ENCOMPASS SERVICES CORP, 10-Q, 2000-05-15

ENCOMPASS SERVICES CORP
10-Q, 2000-05-15
CONSTRUCTION - SPECIAL TRADE CONTRACTORS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended March 31, 2000

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

For the transition period from to

Commission File Number 1-13565

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ENCOMPASS SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

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

Texas 76-0535259
(State of incorporation) (I.R.S. Employer Identification No.)

3 Greenway Plaza, Suite 2000
Houston, Texas 77046
(Address of principal executive offices, including Zip Code)

Registrant's telephone number, including area code: (713) 860-0100

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

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.

Common Stock, par value $0.001 per share; 62,950,968 shares outstanding as
of April 28, 2000.

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<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements............................................. 1
General Information.................................................... 1
Consolidated Condensed Balance Sheets.................................. 2
Consolidated Condensed Statements of Operations........................ 3
Consolidated Condensed Statement of Shareholders' Equity............... 4
Consolidated Condensed Statements of Cash Flows........................ 5
Notes to Consolidated Condensed Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 21
Part II Other Information
Item 1. Legal Proceedings................................................ *
Item 2. Changes in Securities and Use of Proceeds........................ 22
Item 3. Defaults Upon Senior Securities.................................. *
Item 4. Submission of Matters to a Vote of Security Holders.............. 22
Item 5. Other Information................................................ *
Item 6. Exhibits and Reports on Form 8-K................................. 23
</TABLE>
- --------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.

i
<PAGE>

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

General Information

Encompass Services Corporation ("Encompass"), a Texas corporation
incorporated in 1997, is the leading nationwide provider of facilities services
to commercial, industrial and residential customers. As used herein, the
"Company" refers to Encompass and its consolidated subsidiaries.

On February 22, 2000, in accordance with the Agreement and Plan of Merger,
dated as of November 2, 1999, as amended (the "Agreement and Plan of Merger"),
between Group Maintenance America Corp. ("GroupMAC") and Building One Services
Corporation ("Building One"), Building One was merged with and into GroupMAC
(the "Merger"). In connection with the Merger, GroupMAC changed its name to
Encompass Services Corporation. As a result of the Merger, the Company is
approximately twice the size of each of GroupMAC and Building One and has the
capability of providing mechanical, electrical and janitorial services, either
alone or in combination with another service, in more locations than either
constituent company could perform on its own. For additional information
concerning the Merger, see Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 2 to the Consolidated
Condensed Financial Statements of Encompass Services Corporation and
Subsidiaries.

Because the Merger is accounted for as a reverse acquisition of GroupMAC by
Building One, the financial statements included herein for periods prior to the
Merger reflect the historical operations of Building One rather than GroupMAC.

In connection with the Merger, Encompass issued to affiliates of Apollo
Management, L.P. approximately $256 million of 7.25% Convertible Preferred
Stock in exchange for $150 million in cash and approximately $106 million
aggregate principal amount of Building One convertible junior subordinated
debentures. Based upon the current conversion price of $14.00 per share, the
preferred stock is convertible into approximately 18.2 million shares of
Encompass common stock, representing approximately 23% of the voting power of
Encompass. Encompass used the cash proceeds from the issuance of the
Convertible Preferred Stock to fund the right of the former GroupMAC
shareholders to elect to receive in the Merger cash for up to 50% of their
shares of Encompass' common stock at $13.50 per share, subject to proration.
The cash election was over-subscribed, resulting in a cancellation of
11,052,377 shares of Encompass common stock.

1
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except par value)
(unaudited)

<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 10,468 $ 17,085
Marketable securities............................... -- 2,275
Accounts receivable, net............................ 762,254 400,326
Inventories......................................... 33,763 10,324
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 131,169 59,418
Deferred tax assets................................. 14,704 4,168
Refundable income taxes............................. 14,109 1,757
Prepaid expenses and other current assets........... 17,193 13,260
---------- ----------
Total current assets.............................. 983,660 508,613
Property and equipment, net........................... 116,279 63,288
Goodwill and other intangible assets, net............. 1,318,067 713,346
Deferred debt issue costs............................. 18,280 20,411
Other assets.......................................... 11,508 8,096
---------- ----------
Total assets...................................... $2,447,794 $1,313,754
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities of long
term debt.......................................... $ 13,100 $ 7,950
Accounts payable.................................... 225,291 107,319
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 141,507 86,122
Due to related parties.............................. 41,219 10,290
Accrued compensation................................ 70,345 39,873
Accrued liabilities................................. 69,703 36,628
---------- ----------
Total current liabilities......................... 561,165 288,182
Revolving credit facility............................. 424,373 166,500
Term credit facilities................................ 296,250 124,063
Senior subordinated notes, net of unamortized
discount............................................. 195,905 195,793
Junior subordinated notes............................. 4,150 --
Convertible junior subordinated debentures............ -- 105,103
Other long-term debt.................................. -- 769
Deferred tax liabilities.............................. 8,223 2,085
Other liabilities..................................... 3,751 2,502

Commitments and contingencies

Mandatorily redeemable, convertible preferred stock,
$0.001 par value, 50,000,000 shares authorized,
256,191 and zero shares issued and outstanding,
respectively......................................... 252,467 --

Shareholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized, 63,062,703 and 35,134,773 shares issued
and outstanding, respectively........................ 63 35
Additional paid-in capital............................ 612,742 329,118
Retained earnings..................................... 88,705 100,317
Accumulated other comprehensive loss.................. -- (713)
---------- ----------
Total shareholders' equity........................ 701,510 428,757
---------- ----------
Total liabilities and shareholders' equity........ $2,447,794 $1,313,754
========== ==========
</TABLE>

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

2
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues................................................... $678,517 $350,842
Cost of services........................................... 557,718 282,328
-------- --------
Gross profit............................................. 120,799 68,514
Selling, general and administrative expenses............... 78,095 41,078
Merger and related charges................................. 7,800 --
Costs to exit certain activities and integration costs..... 12,200 --
Amortization of goodwill................................... 6,069 3,469
-------- --------
Income from operations................................... 16,635 23,967

Other income (expense):
Interest income.......................................... 125 2,508
Interest expense......................................... (16,642) (96)
Loss on sale of marketable securities.................... (1,018) --
Other, net............................................... 551 281
-------- --------
Income (loss) before income tax provision.................. (349) 26,660
Income tax provision....................................... 1,168 11,927
-------- --------
Income (loss) before extraordinary loss.................... (1,517) 14,733
Extraordinary loss, net of tax............................. (8,057) --
-------- --------
Net income (loss).......................................... (9,574) 14,733
Less convertible preferred stock dividends................. (2,038) --
-------- --------
Net income (loss) available to common shareholders......... $(11,612) $ 14,733
======== ========
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary loss.................. $ (.08) $ 0.26
Extraordinary loss, net of tax........................... (.18) --
-------- --------
Net income (loss)........................................ $ (.26) $ 0.26
======== ========
Weighted average shares outstanding...................... 44,759 57,467
======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary loss.................. $ (.08) $ 0.25
Extraordinary loss, net of tax........................... (.18) --
-------- --------
Net income (loss)........................................ $ (.26) $ 0.25
======== ========
Weighted average shares outstanding...................... 44,759 59,676
======== ========
</TABLE>

