             $ (40,000)                        0     0.0%      0.0%          0        0
Accounts Receivable........  $(110,987)  (125,887)                  402,980    10.0%     20.0%     40,298   80,596
Inventory..................                                          18,897    25.0%     35.0%      4,724    6,614
Costs in Excess of Billings                                         103,887    10.0%     20.0%     10,389   20,777
Prepaid Expenses and Other
  Current Assets...........                                          41,888    10.0%     15.0%      4,189    6,283
                                                                 ----------   -----     -----    -------- --------
   Total Current Assets....                                      $  574,449    11.6%     21.1%   $ 66,396 $121,067

Property & Equipment, net..                         $(607)/(3)/  $  103,145    20.0%     30.0%   $ 20,629 $ 30,944
Net Intangible Assets......                                         788,519     0.0%      0.0%          0        0
Deferred Taxes.............                                          40,976     0.0%      0.0%          0        0
Deferred Debt Issuance
  Costs....................                                          18,801     0.0%      0.0%          0        0
Other Long-Term Assets.....                                          39,928    20.0%     30.0%      7,986   11,978
                                                                 ----------   -----     -----    -------- --------
   Total Other Assets......                                      $  991,369     2.9%      4.3%   $ 28,615 $ 42,922
                                                                 ----------   -----     -----    -------- --------
   Total Assets............                                      $1,565,818     6.1%     10.5%   $ 95,011 $163,989
                                                                 ==========                      ======== ========
                                                   Tax Refund/(4)/                               $126,820 $126,820
                                                                                                 -------- --------
                                                   Total Liquidation Proceeds                    $221,831 $290,809

                            Collateral Pool A: Cash and Tax Refund                               $133,617 $133,617

                            Collateral Pool B: A/R, Inventory and Costs in Excess of
                              Billings                                                           $ 55,411 $107,987
                            Collateral Pool C: P&E and Other Assets                              $ 32,803 $ 49,205
</TABLE>
--------
(1) Assumes instantaneous liquidation on November 30, 2002.
(2) Management estimates.
(3) Management estimates that $607 thousand of capital leases and other secured
    debt are secured by specific assets in P&E, as a result P&E has been
    adjusted to reflect this distribution.
(4) Management estimate. Tax Refund equal to minimum of total cumulative taxes
    paid from 1997 to 2001 or 35% refund on the net loss. Net loss is defined
    as liquidation proceeds less tax basis of assets sold. Tax Refund is
    included in the Collateral Pool A. Assumes all asset sales completed on
    11/30/02 prior to 12/31/02 when the tax benefits expire. The amount of the
    Tax Refund could be reduced if the Internal Revenue Service were to make
    substantial adjustments to the Debtors' taxable income on audit of the
    Debtors' tax returns.

                                      2

<PAGE>

Liquidation Analysis (continued)/(1)/

($ in thousands)

<TABLE>
<CAPTION>
Distribution of Liquidation Proceeds:                       Estimated      Recovery Amount    Percent Recovery
    -------------------------------------                  Claims as of --------------------  ---------------
                                                            11/30/2002   Low End    High End  Low End High End
                                                           ------------ ---------  ---------  ------- --------
<S>                                               <C>      <C>          <C>        <C>        <C>     <C>
Collateral Pool A--Cash and Tax Refund....................               $133,617   $133,617
    Estimated Administrative Expense Claims......   5.0%          NMF      (6,681)    (6,681)    NMF     NMF
    Priority Tax Claims/(2)/.....................            $ 10,777     (10,777)   (10,777)  100.0%  100.0%
                                                                        ---------  ---------
    Subtotal.....................................                        $116,159   $116,159

    Existing Credit Agreement Claims/(3)/........            $603,002   ($116,159) ($116,159)   19.3%   19.3%
                                                                        ---------  ---------
Residual Proceeds for Secured Creditors...................               $      0   $      0

Collateral Pool B--A/R, Inventory and Costs in Excess of
 Billings.................................................               $ 55,411   $107,987
    Estimated Administrative Expense Claims......   5.0%          NMF      (2,771)    (5,399)    NMF     NMF
    Priority Tax Claims/(2)/.....................            $  6,304      (6,304)    (6,304)  100.0%  100.0%
                                                                        ---------  ---------
    Subtotal.....................................                        $ 46,336   $ 96,284

    Secured Accounts Payable/(4)/................            $ 78,531   ($ 46,336) ($ 78,531)   59.0%  100.0%
                                                                        ---------  ---------
Residual Proceeds for Other Creditors............                        $      0   $ 17,753

    Existing Credit Agreement Claims/(4)/........            $603,002    $      0  ($ 17,753)    0.0%    2.9%
                                                                        ---------  ---------
Residual Proceeds for Unsecured Creditors.................               $      0   $      0

Collateral Pool C--Net P&E and Other Assets...............               $ 32,803   $ 49,205
    Estimated Administrative Expense Claims......   5.0%          NMF      (1,640)    (2,460)    NMF     NMF
    Priority Tax Claims/(2)/.....................            $  3,218      (3,218)    (3,218)  100.0%  100.0%
    Secured Tax Claims/(5)/......................               3,113      (3,113)    (3,113)  100.0%  100.0%
                                                                        ---------  ---------
    Subtotal.....................................                        $ 24,832   $ 40,414

    Existing Credit Agreement Claims/(6)/........            $603,002   ($ 24,832) ($ 40,414)    4.1%    6.7%
                                                                        ---------  ---------
Residual Proceeds for Other Creditors............                        $      0   $      0
</TABLE>
<TABLE>
<CAPTION>

Recovery Calculation:                                         Estimated    Recovery Amount  Percent Recovery
        ---------------------                                Claims as of ----------------- ---------------
                                                              11/30/2002  Low End  High End Low End High End
                                                             ------------ -------- -------- ------- --------
<S>                                    <C>                   <C>          <C>      <C>      <C>     <C>
Existing Credit Agreement Claims
    Collateral Pool A: Cash and Tax Refund...........................     $116,159 $116,159   19.3%   19.3%
    Collateral Pool B: A/R, Inventory and............................
      Costs in Excess of Billings....................................            0   17,753    0.0%    2.9%
    Collateral Pool C: P&E and Other Assets..........................       24,832   40,414    4.1%    6.7%
                                          -                               -------- --------  -----   -----
    Total...............................................       $603,002   $140,991 $174,325   23.4%   28.9%

