<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