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

3
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY

For the three months ended March 31, 2000
(In thousands)
(unaudited)

<TABLE>
<CAPTION>
Common Stock Accumulated
------------------ Additional Other Total Total
Shares Paid- in- Retained Comprehensive Shareholders' Comprehensive
Outstanding Amount Capital Earnings Loss Equity Loss
----------- ------ ---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1999................... 28,108 $28 $329,125 $100,317 $(713) $428,757
Adjustment to convert
number and par value of
Building One shares to
shares of Encompass.... 7,027 7 (7) -- -- --
------ --- -------- -------- ------ --------
Restated balance,
December 31, 1999...... 35,135 $35 $329,118 $100,317 $ (713) $428,757
Acquisition of
GroupMAC............... 27,909 28 282,404 -- -- 282,432
Exercise of options..... 1 -- 6 -- -- 6
Common stock issued or
to be issued in
acquisitions........... 18 -- 1,214 -- -- 1,214
Net loss................ -- -- -- (9,574) -- (9,574) (9,574)
Convertible preferred
stock dividends........ -- -- -- (2,038) -- (2,038)
Reclassification
adjustment, net for
other comprehensive
loss realized in net
loss................... -- -- -- -- 713 713 713
-------
Total comprehensive
loss................... -- -- -- -- -- -- $(8,861)
------ --- -------- -------- ------ -------- =======
Balance, March 31,
2000................... 63,063 $63 $612,742 $ 88,705 $ -- $701,510
====== === ======== ======== ====== ========
</TABLE>

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

4
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)
(unaudited)

<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (9,574) $ 14,733
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization............................ 11,273 6,117
Extraordinary loss, net of tax........................... 8,057 --
Impairment of property and equipment..................... 1,700 --
Loss on sale of marketable securities.................... 1,018 --
Other.................................................... 636 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (10,617) (8,692)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (14,762) (8,403)
Prepaid expenses and other current assets.............. 9,441 (1,178)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (9,561) 1,781
Refundable income taxes................................ (1,937) --
Accounts payable....................................... 11,935 152
Accrued liabilities.................................... (7,646) 7,825
Change in other assets and liabilities................. (2,266) (659)
-------- --------
Net cash (used in) provided by operating activities.... (12,303) 11,676
-------- --------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired......... 6,639 (45,271)
Purchases of property and equipment...................... (7,186) (5,632)
Proceeds on sale of equipment............................ 695 90
Proceeds from sale of marketable securities.............. 2,422 --
Other.................................................... -- (98)
-------- --------
Net cash provided by (used in) investing activities.... 2,570 (50,911)
-------- --------
Cash flows from financing activities:
Issuance of preferred stock, net of issuance costs....... 146,250 --
Retirement of GroupMAC common stock in the Merger........ (150,000) --
Payments on long-term debt............................... (722,733) (427)
Proceeds from long-term debt............................. 729,593 1,163
Distribution to Minority Shareholders.................... -- (842)
Proceeds from stock options exercised.................... 6 83
Proceeds from issuance of stock under employee stock
purchase plan........................................... -- 435
-------- --------
Net cash provided by financing activities.............. 3,116 412
-------- --------
Net decrease in cash and cash equivalents.................. (6,617) (38,823)
Cash and cash equivalents, beginning of period............. 17,085 213,096
-------- --------
Cash and cash equivalents, end of period................... $ 10,468 $174,273
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid............................................ $ 17,834 $ 96
Income taxes paid........................................ $ 1,625 $ 7,023
</TABLE>

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

5
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands except share and per share amounts)

(unaudited)

NOTE 1--Business and Organization

Encompass Services Corporation ("Encompass", and together with its
consolidated subsidiaries, the "Company"), formerly Group Maintenance America
Corp. ("GroupMAC") was incorporated as a Texas corporation to build a national
company providing mechanical and electrical services in the commercial,
industrial and residential markets.

On February 22, 2000, the shareholders of GroupMAC and Building One Services
Corporation ("Building One") approved a merger of the two companies (the
"Merger"). In connection with the closing of the Merger, GroupMAC amended its
articles of incorporation to change its name to Encompass Services Corporation.

GroupMAC was the surviving legal entity in the Merger. However, for
accounting purposes, Building One is deemed to be the acquiror and,
accordingly, the Merger is 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. The consolidated
condensed statement of shareholders' equity has been converted from Building
One's capital structure to the Company's capital structure to reflect the
exchange of shares pursuant to the Merger. All share and per share information
has been revised to reflect the exchange ratio on a retroactive basis. See Note
2 for discussion of the Merger.

As of March 31, 2000, the Company was comprised of approximately 250
operating locations performing services in each of the top 100 cities across
the United States. The Company derives approximately 90% of its revenues from
commercial/industrial customers and has initiated a targeted effort to rapidly
grow its national accounts initiatives.

The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the separate audited consolidated financial statements and
notes thereto of GroupMAC and Building One for the year ended December 31, 1999
as filed in the Company's Annual Report on Form 10-K and Current Report on Form
8-K/A dated April 17, 2000, respectively.

Certain amounts recorded in the three-month period ended March 31, 1999 and
at December 31, 1999 have been reclassified to conform with the current period
presentation.

NOTE 2--Merger and Related Transactions

As noted above, on February 22, 2000 the shareholders of GroupMAC and
Building One approved a merger of the two companies. 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, subject
to pro ration, at $13.50 per share. As a result of this option, 11,052,377
shares of GroupMAC common stock were canceled in the Merger.

6
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

Concurrent with the closing of the Merger, affiliates of Apollo Management,
L.P. exchanged approximately $106,191 of Building One convertible junior
subordinated debentures and $150,000 in cash for approximately $256,191 of
Encompass Convertible Preferred Stock. See Note 6 for further discussion of the
Convertible Preferred Stock. The proceeds from the issuance of the Convertible
Preferred Stock were used to fund the cash election feature of the Merger.

On February 22, 2000, Encompass entered into a new credit agreement to
provide a total of $800,000 in financing. The proceeds of this new credit
agreement were used to refinance the existing revolving credit facilities of
GroupMAC and Building One, as well as GroupMAC's senior subordinated notes. See
Note 4 for further discussion of the new credit agreement.