Secured A/P/(7)/
    Collateral Pool B: A/R, Inventory and Costs in Excess
     of Billings........................................       $ 78,531   $ 46,336 $ 78,531   59.0%  100.0%

Other Secured Claims/(8)/
    P&E.................................................       $    607   $    607 $    607  100.0%  100.0%
                                          -                               -------- --------

Residual Proceeds for Unsecured Creditors................................ $      0 $      0

Unsecured Claims
    Unsecured Accounts Payable..........................       $ 41,900   $      0 $      0    0.0%    0.0%
    Other Unsecured Claims/(9)/.........................        125,677          0        0    0.0%    0.0%
    Senior Subordinated Notes...........................        355,519          0        0    0.0%    0.0%
    Junior Subordinated Notes...........................          4,161          0        0    0.0%    0.0%
                                          -                               -------- --------

Residual Proceeds for Preferred Stock.................................... $      0 $      0

    Mandatorily Redeemable Convertible Preferred
     Stock..............................................       $312,744          0        0    0.0%    0.0%
                                          -                               -------- --------

Residual Proceeds for Common Stock....................................... $      0 $      0
</TABLE>
--------
(1) Assumes instantaneous liquidation on November 30, 2002.

                                      3

<PAGE>

(2) Assumes $16.8 million for two weeks of outstanding Employment Taxes and
    $3.5 million of Sales and Use Taxes for one month. Total amount is divided
    pro rata among the collateral pools.
(3) Assumes that the Existing Credit Agreement Claims receive the remainder of
    Collateral Pool A after distribution to Estimated Administrative Expense
    Claims and Priority Taxes.
(4) Assumes that holders of Secured A/P have priority over the Existing Credit
    Agreement Claims on Collateral Pool B. The Existing Credit Agreement Claims
    receive the remainder of proceeds.
(5) Assumes property tax is approximately 3% of Net P&E.
(6) Assumes that the Existing Credit Agreement Claims receive the remainder of
    Collateral Pool C after distribution to Estimated Administrative Expense
    Claims, Priority Taxes and Secured Tax Claims.
(7) Assumes Secured A/P is 70% of the Total A/P and 20% of the Secured A/P is
    Bonded A/P based on discussions with management. The Bonded A/P is excluded
    from the secured A/P since it will be passed on to the Surety providers in
    connection with a liquidation process.
(8) Management estimates that $607 thousand of capital leases and other secured
    debt are secured by specific assets in P&E; as a result P&E has been
    adjusted to reflect this distribution.
(9) Includes accrued and other liabilities. Does not include contingent claims
    that may arise in connection with Chapter 7 (i.e., WARN Act claims, lease
    rejection claims, claims relating to canceled contracts, etc.).

Assumptions

   The balance sheet amounts illustrated in the above liquidation analysis are
projected balances at November 30, 2002 and conservatively assume, for purposes
of this analysis only, an instantaneous liquidation period. These projected
amounts are taken from the Debtors' Financial Projections, and represent the
consolidated business (both Core Business and Divestiture Candidates).

   In order to determine the liquidation proceeds available to creditors, the
consolidated balance sheet was adjusted to remove assets that the surety
providers would likely receive in the event of a liquidation of Encompass.
Accordingly, the consolidated Accounts Receivable balance excludes Bonded
Accounts Receivable and the consolidated Cash balance excludes cash collateral
provided to secure surety bonds. In addition, the consolidated Net P&E is net
of capital leases and other secured debt secured by specific assets in P&E.
Furthermore, the consolidated Accounts Receivable is presented net of Billings
in Excess of Costs, which are amounts that have been billed but not yet earned
based on percentage of completion accounting.

   As illustrated previously, the Debtors' assets consist of the following:

  Cash and Cash Equivalents

   Cash and Cash Equivalents are highly liquid instruments, including
short-term investments and time deposits with maturities of three months or
less at the time of purchase. As this analysis assumes the liquidation process
is completed instantly, all Cash as of November 30, 2002 is assumed to be
recoverable. Cash collateral provided to surety providers is excluded.

  Bonded Accounts Receivable

   In connection with certain construction contracts, the Debtors are often
required to post performance bonds issued by a financial institution known as a
surety. Such bonds provide a guarantee to the Debtors' customers that the
Debtors will perform under the terms of their contracts and be able to pay
their subcontractors and vendors. If the Debtors fail to perform their
obligations under their contracts, their customers have the right to demand
payment from the surety providing the bond for the relevant contract. The
Debtors would then be obligated to reimburse the surety for any expenses or
outlays that they incurred in paying the Debtors' subcontractors and vendors.
As of August 31, 2002, the Company had approximately $130 million of Bonded
Accounts Receivable, which represents approximately 20% of their total Accounts
Receivable. It is assumed that the same percentage of Bonded Accounts
Receivables to Total Accounts Receivable is achieved as of November 30, 2002.
In a liquidation, the surety providers would be entitled to collect the Bonded
Accounts Receivable and therefore, the Debtors' Accounts Receivable have been
adjusted to exclude the Bonded Accounts Receivable.

                                      4

<PAGE>

  Adjusted Accounts Receivable

   Adjusted Accounts Receivable (consolidated Accounts Receivable less Bonded
Accounts Receivable and less Billings in Excess of Costs) primarily consists of
various customer and trade receivables related to construction and service
projects that do not require performance bonds. Based on management's
estimates, 75%-90% of such receivables relate to uncompleted work projects and
are assumed to be unrecoverable. The other 10%-25% of the Adjusted Accounts
Receivable represents completed work projects and assumes a recovery rate in
the range of 80%-100%. Receivable balances pursuant to retainage provisions in
construction contracts are due upon completion of the contracts and acceptance
by the customer. The liquidation analysis assumes no recovery for retainage on
uncompleted work, and assumes a recovery rate in the range of 80%-100% for
retainage on completed work. Based on the above assumptions, an estimated
recovery rate in the range of 10%-20% is applied by management to the Adjusted
Accounts Receivable balance.