The Merger has been accounted for as a purchase under generally accepted
accounting principles. The purchase consideration for the Merger has been
calculated as follows:

<TABLE>
<CAPTION>
Common Warrants/
Stock Options
-------- ---------
<S> <C> <C>
GroupMAC number of shares, options and warrants outstanding
or due at date of the Merger.............................. 38,961 5,358
Shares canceled in the cash election right................. (11,052) (76)
-------- --------
Shares issued or due at date of the Merger................. 27,909 5,282
Building One five day share price average with 11/03/99 as
midpoint/Black-Scholes option valuation, adjusted for the
1.25 exchange ratio of the Merger......................... $ 9.06 $ 5.60
-------- --------
Fair value of shares, options and warrants issued.......... $252,850 $ 29,582
======== ========
Total value of shares, options and warrants issued......... $282,432
Add: Transaction costs..................................... 7,358
--------
Total purchase consideration............................... $289,790
========
</TABLE>

The total consideration has been allocated to the assets and liabilities of
GroupMAC based on the assumption that assets and liabilities (excluding debt
repaid concurrent with the Merger, which has been recognized at fair value to
settle) are carried at historical amounts which approximate fair market value.
Identifiable intangible assets of approximately $13,000 primarily relate to
workforce and customer lists. Preliminary goodwill of approximately $566,847 is
being amortized over 40 years. The purchase price allocation is subject to
change based on the final determination of the fair value of GroupMAC's net
assets on the effective date of the Merger. Management does not believe the
final purchase price allocation will differ materially from the preliminary
purchase price allocation.

7
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

The following unaudited pro forma combined income statement 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 and 2000 including amounts owed in connection with those
acquisitions, as if the Merger and all of the acquisitions were effective on
January 1, 1999.

<TABLE>
<CAPTION>
Pro Forma Data
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues........................................... $ 966,523 $ 795,279
Net income......................................... $ 4,310 $ 17,666
Net income (loss) available to common
shareholders...................................... $ (412) $ 12,945
Net income (loss) per share:
Basic............................................ $ (0.01) $ 0.20
Diluted.......................................... $ (0.01) $ 0.20
</TABLE>

Significant pro forma adjustments included in the amounts above consist of
(i) compensation differentials, (ii) adjustment for goodwill amortization over
a period of 40 years, (iii) adjustment for interest expense as if borrowings
outstanding as of March 31, 2000 had been outstanding for the three month
periods ended March 31, 2000 and 1999 at interest rates in effect on March 31,
2000, (iv) the issuance of the Convertible Preferred Stock concurrent with the
Merger and (v) adjustment to the federal and state income tax provisions based
on pro forma operating results. Net income (loss) per share assumes all shares
issued for the Merger and the acquisitions were outstanding from the beginning
of the periods presented.

Pro forma net income (loss) for the three months ended March 31, 2000
includes the costs to exit certain activities and integration costs of $12,200
discussed more fully in Note 3, a loss on sale of marketable securities held by
one of the Company's subsidiaries of $1,018 and a non-cash compensation charge
of $1,571 incurred by GroupMAC prior to the Merger in connection with the
modification of certain option agreements. Excluding these charges, net income,
net income available to common shareholders, and net income per share (both
basic and diluted) would be $14,009, $9,287 and $0.15, respectively.

8
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

NOTE 3--Charges Associated with Merger Transaction and Restructuring

Merger and Related Charges

In connection with the Merger and related transactions, the Company has
recorded costs and expenses related to the extinguishment of Building One's
existing financing arrangements, severance and office closing costs and other
exit activities costs. These costs and expenses are included in the
consolidated condensed statements of operations for the three months ended
March 31, 2000 as follows:

<TABLE>
<S> <C>
Merger and Related Charges:
Severance costs................................................... $6,100
Office closing costs.............................................. 1,000
Disposition of assets and other costs............................. 700
------
Total charge.................................................... 7,800
Tax benefit at 38.5%.............................................. 3,003
------
Net of tax impact............................................... $4,797
======
Extraordinary Items:
Deferred debt issue costs on Building One convertible debt........ $4,367
Deferred debt issue costs on Building One existing revolving and
term credit facility............................................. 8,028
------
Total charge.................................................... 12,395
Tax benefit at 35.0%.............................................. 4,338
------
Net of tax impact............................................... $8,057
======
</TABLE>

The severance and office closing costs relate to the closing of Building
One's corporate headquarters in Minnetonka, MN and the resulting consolidation
with the GroupMAC corporate office in Houston, TX. 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 are no
longer of service and incurred lease termination costs. Severance costs covered
20 employees, of which 8 have been terminated as of March 31, 2000.

The following table is a reconciliation of the cash portion of the reserve
related to the severance and office closing costs incurred through March 31,
2000. The total disposition of assets and other costs include approximately
$400 in non-cash related charges. The reconciliation below reflects the
accruals recorded and payments applied during the quarter.

<TABLE>
<CAPTION>
Balance at
Total March 31,
Reserve Payments 2000
------- -------- ----------
<S> <C> <C> <C>
Severance and Office Closing Costs:
Severance................................ $6,100 $(4,957) $1,143
Office Closing Costs..................... 1,000 (131) 869
Disposition of assets and other exit
activities costs........................ 300 (--) 300
------ ------- ------
Total...................................... $7,400 $(5,088) $2,312
====== ======= ======
</TABLE>

9
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

Costs to Exit Certain Activities and Integration Costs

During the quarter ended March 31, 2000 the Company began the shutdown of
certain operations, the reorganization of other operations and integration
efforts 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 janitorial management offices...................... 1,600
Integration costs resulting from Merger.......................... 800
-------
Total........................................................ $12,200
=======
</TABLE>

The costs related to the shutdown of the janitorial group's 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 anticipates that the final shutdown of these operations
will occur during the second quarter of 2000.

The Company began the relocation of the janitorial management offices in
January 2000 and was substantially complete as of March 31, 2000. The related
costs include (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.

NOTE 4--Borrowing Activity

10 1/2% Senior Subordinated Notes

In April 1999, the Company completed a private placement offering of
$200,000 of 10 1/2% senior subordinated notes. The senior subordinated notes
are unsecured, 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 senior subordinated notes were issued at 97.746%, or a discount of
$4,508, which is being amortized over the term of the notes. Additionally, debt
issuance costs of $8,388 incurred in connection with the offering, have been
capitalized and are being amortized over the 10-year term of the notes. The
unamortized portion of these costs were approximately $7,701 and $7,828 at
March 31, 2000 and December 31, 1999, respectively, and are included in
deferred debt issue costs in the accompanying consolidated condensed balance
sheets.

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 can redeem up to 35% of the outstanding senior subordinated notes
with money raised in one or more equity offerings under certain circumstances.
Upon a change in control of the Company (as defined in the indenture for the
senior subordinated notes), the holders of the senior subordinated notes will
have the right to sell the notes to the Company at 101% of the face amount plus
accrued interest.

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.

10
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

7 1/2% Convertible Junior Subordinated Debentures

The convertible junior subordinated debentures were scheduled to mature on
May 1, 2012 and provided for interest payments at a rate of 7 1/2% to be paid
in additional convertible junior subordinated debentures or cash, at the
Company's election, for the first five years after their issuance, and in cash
thereafter. During the three months ended March 31, 2000, $2,387 of interest
was paid in additional convertible junior subordinated debentures. Debt
issuance costs of $4,634 incurred in connection with the debentures were
deferred and were being amortized over the 13-year term of the debentures.