  Inventory

   Inventory consists primarily of purchased materials, parts and supplies held
for use in the ordinary course of business. Inventory is valued at the lower of
cost or market, with cost determined on a first-in, first-out ("FIFO") basis.
Based on management estimates, a recovery rate in the range of 25%-35% is
applied to the inventory balance.

  Costs and Estimated Earnings in Excess of Billings

   Costs and Estimated Earnings in Excess of Billings are composed of costs
incurred but not yet billed, primarily related to construction contracts.
According to percentage of completion accounting, revenues recognized during
the performance of a contract are determined by dividing the costs incurred to
date by the estimated total contract costs upon completion, and applying this
percentage to the estimated total contract value. Accordingly, contract
revenues recognized in the income statement usually differ from amounts that
can actually be billed to the customer at any given point during the contract.
Costs and Estimated Earnings in Excess of Billings represent revenues
recognized in excess of amounts billed under the terms of the contract. These
amounts are billable upon completion of the contract performance milestones or
other specified conditions of the contract. Management estimates the same
recovery rates as the recovery rates of Adjusted Accounts Receivable, which are
in the range of 10%-20%.

  Prepaid Expenses and Other Current Assets

   Prepaid Expenses and Other Current Assets consist primarily of current
deferred tax assets, income tax refund receivables, prepaid expenses, deposits
and other current assets. Based on management estimates, a recovery rate in the
range of 10%-15% is applied to this balance.

  Property & Equipment, net

   Property and Equipment consists of land and improvements, buildings and
improvements, service and other vehicles, machinery and equipment, computer
hardware and software, office equipment, furniture and fixtures and leasehold
improvements. Based on management estimates, a recovery rate in the range of
20%-30% is applied to these fixed assets.

  Intangible Assets

   Intangible assets primarily represent goodwill and are assumed to be of
marginal or no value in a liquidation scenario. Accordingly, it is assumed that
these assets are not recoverable.

                                      5

<PAGE>

  Deferred Taxes

   Deferred income taxes result from temporary differences in the recognition
of expenses for tax and financial reporting purposes. In order to realize the
benefits of the Deferred Taxes, the Debtors would need to earn taxable profits,
which are not contemplated under a liquidation scenario. It is therefore
assumed that these assets are not recoverable. However, the Debtors would
realize the benefits of the Deferred Taxes due to liquidating the assets that
gave rise to the Deferred Taxes. If the assets are liquidated prior to December
31, 2002, the tax losses generated by the liquidation could be carried back to
offset the total taxes paid during 1997-2001 and create tax refunds that would
be payable to Encompass. The estimated Tax Refunds (as defined below)
associated with the liquidation are included in the foregoing liquidation
analysis.

  Deferred Debt Issuance Costs

   Deferred Debt Issuance Costs relate to the Debtors' Existing Credit Facility
and Senior Subordinated Notes and are amortized and included in interest
expense over the scheduled maturity of the related debt. It is assumed that
these assets are not recoverable.

  Other Long-Term Assets

   Other long-term assets consist of certain long-term receivables, cost basis
investments, software licenses, notes receivable, cash surrender values of
certain life insurance policies and other long-term assets. Management
estimates a recovery rate in the range of 20%-30% on this group of assets.

General Methodology

   The liquidation analysis arrives at a range of estimated proceeds from
liquidation by applying the above ranges of estimated recovery rates/(1)/ to
all of the Debtors' tangible assets.

   After proceeds from the liquidation of the Debtors' assets have been
estimated, the analysis effectively divides the Debtors' assets (and derivative
proceeds) into three distinct collateral pools: (A) Cash and Tax Refund
(described hereinafter) ("Collateral Pool A"), (B) A/R, Inventory, and Costs in
Excess of Billings ("Collateral Pool B") and (C) P&E and Other Assets
("Collateral Pool C").

   The analysis then estimates the Debtors' tax refund resulting from the asset
sales pursuant to the contemplated liquidation. The analysis assumes that the
liquidation process is completed on November 30, 2002, as receipt of any tax
refund ("Tax Refund") is contingent upon the realization of all liquidation
proceeds on or before December 31, 2002. The Tax Refund is calculated as the
minimum of: (i) cumulative income taxes paid since 1997 or (ii) total
liquidation proceeds minus the tax basis of the assets sold multiplied by
35.0%. As mentioned previously, the Tax Refund is allocated to Collateral Pool
A. The Tax Refund is a general intangible asset of the Debtors in which the
holders of the Existing Credit Agreement Claims are assumed to have a perfected
security interest. For the purposes of this analysis, it is assumed that the
holders of the Allowed Existing Credit Agreement Claims have a security
interest in the Tax Refund and that such security interest is perfected. The
amount of the Tax Refund could be reduced if liquidation proceeds are higher,
asset sales are not completed by December 31, 2002 or the Internal Revenue
Service were to make substantial adjustments to the Debtors' taxable income on
audit of the Debtors' tax returns.

   Next, the analysis estimates the amount of the Priority Tax Claim, which is
composed of Employment-related Taxes and Sales and Use Taxes. Per management
estimates, this analysis assumes two weeks of outstanding Employment Taxes of
approximately $16.8 million and one month of accrued Sales and Use Taxes

--------
(1) Recovery rates provided by management.

                                      6

<PAGE>

of approximately $3.5 million./(1/) The total Priority Tax Claim is then
applied pro rata to each of the distinct collateral pools. In this application,
the pro rata function is based upon the average weighting of the low end and
high end values of each distinct collateral pool, (i.e., 53.1% for Collateral
Pool A, 31.1% for Collateral Pool B and 15.8% for Collateral Pool C).

   The analysis then estimates the Secured Tax Claim, composed of property
taxes on PP&E, by applying a 3% tax rate/(2/) to the projected PP&E balance as
of November 30, 2002.

   Using the existing priority claim structure, the analysis then allocates the
proceeds from the collateral pools to the appropriate claim.