In conjunction with the Merger, the convertible junior subordinated
debentures and $150,000 of cash were exchanged for approximately $256,000 of
convertible preferred stock. In addition, the related debt issuance costs were
written off at that time and are reflected as an extraordinary charge in the
accompanying consolidated condensed statements of operations.

Old Credit Facility

As of December 31, 1999, the Company's credit facility, which was with a
syndicate of banks led by Bankers' Trust Company, consisted of a $125,000 term
loan and a $225,000 revolving credit facility and matured in April 2004
(the "Old Credit Facility"). The revolving credit facility bore interest at
various rates, which were subject to change based on certain levels of
financial performance. Debt issuance costs of $9,445 incurred in connection
with this credit facility were being amortized over the 5-year term of the
credit facility. The Old Credit Facility included a number of significant
covenants including, among others, restrictions on the Company's ability to
incur additional indebtedness, restrictions on mergers, acquisitions and the
disposition of assets, sale and leaseback transactions and capital lease
payments, dividends and other distributions and voluntary prepayments on
indebtedness. Additionally, the Company was required to comply with certain
financial covenants with respect to minimum interest coverage and maximum
leverage ratios.

In conjunction with the Merger, the Old Credit Facility was paid off with
the proceeds from a new credit agreement described below. In addition, the
related debt issuance costs were written off at that time and are reflected as
an extraordinary charge in the accompanying consolidated condensed statements
of operations.

New Credit Agreement

In connection with the Merger, the Company entered into a new $800,000
credit facility (the "New Credit Agreement") and borrowed funds under the New
Credit Agreement to repay (i) the borrowings under the Old Credit Facility,
(ii) $130,000 of senior subordinated notes issued by GroupMAC in January 1999,
and (iii) borrowings of GroupMAC under its revolving credit facility. The New
Credit Agreement, which is with a syndicate of banks led by Bank of America,
N.A. and Chase Bank of Texas, National Association (as Administrative Agent and
Syndication Agent, respectively) includes a $500,000 revolving credit facility,
a $130,000 term loan and a $170,000 term loan. Borrowings under the New Credit
Agreement bear interest at variable rates, as defined. The availability of
borrowings under the New Credit Agreement is subject to the Company's ability
at the time to meet certain specified conditions. These conditions include
compliance with the financial covenants and ratios required by the New Credit
Agreement, absence of default under the facility and continued accuracy of the
representations and warranties contained in the New Credit Agreement.

Debt issuance costs approximating $10,747 have been capitalized and are
being amortized over the five-year and six-year terms of the revolving credit
and the term loan portions of the facility, respectively. The

11
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

unamortized portion of these costs approximate $10,579 at March 31, 2000 and
are included in deferred debt issue costs in the accompanying consolidated
condensed balance sheets.

Subsequent to March 31, 2000, the Company closed a $100,000 institutional
term loan addition to the New Credit Agreement. The seven year term loan has
amortization of 1% per year prior to maturity, bears interest at Libor, as
defined, plus 3.25% and has a call premium in the first two years of the term.

NOTE 5--Other Business Combinations--Contingent Consideration Agreements

In conjunction with acquisitions consummated in 1999 and 1998, the Company
has entered into certain contingent consideration agreements which provide for
the payment of cash and shares of common stock based on the performance of such
acquired companies.

During the three months ended March 31, 2000, $19,899 of cash consideration
under these agreements had been earned and recorded to goodwill. The cash
payable is reflected as due to related parties at March 31, 2000 in the
accompanying consolidated condensed balance sheets. Also during the first
quarter of 2000, $3,853 of cash has been paid and 76,898 shares have been
issued related to previously recorded contingent consideration. The Company
currently estimates the unearned contingent consideration under the remaining
agreements to be up to a maximum of $54,000 as of March 31, 2000.

During the three months ended March 31, 2000, $2,630 of consideration has
been recorded to goodwill related to final purchase price settlements on
acquisitions completed in 1999. This consideration consists of $1,676 in cash
and 93,993 shares of common stock. The cash payable is reflected as due to
related parties at March 31, 2000 in the accompanying consolidated condensed
balance sheets and the shares to be issued have been reflected as common shares
to be issued in the consolidated condensed statement of shareholders' equity.
These common shares to be issued have been included in the weighted average
shares outstanding for purposes of computing basic and diluted earnings per
share for the three months ended March 31, 2000.

A rollforward of the due to related parties balance in the accompanying
consolidated condensed balance sheets related to the above activity is as
follows:

<TABLE>
<S> <C>
Balance at December 31, 1999........................................ $10,290

Acquisition of GroupMAC............................................. 13,207
Record contingent consideration..................................... 19,899
Record final purchase price settlements............................. 1,676
Payments............................................................ (3,853)
-------
Balance at March 31, 2000........................................... $41,219
=======
</TABLE>

NOTE 6--Convertible Preferred Stock

In connection with the merger, the Company issued 256,191 shares of 7.25%
Convertible Preferred Stock (the "Convertible Preferred Stock") to affiliates
of Apollo Management, L.P. ("Apollo") at a value of $1,000 per share in
exchange for $150,000 in cash and all of the outstanding convertible junior
subordinated debentures of Building One (approximately $106,191).

12
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

The Convertible Preferred Stock has a par value of $.001 per share and is
convertible into shares of the Company's common stock at any time by the
holders at a conversion price of $14.00 per share, subject to adjustment under
certain circumstances. At 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). The Company has the right to redeem, at any time after five years
from the date of issuance, all, but not less than all, of the shares of
Convertible Preferred Stock then outstanding at an amount per share of 103% of
the Liquidation Amount; this amount declines to 102% after six years and 101%
after eight years. The Convertible Preferred Stock bears a preferred cumulative
dividend at the rate of 7.25% per year, payable quarterly. However, for the
first three years, dividends on the Convertible Preferred Stock may be paid in
cash on a current basis or accumulated at the option of the Company. At March
31, 2000, accrued dividends were approximately $2,012. The Convertible
Preferred Stock is also entitled to share in any dividends the Company may
declare on its common stock.

The holders of the Convertible Preferred Stock are entitled to vote on all
matters presented to the holders of the 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). The holders of the Convertible Preferred Stock, voting as a
separate class, are entitled to elect directors to the Board at the greater of
3 directors or the number of directors that represents 30% of the Board
(subject to Apollo's ownership percentage of common stock equivalents). As of
March 31, 2000, the Convertible Preferred Stock comprised approximately 23% of
the voting power of Encompass.

Convertible Preferred Stock issuance costs approximating $3,750 are being
amortized over the 12-year term of the Convertible Preferred Stock. The
unamortized portion of these costs approximates $3,724 at March 31, 2000 and is
recorded against mandatorily redeemable, convertible preferred stock in the
accompanying consolidated condensed balance sheets.

NOTE 7--Operating Segments

The Company's reportable segments are strategic business units that offer
products and services to distinct customer groups. They are managed separately
because each business requires different operating and marketing strategies.