   To the extent that all secured claims are fully recovered, any residual
value is then distributed to unsecured claims.

   After all proceeds have been allocated, a recovery percentage is then
calculated based upon the amount allocated to each claim and the original claim
amount.

Distribution of Proceeds

   This analysis assumes that before any proceeds are distributed, 5% of the
total proceeds available for distribution are allocated to estimated
Administrative Expense Claims (3% of which is applied to trustee compensation
payable under section 326 of the Bankruptcy Code with the remaining 2% applied
to Professional Fee Claims). The remaining proceeds in each collateral pool are
then distributed according to priority claim status.

  Secured Claim Priority Structure:

   As of the assumed liquidation date, each distinct collateral pool is assumed
to have the following priority claim structure and associated proceeds
distribution rights (i.e., the first class must have its distribution rights
fully satisfied before the second class receives any recovery, etc.):

Collateral Pool A:

   1. Priority Tax Claims (e.g., trust fund taxes which do not generally
qualify as property of the estate under section 541 of the Bankruptcy Code); and

   2. Existing Credit Agreement Claims.


Collateral Pool B:

   1. Priority Tax Claims;

   2. Secured Payables (primarily Mechanic's & Materialmen's Lien Claimants to
whom the Debtors will have likely breached their payment obligations in the
event of a Chapter 7 liquidation, and who will generally be entitled to payment
priority over the holders of the Existing Credit Agreement Claims pursuant to
applicable state law and section 546(b) of the Bankruptcy Code); and

   3. Existing Credit Agreement Claims.

Collateral Pool C:

   1. Priority Tax Claims;

   2. Secured Tax Claims; and

   3. Existing Credit Agreement Claims.
--------
(1) Based on management estimates, Sales and Use Taxes average approximately
    $3.5 million per month.
(2) Ad valorem tax rate estimation provided by management.

                                      7

<PAGE>

  Unsecured Claims:

   To the extent all secured creditors' claims have been satisfied, this
analysis assumes that the remainder of the liquidation proceeds would be
allocated to the unsecured claimants, on a pro rata basis.

  Remaining Proceeds after Satisfying Secured Claims

   1. Unsecured Accounts Payable;

   2. Other Unsecured Claims/(1)/;

   3. Senior Subordinated Notes; and

   4. Junior Subordinated Notes.

  Other Constituents:

   To the extent all unsecured creditors' claims were satisfied, this analysis
assumes that the remainder of the liquidation proceeds would be allocated to
the other constituents, as determined by their relative priorities (as shown
below).

  Remaining Proceeds after Satisfying Unsecured Claims

   1. Mandatorily Redeemable Convertible Preferred Stock; and

   2. Common Stock.



--------
(1) Does not include contingent claims that may arise in connection with
    Chapter 7 (i.e., WARN Act claims, lease rejection claims, claims relating
    to canceled contracts, etc.).

                                      8

<PAGE>

                                   EXHIBIT D

                             Financial Projections

                                  Exhibit D-1

<PAGE>

                                   EXHIBIT D


<TABLE>
<CAPTION>
                                       Core Business Financial Projections (1) (2)
($ in thousands)
                                          A           P           P           P           P           P           P
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                         2001        2002        2003        2004        2005        2006        2007
                                          FY          FY          FY          FY          FY          FY          FY
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>         <C>
Income Statement:
Revenue from Core Business........... $2,877,902  $2,409,706  $1,976,555  $2,154,343  $2,518,424  $2,644,345  $2,776,562
% Growth (YoY).......................      -11.5%      -16.3%      -18.0%        9.0%       16.9%        5.0%        5.0%
Gross Profit from Core Business...... $  492,497  $  375,212  $  309,973  $  356,954  $  417,059  $  439,226  $  464,269
Gross Margin.........................       17.1%       15.6%       15.7%       16.6%       16.6%       16.6%       16.7%
EBITDA from Core Business (Pre-
 Restructuring Costs)................ $  156,906  $   95,536  $   58,459  $  102,776  $  131,795  $  151,098  $  159,330
EBITDA Margin........................       5.45%       3.96%       2.96%       4.77%       5.23%       5.71%       5.74%
Total Interest Expense............... $   84,193  $   78,969  $   28,586  $    7,888  $    8,131  $    1,333  $       94
Cash Interest Expense (3)............ $   80,032  $   48,619  $    7,306  $    7,888  $    8,131  $    1,333  $       94
Cash Flow Statement:
Capital Expenditures from the Core
 Business............................ $   29,795  $   15,983  $   26,004  $   28,000  $   29,000  $   30,000  $   30,000
Proceeds from Asset Sales (4)........ $       --  $   18,050  $   92,070  $       --  $       --  $       --  $       --
Source/(Use) of Cash from Divestiture
 Candidates (4)...................... $       --  $  (11,684) $    9,733  $       --  $       --  $       --  $       --
Balance Sheet:
Total Restricted and Unrestricted
 Cash................................ $   25,085  $   65,000  $  115,000  $  213,147  $  260,783  $  220,667  $  293,612
Revolver (5)......................... $   90,000  $  204,272  $       --  $       --  $       --  $       --  $       --
Term Loans (5).......................    392,250     387,818          --          --          --          --          --
Junior/Senior Subordinated Notes (5).    332,013     356,567          --          --          --          --          --
Other Debt...........................        356         607         607         607          --          --          --
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------
Total Pre-Petition Debt.............. $  814,619  $  949,264  $      607  $      607  $       --  $       --  $       --
DIP/Exit Facility.................... $       --  $    5,218  $      445  $       --  $       --  $       --  $       --
New Senior Secured Debt..............         --          --     121,955     119,955     117,955          --          --
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------
Total Debt........................... $  814,619  $  954,482  $  123,007  $  120,562  $  117,955  $        0  $        0
Outstanding L/Cs (6)................. $    1,457  $   25,378  $   25,378  $   25,378  $       --  $       --  $       --
Revolver/DIP/Exit Availability....... $  208,543  $   94,782  $   99,555  $  100,000  $  100,000  $  100,000  $  100,000
</TABLE>

   The summary projections above are not prepared on a consolidated basis for
Encompass Services Corporation and Subsidiaries nor are they prepared in
accordance with Generally Accepted Accounting Principles due to the
non-consolidation of certain businesses planned for future divestiture and
other items.

--------
1) Projections based on management guidance.
(2) With the exception of Proceeds from Asset Sales and Source/(Use) of Cash
    from Divestiture Candidates, all line items representative of the Core
    Business expected to be retained.
(3) Cash interest expense assumes November 1, 2002 interest payment on Senior
    Subordinated Notes is not made. Assumes quarterly payments on Junior
    Subordinated Notes are not made beginning September 30, 2002. Assumes no
    interest or principal paid on Existing Senior Credit Facility from December
    1, 2002 through the Effective Date.
(4) Timing and amount of Proceeds from Asset Sales provided by management.
    Source/(Use) of Cash Flow from Divestiture Candidates derived from
    Divestiture Candidate Projections presented herein.
(5) FY 2002 balances represent accreted values.
(6) It is contemplated that outstanding L/Cs will remain outstanding through
    the transaction and, if drawn upon, will constitute additional borrowing.


                                      1

<PAGE>

   Management prepared the projections (the "Projections") of the Debtors'
combined balance sheets, statements of operations, cash flows and certain other
items for the period from September 30, 2002 through December 31, 2007 (the
"Projection Period"). The Projections are based on a number of assumptions,
certain of which are more fully described below. Although the Debtors believe
that the assumptions upon which the Projections are based are reasonable,
actual operating results will vary and may vary materially. In addition, the
Projections are subject to the events described below under "Risk Factors" as
well as to other unforeseen events.

   OTHER THAN AS REQUIRED BY APPLICABLE LAW (INCLUDING THE RULES AND
REGULATIONS OF THE SEC), THE DEBTORS DO NOT IN THE ORDINARY COURSE PUBLISH
THEIR BUSINESS PLAN, BUDGET OR STRATEGY OR MAKE PUBLIC DETAILED PROJECTIONS OR
FORECASTS OF THEIR ANTICIPATED FINANCIAL POSITION OR RESULTS OF OPERATIONS.
ACCORDINGLY, THE DEBTORS (INCLUDING THE REORGANIZED DEBTORS) DO NOT ANTICIPATE
THAT THEY WILL, AND DISCLAIM ANY OBLIGATION TO, FURNISH UPDATED BUSINESS PLANS,
BUDGETS OR PROJECTIONS TO HOLDERS OF CLAIMS OR EQUITY INTERESTS PRIOR TO THE
EFFECTIVE DATE OR TO EQUITY INTEREST HOLDERS OR CREDITORS AFTER THE EFFECTIVE
DATE OR TO INCLUDE SUCH INFORMATION IN DOCUMENTS REQUIRED TO BE FILED WITH THE
SEC OR ANY STOCK EXCHANGE OR OTHERWISE MAKE SUCH INFORMATION PUBLICLY AVAILABLE.

   The Projections were not prepared with a view toward compliance with
published guidelines of the SEC or the American Institute of Certified Public
Accountants regarding forecasts. KPMG LLP, the Debtors' independent auditors
have not examined, compiled or otherwise reviewed the Projections and
consequently do not express an opinion or any other form of assurance with
respect to the Projections.

   The Projections should be read in conjunction with the assumptions,
qualifications and explanations set forth herein, as well as the Debtors'
Annual Report on Form 10-K for the Year ended December 31, 2001, as amended,
and the Debtors' Quarterly Report on Form 10-Q for the Quarter ended June 30,
2002 filed with the SEC and attached hereto as Exhibits B-1 through B-4.

   The Projections are based on and assume the successful and timely
implementation of the Plan. The Projections reflect numerous assumptions,
including various assumptions regarding anticipated industry performance,
general business and economic conditions in the United States, the impact on
the business of announcing the Plan, availability of adequate surety bonding
capacity and other matters, most of which are beyond the Debtors' control.
Therefore, although the Projections are necessarily presented with numerical
specificity, the actual results achieved during the Projection Period will vary
from the projected results. These variations may be material. Accordingly, no
representations can be made or are made with respect to the accuracy of the
Projections or the ability of the Reorganized Debtors to achieve the projected
results. See "Risk Factors" for a discussion of certain factors that may affect
the future financial performance of the operations and financial information of
the Debtors that management believes are significant and upon which the
financial results of Reorganized Debtors will depend.

  Core Business Projections Overview:

   For the purposes of developing these Projections, the Debtors consolidated
the individual financial statements of all of the Debtors' individual business
units, other than certain business units which management anticipates divesting
from the beginning of the Projection Period through 2003. Management's
rationale for the selection of divestitures was based on current and expected
operating performance and certain strategic factors. The individual financial
statements of the reporting units not targeted for divestiture did not include
corporate expenses, and accordingly management included 100% of such expenses
in the historical combined financial statements.

                                      2

<PAGE>

   The Projections are therefore presented on a pro forma basis excluding the
expected divestitures of a number of business units (the "Divestiture
Candidates"). Free cash flows of the Divestiture Candidates are included in the
Core Model up to the point of divestiture for each entity. Asset sale proceeds
from the Divestiture Candidates, which were provided by management, are also
included at assumed sale dates. Accordingly, all financial statement data
presented above is representative of the Debtors' non-Divestiture Candidate
business units (the "Core Business") giving exception to the two items
previously referenced. The Projections for the Divestiture Candidates, which
arrive at the free cash flow from each Divestiture Candidate up to the point at
which each Divestiture Candidate is estimated to be divested and estimated
asset sale proceeds referenced above, are presented immediately following this
description of Core Business projections assumptions.

   (i) Effective Date. The Projections assume the confirmation of the Plan and
       that all transactions and settlement agreements contemplated by the Plan
       will be consummated by the Effective Date of March 31, 2003.