The Company has three reportable segments: electrical/mechanical/industrial,
residential and janitorial markets. The electrical/mechanical/industrial
segment provides maintenance, repair and replacement services and new
installation services in manufacturing and processing facilities, power
generation facilities, hospitals and other critical care facilities, colleges
and universities, hotels, commercial office buildings and complexes, retail
stores and restaurants, supermarkets and convenience stores. The residential
segment provides maintenance, repair and replacement and new installation
services in single family and low-rise multifamily housing units. The
janitorial segment provides a wide variety of facility cleaning and maintenance
management services nationwide.

The Company evaluates performance based on income from operations before
amortization expense of the respective operating segments prior to unallocated
corporate expenses, and merger and related charges and costs to exit certain
activities and integration costs. Prior to this report, segment performance was
evaluated including amortization expense. The presentation for 1999 has been
conformed to the new measurement evaluation criteria after the Merger.

13
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

Unallocated corporate expenses primarily include (1) corporate overhead, (2)
corporate and operating company management bonuses, and (3) savings from
national purchase agreements relating to materials and property/casualty
insurance.

As the Company has not yet completed the allocation of the purchase price
consideration from the Merger to its individual operating companies, asset
allocation by segment is not available at this time. Segment information for
the three-month periods ended March 31, 2000 and 1999 was as follows:

<TABLE>
<CAPTION>
Electrical/
Mechanical/
Industrial Residential Janitorial Total
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
THREE MONTH PERIOD ENDED MARCH
31, 2000
Revenues......................... $584,786 $29,162 $64,569 $678,517
Operating costs.................. 544,236 26,487 60,548 631,271
-------- ------- ------- --------
Segment operating earnings....... 40,550 2,675 4,021 47,246
======== ======= =======
Goodwill amortization............ (6,069)
Merger and related charges and
costs to exit certain activities
and integration costs........... (20,000)
Unallocated corporate expenses... (4,542)
--------
Income from operations........... $ 16,635
========

THREE MONTH PERIOD ENDED MARCH
31, 1999
Revenues......................... $296,632 $ -- $54,210 $350,842
Operating costs.................. 269,992 -- 50,255 320,247
-------- ------- ------- --------
Segment operating earnings....... 26,640 -- 3,955 30,595
======== ======= =======
Goodwill amortization............ (3,469)
Unallocated corporate expenses... (3,159)
--------
Income from operations........... $ 23,967
========
</TABLE>

14
<PAGE>

ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

(In thousands except share and per share amounts)

(unaudited)

NOTE 8--Earnings Per Share

The following table reconciles the numerators and denominators of the basic
and diluted EPS computations for the three-month periods ended March 31, 2000
and 1999.

<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Basic earnings per share:
Net income (loss)....................................... $ (9,574) $ 14,733
Less: dividends on convertible preferred stock.......... (2,038) --
--------- ---------
Net income (loss) available to common shareholders...... $ (11,612) $ 14,733
Weighted average shares outstanding--Basic (in
thousands)............................................. 44,759 57,467
--------- ---------
Net income per share--Basic............................. $ (0.26) $ 0.26
========= =========

Diluted earnings per share:
Net income (loss) available to common shareholders...... $ (11,612) $ 14,733
Plus: dividends on convertible preferred stock.......... -- --
--------- ---------
Net (loss) income on an as-if converted basis........... $ (11,612) $ 14,733
========= =========
Total weighted average shares outstanding--Diluted (in
thousands)............................................. 44,759 59,676
--------- ---------
Net income per share--Diluted........................... $ (0.26) $ 0.25
========= =========
Weighted average shares (in thousands):
Weighted average shares outstanding--Basic.............. 44,759 57,467
Common stock equivalents from stock options and
warrants............................................... -- 346
Contingently issuable shares............................ -- 1,863
--------- ---------
Total weighted average shares outstanding--Diluted...... 44,759 59,676
========= =========
</TABLE>

The Convertible Preferred Stock, which is convertible into approximately
18,299,000 shares of common stock, and outstanding stock options and warrants
to purchase 13,292,412 shares of common stock were outstanding as of March 31,
2000, but were not included in the computation of diluted earnings per share
because the Company reported a net loss for the quarter ended March 31, 2000.

15
<PAGE>

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

INTRODUCTION

On February 22, 2000 the shareholders of GroupMAC and Building One Services
Corporation ("Building One") approved a merger of the two companies (the
"Merger"). In connection with the closing of the Merger, GroupMAC amended its
articles of incorporation to change its name to Encompass Services Corporation.

The following discussion should be read in conjunction with the consolidated
condensed financial statements, including the related notes thereto, appearing
elsewhere in this Quarterly Report on Form 10-Q, as well as the separate
consolidated financial statements and notes thereto of GroupMAC and Building
One for the year ended December 31, 1999 as filed in the Company's Annual
Report on Form 10-K and Current Report on Form 8-K/A dated April 17, 2000,
respectively.

The Company has historically derived revenues from providing maintenance,
repair and replacement services and new installation services for electrical,
mechanical and other systems to electrical/ mechanical/industrial customers and
providing janitorial and maintenance management services. The Merger allowed
the Company to further expand its electrical and mechanical offerings and to
provide maintenance, repair and replacement services and new installation
services for residential customers.

The Company recognizes maintenance, repair and replacement revenues,
including janitorial and maintenance management services, as services are
performed, except for service contract revenue, which is recognized ratably
over the life of the contract. The Company generally accounts for revenues from
fixed price installation and retrofit contracts on a percentage-of-completion
basis using the cost-to-cost method. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result
in revisions to costs and income and are recognized in the period in which the
revisions are determined.

Cost of services consists primarily of components, parts and supplies
related to new installation and maintenance, repair and replacement services,
salaries and benefits of service and installation technicians, 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.

The Company has realized savings from (1) greater volume discounts from
suppliers of components, parts and supplies; (2) consolidation of insurance and
bonding programs; and (3) its ability to borrow at lower interest rates than
most, if not all, of its subsidiaries. These savings are offset by costs
related to corporate management structure, costs associated with being a public
company and integration costs.

16
<PAGE>

RESULTS OF OPERATIONS

Three months ended March 31, 2000 compared to the three months ended March
31, 1999

Revenues. Revenues increased $327.7 million, or 93.4%, to $678.5 million for
the three months ended March 31, 2000 from $350.8 million for the three months
ended March 31, 1999. This increase in revenues is attributable to the
following:

. $178.4 million relates to the GroupMAC companies in the electrical /
mechanical / industrial and residential groups that were acquired in
connection with the Merger.

. $48.7 million relates to the incremental revenues contributed in the
three months ended March 31, 2000 by electrical / mechanical /
industrial and janitorial companies acquired during or subsequent to the
three months ended March 31, 1999.

. $90.3 million relates to internal growth in the electrical / mechanical
/ industrial group. This increase primarily relates to volume increases
in the Texas, Florida, Arizona and Colorado markets.

. $10.3 million relates to internal growth in the janitorial group.

Gross profit. Gross profit increased $52.3 million, or 76.4%, to $120.8
million for the three months ended March 31, 2000 from $68.5 million for the
three months ended March 31, 1999. This increase in gross profit is
attributable to the following:

. $32.5 million relates to the GroupMAC companies in the electrical /
mechanical / industrial and residential groups that were acquired in
connection with the Merger.