  (ii) General Economic Conditions. The Projections take into account the
       difficult economic environment currently prevailing throughout the
       United States, particularly with respect to non-residential construction
       spending, which has negatively affected business in general and the
       demand for the Debtors' services in particular. The Projections assume
       that weakness in general economic activity, and non-residential
       construction in particular, will continue to affect the Debtors'
       near-term results of operations and financial performance. Although
       there can be no assurance, the Projections assume no significant
       worsening of the current adverse economic conditions present in the
       United States and the eventual return to a more favorable economic
       climate in 2004, which should increase demand for non-residential
       construction and for the Debtors' services.

 (iii) Revenues. The Debtors primarily generate revenues from non-residential
       mechanical and electrical construction and service. The Debtors also
       have a significant component of residential mechanical construction and
       service. Consolidated annual revenues from the Core Business (excluding
       the Divestiture Candidates) are estimated to range between $1.9 billion
       in 2003 and $2.8 billion in 2007. As the Debtors generally have an
       average contract life of six to eight months, the projected revenue
       declines for the first three quarters of fiscal year 2003 reflect the
       impact of backlog contracted during the difficult operating climate
       caused by severe financial distress beginning in September 2002 and
       extending through March 2003, (the "Restructuring Period"). As the
       Debtors emerge from the Restructuring Period and regain customer/market
       confidence with respect to the Debtors' financial condition from
       mid-2003 to early 2004, management believes the Debtors will begin to
       regain market share lost before and during the Restructuring Period.
       Fiscal year 2004 represents the first post-restructuring year wherein
       substantially all backlog and newly contracted revenue is expected to
       have been derived in an operating environment free of commercial issues
       associated with the restructuring and in which the economy is assumed to
       have begun its rebound.

       A critical component of the revenue assumptions outlined herein is the
       Debtors' ability to secure adequate surety bonding and, if this
       assumption is incorrect, the Debtors' will not likely be able to meet
       the revenue levels presented in the Projections.

  (iv) Costs of Services. The Debtors' direct costs consist primarily of
       salaries, wages, benefits and insurance, materials, engineered
       equipment, subcontracted services, depreciation, fuel, and equipment
       rentals. The Debtors anticipate that costs of services as a percentage
       of revenues will increase through the second fiscal quarter of 2003,
       resulting in a gross margin of 15.4% for that period. The Debtors have
       factored in anticipated gross margin decreases for the Restructuring
       Period mentioned above as the Debtors anticipate disruptions and the
       necessity of carrying slightly higher cost structures during the
       Restructuring Period. Management believes this decline in gross margin
       will be offset by an increasing proportion of higher margin service
       revenues in the total revenue mix. According to management, service
       revenues are projected to increase proportionally as the Debtors will
       have

                                      3

<PAGE>

       difficulty booking lower margin construction contracts during the
       Restructuring Period. As the Debtors emerge from the Restructuring
       Period and as general economic conditions begin to improve, gross margin
       is projected to increase accordingly and to remain constant at
       approximately 16.6% through 2007.

   (v) Selling, General & Administrative ("SG&A") Costs. The Debtors' SG&A
       costs are principally comprised of compensation and related benefits for
       sales, management and administrative personnel and facility rent and
       support costs for field offices. The Debtors project SG&A costs to
       increase to approximately 15% of revenues during the Restructuring
       Period given the projected rapid revenue decline ($400 million from Q3
       2002 to Q3 2003). According to management, the Debtors recently
       initiated a cost-cutting program in an effort to 'right-size' the
       business, targeting a cost structure appropriate to what management
       believes are normalized Core Business revenue levels. Following the
       Restructuring Period, as revenues are expected to begin to increase,
       management believes the Debtors will have a cost structure which will
       enable it to support these continued growth trends while maintaining
       consistent SG&A as a percentage of revenue of approximately 12.5%
       through 2007.

  (vi) EBITDA. Earnings before Interest Expense, Income Taxes, Depreciation and
       Amortization ("EBITDA") is projected to decrease in connection with
       projected gross margin declines during the Restructuring Period, falling
       to an annual low of approximately 3.0% of revenues for 2003, as a result
       of the difficult operating dynamics noted above, and to subsequently
       return to more normal margin levels of approximately 4.8%-5.8% during
       2004 through 2006.

 (vii) Working Capital. Management anticipates significant increases in working
       capital requirements throughout the Restructuring Period, with Accounts
       Receivable Days Outstanding increasing to a high in the first fiscal
       quarter of 2003 and Accounts Payable Days Outstanding decreasing to a
       low in the first fiscal quarter of 2003. During the same time frame,
       management believes that inventory turns will increase to a high in the
       first quarter of 2003. Management expects Accrued Liabilities as a
       percentage of costs of services to increase through the first quarter of
       2003. These working capital assumptions factor in the potential negative
       effects of the Restructuring Period on both customers and vendors. Upon
       emergence, management expects a gradual return to normalized payable
       terms, receivables levels, and inventory balances. Management expects
       Accrued Liabilities to remain relatively constant as a percentage of
       costs of services from the first quarter of 2003 throughout the
       Projection Period.

(viii) Capital Expenditures. The Debtors anticipate increasing annual capital
       expenditures throughout the Projection Period from $16.0 million in 2002
       to approximately $26.0 million in 2003 and gradually increasing capital
       expenditures from $28.0 million to $30.0 million from 2004 through 2007,
       commensurate with historical levels.

  (ix) Interest Expense. The Projections assume that the Plan is accepted and
       that the $200.0 million of indebtedness to be held by Holders of Class 6
       claims is repaid prior to anticipated maturity in 2008. Total
       consolidated indebtedness is projected at approximately $200.0 million
       as of the Effective Date, and cash interest expense for 2003 is
       anticipated to be approximately $7.3 million. Management projects draws
       on the Exit Facility to be minimal. Concurrent with the continuing
       reduction of outstanding indebtedness via operational cash flow and
       additional funds generated by specific asset sales, the Projections
       anticipate the Debtors' paying off all outstanding indebtedness by 2006.
       Accordingly, cash interest expense of $94 thousand during 2007 is
       comprised solely of the anticipated commitment fee on the Exit Facility,
       which is projected to be undrawn during the year, prorated for its
       projected maturity of March 31, 2007.

   (x) Income Taxes. The Projections post-confirmation assume that all of the
       Debtors' consolidated tax loss carryforwards and other attributes earned
       prior to the commencement of the Chapter 11 Cases will be eliminated.
       Additionally, to the extent that net losses before taxes create deferred
       tax assets, the Projections do not offset future tax liabilities with
       the accrued tax benefits. Management expects an income tax rate for
       fiscal year 2003 of 35%, increasing to 44% during Fiscal Year 2004 as
       the Debtors earn taxable income and remaining at approximately that
       level throughout the Projection Period.

                                      4

<PAGE>

  Divestiture Candidates Overview:

   Divestiture Candidates were determined by management through an iterative
process in which the Debtors examined each of their reporting units and
evaluated them based on current and potential operating performance, sale
prospects, and other strategic criteria.

   The following set of projections illustrate the expected financial
performance of the Divestiture Candidates from the beginning of the Projection
Period through each entity's projected sale date. The cash flows included in
the Core Business projections are derived from the schedule set forth below.

   The Divestiture Candidates include a number of the Debtors' individual
business units. As of September 30, 2002, substantially all of these potential
Divestiture Candidates remained operating business units of the Debtors. In
order to realize certain tax benefits associated with the Divestiture
Candidates, the sales of certain of the Divestiture Candidates must be
consummated on or before December 31, 2002.

   Management examined each Divestiture Candidate individually in order to
determine appropriate specific operating assumptions. However, the general
assumptions regarding the Divestiture Candidates are in line with the
assumptions detailed above for the Core Businesses with respect to revenue
growth, gross margin trends, fixed costs, and working capital requirements. The
total projected cash flow generated by the Divestiture Candidates for the
Projection Period is approximately negative $1.9 million, while sale proceeds
and tax benefits are approximately $110.0 million./1/




--------
(1) Sale proceeds, tax refunds, and timing provided by management.

                                      5

<PAGE>

             Divestiture Candidates--Financial Projections/ (1) /

<TABLE>
<CAPTION>
                                 A         A         A         E         P         P         P         P         P         P
($ in thousands)              --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
                                                         2002                                              2003
                                2001    --------------------------------------    2002    --------------------------------------
                                 FY        Q1        Q2        Q3        Q4        FY        Q1        Q2        Q3        Q4
                              --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Income Statement:
Revenue...................... $947,365  $261,980  $229,072  $205,050  $194,691  $890,793  $154,476  $102,198  $  6,129  $      0

LTM Revenue.................. $947,365  $973,262  $971,208  $950,703  $890,793  $890,793  $783,289  $656,415  $457,494  $262,803

Gross Profit................. $111,185  $ 25,379  $ 14,416  $ 16,936  $ 21,174  $ 77,906  $ 15,745  $ 11,036  $    146  $      0
Gross Margin.................    11.74%     9.69%     6.29%     8.26%    10.88%     8.75%    10.19%    10.80%     2.38%      NMF

EBITDA....................... $ 33,166  $  5,821  $ (3,257) $  2,777  $  2,451  $  7,792  $  3,011  $    843  $    (61) $      0
EBITDA Margin................     3.50%     2.22%    -1.42%     1.35%     1.26%     0.87%     1.95%     0.82%    -1.00%      NMF

LTM EBITDA...................   33,166    24,795     5,022    14,772     7,792     7,792     4,982     9,082     6,244     3,793
EBITDA Margin................     3.50%     2.55%     0.52%     1.55%     0.87%     0.87%     0.64%     1.38%     1.36%     1.44%

Cash Flow:

Capital Expenditures......... $ 15,060  $    587  $  1,542  $  1,266  $  1,238  $  4,633  $  1,004  $    749  $      7  $      0
LTM Capital Expenditures.....   15,060    13,256    12,751     6,841     4,633     4,633     5,050     4,257     2,997     1,759

Net Working Capital (2)...... $ 92,947  $110,717  $111,122  $119,701  $110,341  $110,341  $102,968  $ 67,371  $  5,129  $      0
Change in Net Working Capital   55,363   (17,770)     (405)   (8,579)  (10,851)  (37,605)    2,145     5,555        --        --

Source/(Use) of Cash from
 Operations.................. $ 73,470  $(12,535) $ (5,204) $ (7,069) $ (9,638) $(34,446) $  4,153  $  5,649  $    (68) $      0
                              --------  --------  --------  --------  --------  --------  --------  --------  --------  --------

Proceeds from Asset Sales (3)      N/A       N/A       N/A  $    950  $ 17,100  $ 18,050  $ 15,525  $ 48,045  $  1,500  $  1,000
Proceeds from Tax Refunds(3).      N/A       N/A       N/A        --        --        --        --    26,000        --        --
                                                            --------  --------  --------  --------  --------  --------  --------
   Total Sale Proceeds/Tax
    Refunds..................      N/A       N/A       N/A  $    950  $ 17,100  $ 18,050  $ 15,525  $ 74,045  $  1,500  $  1,000
                              ========  ========  ========  ========  ========  ========  ========  ========  ========  ========
</TABLE>
<TABLE>
<CAPTION>
                                 P
($ in thousands)              --------

                                2003
                                 FY
                              --------
<S>                           <C>
Income Statement:
Revenue...................... $262,803

LTM Revenue.................. $262,803

Gross Profit................. $ 26,926
Gross Margin.................    10.25%

EBITDA....................... $  3,793
EBITDA Margin................     1.44%

LTM EBITDA...................    3,793
EBITDA Margin................     1.44%

Cash Flow:

Capital Expenditures......... $  1,759
LTM Capital Expenditures.....    1,759

Net Working Capital (2)...... $      0
Change in Net Working Capital    7,700

Source/(Use) of Cash from
 Operations.................. $  9,733
                              --------

Proceeds from Asset Sales (3) $ 66,070
Proceeds from Tax Refunds(3).   26,000
                              --------
   Total Sale Proceeds/Tax
    Refunds.................. $ 92,070
                              ========
</TABLE>




--------
(1) Projections based on management estimates.
(2) Net Working Capital defined as Total Current Assets (Net of Cash), less
    Total Current Liabilities (Net of Debt), i.e., Net Working Capital equal to
    A/R plus Inventory plus Costs in Excess of Billings plus Other Current
    Assets less A/P less Billings in Excess of Costs less Other Current
    Liabilities.
(3) Timing and amount of asset sale proceeds and tax refunds provided by
    management.