. $9.1 million relates to the incremental gross profit contributed in the
three months ended March 31, 2000 by electrical / mechanical /
industrial and janitorial companies acquired during or subsequent to the
three months ended March 31, 1999.

. $8.3 million relates to internal growth in the electrical / mechanical /
industrial group. This increase primarily relates to volume increases in
the Texas, Florida, Arizona and Colorado markets.

. $2.4 million relates to internal growth in the janitorial group.

Gross profit margin decreased 1.7% to 17.8% for the three months ended March
31, 2000 compared to 19.5% for the three months ended March 31, 1999. This
decline resulted 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 the Merger in the middle of
the quarter caused a significant amount of distraction among the operating
leadership of the Company.

Selling, general and administrative expenses. Selling, general and
administrative expenses, excluding merger and related charges, costs to exit
certain activities and integration costs and goodwill amortization, increased
$37.0 million, or 90.0%, to $78.1 million for the three months ended March 31,
2000 from $41.1 million for the three months ended March 31, 1999. This
increase in these expenses is attributable to the following:

. $23.8 million relates to the GroupMAC companies in the electrical /
mechanical / industrial and residential groups that were acquired in
connection with the Merger.

. $4.5 million relates to the incremental selling, general and
administrative expense incurred in the three months ended March 31, 2000
by electrical / mechanical / industrial and janitorial companies
acquired during or subsequent to the three months ended March 31, 1999.

. $6.7 million relates to internal growth in the electrical / mechanical /
industrial group. This increase primarily relates to supporting the
revenue growth in the Texas, Florida, Arizona and Colorado markets.

17
<PAGE>

. $2.0 million relates to internal growth in the janitorial group.

As a percentage of revenues, selling, general and administrative expense,
excluding merger and related charges, costs to exit certain activities and
integration costs and goodwill amortization, decreased to 11.5% for the three
months ended March 31, 2000 from 11.7% for the three months ended March 31,
1999.

Merger and related charges. In connection with the Merger, the Company has
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 Minnetonka, MN and the resulting consolidation with the
GroupMAC corporate office in Houston, TX. These costs are more fully described
in Note 3 to the Notes to Consolidated Condensed Financial Statements included
herein.

Costs to exit certain activities and integration costs. During the quarter
ended March 31, 2000, the Company recorded $12.2 million of costs and expenses
related to the shutdown of certain operations, the reorganization of other
operations and integration efforts resulting from the Merger. These costs are
more fully described in Note 3 to the Notes to Consolidated Condensed Financial
Statements included herein.

Goodwill amortization. Goodwill amortization for the three months ended
March 31, 2000 increased $2.6 million, or 74.3%, to $6.1 million from $3.5
million for the three months ended March 31, 1999. This increase primarily
relates to (1) the GroupMAC companies that were acquired in connection with the
Merger and (2) the companies acquired during or subsequent to the three months
ended March 31, 1999.

Other income and expense. Other income and expense activity can be
summarized as follows:

. Net interest expense increased $18.9 million to $16.5 million of net
interest expense for the three months ended March 31, 2000 from $2.4
million of net interest income for the three months ended March 31,
1999. This change is the result of the Company having minimal debt and
remaining cash reserves during the first quarter of 1999 from Building
One's initial public offering in November 1997 compared to having total
debt of $598.9 million at December 31, 1999 from the acquisitions and
the tender offer that occurred during 1999. The debt levels were further
increased to $933.8 million at March 31, 2000 as a result of the Merger.

. The loss on sale of marketable securities relates to the sale of a
marketable security held by one of the Company's subsidiaries during the
first quarter of 2000.

Income tax provision. The income tax provision decreased $10.7 million to
$1.2 million for the three months ended March 31, 2000 from $11.9 million for
the three months ended March 31, 1999. This decrease primarily relates to the
Merger and related charges and the costs to exit certain activities and
integration costs incurred during the first quarter of 2000. Excluding these
charges, the income tax provision decreased $2.7 million for the three months
ended March 31, 2000, which corresponds with the pre-tax income decrease of
$6.0 million that results before such charges. Excluding these charges, the
effective tax rate was 44.8% and 44.7% for the three months ended March 31,
2000 and 1999, respectively. The effective tax rate exceeds the Company's
statutory federal and state tax rate primarily due to non-deductible goodwill
amortization.

Extraordinary loss, net of tax. The net of tax extraordinary loss of $8.1
million in the first quarter of 2000 relates to the write-off of deferred debt
issue costs associated with Building One's revolver, term credit facility and
junior subordinated notes that were refinanced in connection with the Merger.
These costs are more fully described in Note 3 to the Notes to Consolidated
Condensed Financial Statements included herein.

Seasonality and Cyclicality

The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installations is generally lower during the winter months due to
reduced construction activities during inclement weather. Demand for HVAC
services is generally higher in the second and third quarters. Accordingly, the
Company expects its revenues and operating results generally will be lower in
the first and, to a lesser degree, fourth

18
<PAGE>

quarters. Historically, the construction industry has been highly cyclical. As
a result, the Company's volume of business may be adversely affected by
declines in new installation projects in various geographic regions of the
United States.

A substantial portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial/industrial
and residential facilities. Revenues from new installation services in the
residential market are dependent upon the level of housing starts in the areas
in which the Company operates. The housing industry is cyclical, and the
Company's revenues from residential new installation will be affected by the
factors that affect the housing industry. These factors include changes in
employment and income levels, the availability and cost of financing for new
homebuyers and general economic conditions. The level of new
commercial/industrial installation services is also affected by changes in
economic conditions and interest rates. General downturns in housing starts or
new commercial/industrial construction in the areas in which the Company
operates could have a material adverse effect on the Company's business,
including its financial condition and results of operations.

Inflation

Inflation did not have a significant effect on the results of operations of
the Company for the three-month periods ended March 31, 2000 and 1999.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has financed its operations and growth from
proceeds from Building One's initial public offering, internally generated
working capital and borrowings from commercial banks or other lenders. These
borrowings are generally secured by the accounts receivable and inventory of
the Company.

In connection with the Merger, the Company entered into a new $800 million
credit facility (the "New Credit Agreement") and borrowed funds under the new
facility to repay (i) borrowings of Building One under its $350 million credit
facility, (ii) $130 million of senior subordinated notes issued by GroupMAC in
January 1999, and (iii) borrowings of GroupMAC under its revolving credit
facility. As of March 31, 2000, $723.6 million of borrowings were outstanding
under this facility. The New Credit Agreement, which is with a syndicate of
banks led by Bank of America, N.A. and Chase Bank of Texas, National
Association (as Administrative Agent and Syndication Agent, respectively),
includes a $500 million revolving credit facility (the "Revolving Credit
Facility"), a $130 million term loan and a $170 million term loan (the "Term
Credit Facilities"). Debt under the New Credit Agreement bears interest at
variable rates, as defined. Under the New Credit Agreement, Encompass is
required to maintain (1) a minimum Fixed Charge Coverage Ratio; (2) a maximum
ratio of senior debt to pro forma EBITDA (as defined); (3) a maximum ratio of
Funded Debt (as defined) to EBITDA (as defined); (4) a minimum amount of
Consolidated Net Worth (as defined); and (5) a maximum amount of capital
expenditures in relation to Consolidated Net Worth. At March 31, 2000, the
Company was in compliance with those and all other affirmative and negative
covenants required under the New Credit Agreement. To date, neither the terms
of the New Credit Agreement and the indenture pursuant to which the senior
subordinated notes were issued nor the debt represented thereby have materially
restricted the Company's ability to finance future operations or capital needs
or to respond to changes in the Company's business or competitive activity.

Subsequent to March 31, 2000, the Company closed a $100 million
institutional term loan addition to the New Credit Agreement. The seven year
term loan has amortization of 1% per year prior to maturity, bears interest at
Libor plus 3.25% and has a call premium in the first two years of the term. The
Company plans to use approximately $23 million of these borrowings for
strategic acquisitions with the remainder used to reduce borrowings under the
Revolving Credit Facility.

As of May 11, 2000, borrowings under the above New Credit Agreement were
$763.3 million, providing capacity under the New Credit Agreement of
approximately $131.7 million.

19
<PAGE>

In April 1999, the Company completed a private placement offering of
$200,000 of 10 1/2% senior subordinated notes (the "Senior Subordinated
Notes"). The Senior Subordinated Notes are unsecured, 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 can redeem up to 35% of the outstanding Senior Subordinated Notes
with money raised in one or more equity offerings under certain circumstances.
Upon a change of control of the Company, the holders of the Senior Subordinated
Notes will have the right to sell the notes to the Company 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 our assets or merge or
consolidate with another entity.

Concurrent with the closing of the Merger, affiliates of Apollo Management,
L.P. exchanged approximately $106 million of Building One convertible junior
subordinated debentures and $150 million of cash for approximately $256 million
of the Company's Convertible Preferred Stock. The preferred stock will mature
in 2012, bears a dividend yield coupon rate of 7.25% and will be convertible
into shares of the Company's common stock at a conversion price of $14 per
common share, subject to adjustment. The proceeds from the issuance of the
Convertible Preferred Stock were used to fund the cash election feature of the
Merger.

The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing vehicles, inventory and supplies used in
the operation of the business. During the three months ended March 31, 2000 and
1999, capital expenditures aggregated $7.2 million and $5.6 million,
respectively. The Company anticipates that its cash flow from operations and
its existing credit facility will provide cash in excess of its normal working
capital needs, debt service requirements and planned capital expenditures for
property and equipment.

For the three months ended March 31, 2000 and 1999, the Company used $12.3
million and generated $11.7 million of cash from operating activities,
respectively. For the three months ended March 31, 2000, net income,
depreciation, amortization, write-off of deferred financing costs, impairment
charges related to property and equipment, loss on sale of marketable
securities and other items generated $13.1 million and changes in asset and
liability accounts utilized a net $25.4 million. For the three months ended
March 31, 1999, net income, depreciation, amortization and other items
generated $20.9 million and changes in asset and liability accounts utilized a
net $9.2 million.

For the three months ended March 31, 2000, the Company generated $2.6
million of cash in investing activities. These activities principally consisted
of $6.6 million acquired in acquisitions, net of cash paid, $2.4 million from a
sale of marketable securities and $7.2 million used for capital expenditures.
For the three months ended March 31, 2000, the Company used $50.9 million of
cash in investing activities. These activities principally consisted of $45.3
million for acquisitions and $5.6 million for capital expenditures.

For the three months ended March 31, 2000, the Company generated $3.1
million of cash from financing activities. These activities principally
consisted of issuance of preferred stock, net of issuance costs of $146.3
million, retirement of GroupMAC common stock of $150.0 million, proceeds from
long-term debt of $729.6 million and payments of long term debt of $722.7
million. For the three months ended March 31, 1999, the Company generated $0.4
million of cash from financing activities. These activities principally
consisted of proceeds from long-term debt of $1.2 million, payments of long
term debt of $0.7 million and a $0.8 million distribution to minority
shareholders of an acquired business.

In conjunction with acquisitions, the Company has entered into contingent
consideration agreements. For the quarter ended March 31, 2000, $19.9 million
of consideration has been earned, all of which has been or will be paid in
cash.

20
<PAGE>

The Company expects that a maximum of $54.0 million of additional contingent
consideration will become payable in 2000 through 2002, of which approximately
$30.0 million will be payable in cash, however, management has the option to
increase the cash component of the contingent consideration under the terms of
the respective acquisition agreements.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes new accounting and reporting standards requiring that all
derivative instruments (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. This statement, as amended, is effective for all fiscal years
beginning after June 15, 2000. Under present conditions, this statement will
have no impact on the Company's financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's market risk exposure is changing interest rates. With the exception
of the Senior Subordinated Notes, all other debt instruments do not have a
trading market and have not been registered with the Securities and Exchange
Commission (in thousands).

<TABLE>
<CAPTION>
Fair Value at
2000 2001 2002 2003 2004 Thereafter Total March 31, 2000
------- ------ ------ ------ ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revolving Credit
Facility............... -- -- -- -- -- $424,373 $424,373 $424,373
Average Rate.......... (a)
Term Credit Facilities.. $2,250 $3,000 $3,000 $3,000 $3,000 $285,000 $299,250 $299,250
Average Rate.......... (a)
Senior Subordinated
Notes.................. -- -- -- -- -- $200,000 $200,000 $184,000
Average Rate.......... 10.9%(b)
Junior Subordinated
Notes.................. -- -- -- $1,650 $2,500 -- $4,150 $4,150
Average Rate.......... 6.0% 7.5%
Fixed Rate Debt......... $10,100 -- -- -- -- -- $ 10,100 $ 10,100
Average Rate.......... 8.1%
</TABLE>
- --------
(a) Borrowings under the Revolving Credit Facility and the Term Credit
Facilities bear interest at a rate per annum, at the Company's option, of
either (1) the Alternate Base Rate or (2) the Eurodollar Rate. The
Alternate Base Rate is equal to the greater of the Federal Funds Effective
Rate plus 0.5% or the Prime Rate, plus a Margin depending on the ratio of
indebtedness for borrowed money to pro forma EBITDA (with all capitalized
terms as defined in the New Credit Agreement). The Eurodollar Rate is the
rate defined in the New Credit Agreement plus a Margin depending on the
ratio of indebtedness for borrowed money to pro forma EBITDA. At March 31,
2000, the weighted average interest rate in effect for the Revolving Credit
Facility and the Term Credit Facilities, including amortization of related
debt issuance costs, was 7.7% and 8.5%, respectively.
(b) The Senior Subordinated Notes are unsecured, mature May 1, 2009 and bear
interest at 10.5% payable semi-annually. These notes were issued at
97.746%, or a discount of $4.5 million, which is being amortized over the
term of the notes. In addition, there are approximately $8.4 million in
related debt issuance costs which are being amortized to interest expense
over the ten year life of the notes, increasing the effective interest rate
to 10.9%.