                                      6

<PAGE>

                                   EXHIBIT E

                             List of Subsidiaries

A-1 Mechanical of Lansing, Inc.
AA Advance Air, Inc.
AA Jarl, Inc.
A-ABC Appliance, Inc.
A-ABC Services, Inc.
Air Conditioning, Plumbing & Heating Service Co., Inc.
Air Systems, Inc.
Aircon Energy Incorporated
Airtron, Inc.
Airtron of Central Florida, Inc.
American Air Company, Inc.
AMS Arkansas, Inc.
B&R Electrical Services, Inc.
Building One Commercial, Inc.
Building One Service Solutions, Inc.
BUYR, Inc.
Callahan Roach Products & Publications, Inc.
Cardinal Contracting Corporation
Central Carolina Air Conditioning Company
Chapel Electric Co.
Charlie Crawford, Inc.
ChiP Corp.
Colonial Air Conditioning Company
Commercial Air Holding Company
CONCH Republic Corp.
Costner Brothers, Inc.
Delta Innovations, Ltd.
Divco, Inc.
Dynalink Corporation
EET Holdings, Inc.
Electrical Contracting, Inc.
Encompass Capital, Inc. (fka Commercial Air, Power & Cable, Inc.)
Encompass Capital, L.P.
Encompass Central Plains, Inc. (fka The Lewis Companies, Inc.)
Encompass Constructors, Inc. (fka Atlantic Industrial Constructors, Inc.)
Encompass Design Group, Inc. (fka Engineering Design Group, Inc.)
Encompass Electrical Technologies, Inc. (fka Oil Capital Electric, Inc.) (OK
  Corp.)
Encompass Electrical Technologies, Inc. (fka Continental Electrical
  Construction Co.) (DE Corp.)
Encompass Electrical Technologies Central Tennessee, Inc.
Encompass Electrical Technologies Eastern Tennessee, Inc.
Encompass Electrical Technologies--Florida, LLC
Encompass Electrical Technologies Georgia, Inc.
Encompass Electrical Technologies--Midwest, Inc. (fka Town & Country Electric,
  Inc.)
Encompass Electrical Technologies of Nevada, Inc.
Encompass Electrical Technologies of New England, Inc.
Encompass Electrical Technologies North Carolina, Inc.
Encompass Electrical Technologies North Florida, Inc.
Encompass Electrical Technologies Projects Group, Inc.
Encompass Electrical Technologies--Rocky Mountains, Inc.
Encompass Electrical Technologies Southeast, Inc. (fka Regency Electric
  Company, Inc.)
Encompass Electrical Technologies South Carolina, Inc.
Encompass Electrical Technologies of Texas, Inc.
Encompass Electrical Technologies Western Tennessee, Inc.
Encompass Facility Services, Inc.
Encompass Global Technologies, Inc.
Encompass Ind./Mech. of Texas, Inc.
Encompass Industrial Services Southwest, Inc. (fka Gulf States, Inc.)
Encompass Management Co.
Encompass Mechanical Services of Elko, Inc. (fka Snyder Mechanical)
Encompass Mechanical Services Northeast, Inc. (fka Vermont Mechanical, Inc.)
Encompass Mechanical Services--Rocky Mountains, Inc. (fka Robinson Mechanical
  Company)
Encompass Mechanical Services Southeast, Inc.
Encompass Power Services, Inc. (fka EDG Power Services, Inc.)
Encompass Residential Services of Houston, Inc. (fka Sterling Air Conditioning)
Encompass Services Holding Corp.
Encompass Services Indiana, L.L.C.
ESR PC, L.P.
Evans Services, Inc.
EWG Holdings, Inc.
FacilityDirect.com, LLC
Ferguson Electric Corporation

                                      E-1

<PAGE>

Fred Clark Electrical Contractor, Inc.
Gamewell Mechanical, Inc.
Garfield-Indecon Electrical Services, Inc.
Gilbert Mechanical Contractors, Inc.
GroupMAC Texas L.P.
Hallmark Air Conditioning, Inc.
HPS Plumbing Services, Inc.
HVAC Services, Inc.
Interstate Building Services, L.L.C.
Isla Morada, LLC
Ivey Mechanical Services, L.L.C.
K&N Plumbing, Heating and Air Conditioning, Inc.
Laney's, Inc.
L.T. Mechanical, Inc.
MacDonald-Miller Industries, Inc.
MacDonald-Miller Co., Inc.
MacDonald-Miller Service, Inc.
MacDonald-Miller of Oregon, Inc.
Masters, Inc.
Mechanical Services of Orlando, Inc.
Merritt Island Air & Heat, Inc.
National Network Services, Inc.
National Network Services Northwest, LLC
Omni Mechanical Company
Omni Mechanical Services
Pacific Rim Mechanical Contractors, Inc.
Paul E. Smith Co., Inc.
Phoenix Electric Company
Ray's Plumbing Contractors, Inc.
Regency Electric Company, LLC
Regency Electric Company South Florida Office, Inc.
Riviera Electric of California, Inc.
Romanoff Electric Corp.
Roth Companies Incorporated
Sanders Bros., Inc.
Sequoyah Corporation
S. L. Page Corporation
Southeast Mechanical Service, Inc.
Stephen C. Pomeroy, Inc.
Sun Plumbing, Inc.
Taylor-Hunt Electric, Inc.
Team Mechanical, Inc.
The Farfield Company
Tri-City Electrical Contractors, Inc.
Tri-M Corporation
Tri-State Acquisition Corp.
United Acquisition Corp.
United Service Alliance, Inc.
Van's Comfortemp Air Conditioning, Inc.
Vantage Mechanical Contractors, Inc.
Wade's Heating & Cooling, Inc.
Watson Electrical Construction Co.
Wayzata, Inc.
Weigold & Sons, Inc.
Willis Refrigeration, Air Conditioning & Heating, Inc.
Wilson Electric Company, Inc.
Yale Incorporated

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