21
<PAGE>

PART II

OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds.

See "Item 1. Financial Statements--General Information" for a description of
the use of proceeds from the issuance of the 7.25% Convertible Preferred Stock
issued in connection with the Merger.

Item 4. Submission of Matters to a Vote of Security Holders.

Encompass held a Special Meeting of Shareholders on February 22, 2000 (the
"Special Meeting") for the purpose of (i) considering and voting upon a
proposal to approve and adopt the Agreement and Plan of Merger, (ii) approving
the issuance of up to 275,000 shares of Encompass' 7.25% convertible preferred
stock to affiliates of Apollo Management, L.P., in connection with the Merger,
(iii) approving and adopting the Encompass 2000 Stock Performance Incentive
Plan and (iv) approving and adopting the Encompass 2000 Stock Awards Plan. The
following summarizes the shareholder voting results:

(a) Approval of the Agreement and Plan of Merger:

Broker
For Against Abstained Non-Vote
30,708,202 27,918 15,721 --

(b) Approval of the issuance of up to 275,000 shares of Encompass' 7.25%
Convertible Preferred Stock to BOSS II, LLC, an affiliate of Apollo
Management, L.P., in connection with the Merger:

Broker
For Against Abstained Non-Vote
30,238,695 463,783 49,363 --

Broker
For Against Abstained Non-Vote
29,302,802 1,385,759 63,280 --

(d) Approval of the Encompass 2000 Stock Awards Plan:

Broker
For Against Abstained Non-Vote
27,902,060 2,755,678 85,814 8,289

22
<PAGE>

Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<C> <S>
2.1* --Agreement and Plan of Merger dated as of November 2, 1999, as
amended, by and between Group Maintenance America Corp. and Building
One Services Corporation (Annex A to Joint Proxy
Statement/Prospectus of GroupMAC and Building One dated January 18,
2000).
3.1* --Certificate of Merger dated February 22, 2000 merging Building One
Services Corporation into Group Maintenance America Corp., together
with Exhibit A thereto (the Amended and Restated Articles of
Incorporation of Encompass) (Exhibit 3.1 to Encompass' Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, File No.
1-13565).
3.2* --Statement of Designation dated February 15, 2000 relating to the
7.25% Convertible Preferred Stock of Encompass (Exhibit 3.2 to
Encompass' Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, File No. 1-13565).
3.3* --By-laws of Encompass, as amended (Exhibit 3.2 to Encompass' Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1998,
File No. 1-13565).
4 --None.
10.1* --2000 Stock Performance Incentive Plan of Encompass Services
Corporation (Annex G to Joint Proxy Statement/Prospectus of GroupMAC
and Building One dated January 18, 2000).
10.2* --2000 Stock Awards Plan of Encompass Services Corporation (Annex H
to Joint Proxy Statement/Prospectus of GroupMAC and Building One
dated January 18, 2000).
10.3* --Credit Agreement dated as of February 22, 2000 among Encompass, the
subsidiaries of Encompass named therein, Bank of America, N.A., as
administrative agent, Chase Bank of Texas, National Association, as
syndication agent, First Union National Bank, as documentation
agent, and the banks named therein (Exhibit 10.15 to Encompass'
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, File No. 1-13565).
10.4* --Investors' Rights Agreement dated as of February 22, 2000 between
Group Maintenance America Corp. and BOSS II, LLC (Exhibit 10.17 to
Encompass' Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, File No. 1-13565).
11 --None.
15 --None.
18 --None.
19 --None.
22 --None.
23 --None.
24 --None.
27 --Financial Data Schedule.
99 --None.
</TABLE>
- --------
* Incorporated by reference from a prior filing as indicated.

23
<PAGE>

(b) Reports on Form 8-K.

On January 20, 2000, the registrant filed a Current Report on Form 8-K that
disclosed under Item 5 thereof, the issuance of a press release on January 14,
2000 announcing that it would hold a special meeting of its shareholders on
February 22, 2000. At the meeting, shareholders would be asked to approve
(i) the Agreement and Plan of Merger, (ii) the issuance of 7.25% convertible
preferred stock to affiliates of Apollo Management, L.P. in connection with the
Merger and (iii) two stock-based compensation plans. In connection with the
Merger, the registrant also announced that it had commenced a tender offer and
consent solicitation for all of its outstanding 9 3/4% Senior Subordinated
Notes due 2009.

On February 2, 2000, the registrant filed a Current Report on Form 8-K that
disclosed under Item 5 thereof, the issuance of a (i) press release on January
26, 2000 announcing that it had adjusted the previously announced consent
payment pursuant to its outstanding tender offer and consent solicitation for
all of its outstanding 9 3/4% Senior Subordinated Notes due 2009 (the "Notes")
and (ii) press release on February 1, 2000 announcing that it had received
tenders and consents from holders representing a majority of the $130 million
outstanding principal amount of the Notes.

On February 25, 2000, the registrant filed a Current Report on Form 8-K that
reported under Item 2 thereof, that on February 22, 2000, in accordance with
the terms of the Agreement and Plan of Merger, Building One was merged with and
into GroupMAC and GroupMAC had changed its name to Encompass Services
Corporation.

On April 17, 2000, Encompass filed an amendment to the Current Report on
Form 8-K that it filed on February 25, 2000 (as amended on April 17, 2000),
with respect to the Merger, which was reported under Item 2 of the original
Form 8-K. The amendment included audited financial statements of Building One
and pro forma financial statements giving effect to the Merger.

24
<PAGE>

SIGNATURES

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

Encompass Services Corporation

May 15, 2000
/s/ Darren B. Miller
-------------------------------------
Darren B. Miller
Senior Vice President and Chief Financial
Officer
(principal financial officer)

May 15, 2000
/s/ Daniel W. Kipp
-------------------------------------
Daniel W. Kipp
Vice President, Treasurer and Chief
Information Officer
(principal accounting officer)

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,468
<SECURITIES> 0
<RECEIVABLES> 774,604
<ALLOWANCES> 12,350
<INVENTORY> 33,763
<CURRENT-ASSETS> 983,660
<PP&E> 143,258
<DEPRECIATION> 26,979
<TOTAL-ASSETS> 2,447,794
<CURRENT-LIABILITIES> 561,165
<BONDS> 920,678
252,467
0
<COMMON> 63
<OTHER-SE> 701,447
<TOTAL-LIABILITY-AND-EQUITY> 2,447,794
<SALES> 678,517
<TOTAL-REVENUES> 678,517
<CGS> 557,718
<TOTAL-COSTS> 557,718
<OTHER-EXPENSES> 104,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,517
<INCOME-PRETAX> (349)
<INCOME-TAX> 1,168
<INCOME-CONTINUING> (1,517)
<DISCONTINUED> 0
<EXTRAORDINARY> (8,057)
<CHANGES> 0
<NET-INCOME> (9,574)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)

</TABLE>