10-Q 1 h99125e10vq.txt AMERICAN PLUMBING & MECHANICAL, INC. - 6/30/2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 333-81139 AMERICAN PLUMBING & MECHANICAL, INC. (Exact name of Registrant as Specified in Its Charter) DELAWARE 76-0577626 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) 1950 LOUIS HENNA BLVD. ROUND ROCK, TEXAS 78664 (Address of Principal Executive Offices) (ZIP Code) (512) 246-5260 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 13, 2002, there were outstanding 13,211,383 shares of common stock and 331,116 shares of Class B common stock of the Registrant. ================================================================================ AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS Part I - Financial Information........................................................................................2 Item 1. Financial Statements......................................................................................2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................13 Item 3. Quantitative and Qualitative Disclosures About Market Risks..............................................18 Part II - Other Information..........................................................................................20 Item 1. - Legal Proceedings.......................................................................................20 Item 2. - Changes in Securities and Use of Proceeds...............................................................20 Item 3. - Defaults Upon Senior Securities.........................................................................20 Item 4. - Submission of Matters to a Vote of Security Holders.....................................................20 Item 5. - Other Information.......................................................................................21 Item 6. - Exhibits and Reports on Form 8-K........................................................................21 SIGNATURES...........................................................................................................22

1 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)

The accompanying notes are an integral part of these consolidated financial statements. 2 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 3 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 4 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM" or the "Company"), is the largest company in the United States focused primarily on the plumbing contracting services industry. The Company also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services. AMPAM provides plumbing, mechanical and HVAC installation services to single family residential, multifamily residential and commercial construction customers. These unaudited interim statements should be read in conjunction with the Company's historical consolidated financial statements and related notes included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2001. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for reporting interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the fiscal year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue from construction contracts on the percentage-of-completion method measured by the percentage of cost incurred to total estimated costs for each contract. Contract costs include all direct material and labor costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income, the effects of which are recognized in the period the revisions are determined. Revenues from services are recognized when services are performed. The current asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. 5 3. LOCATION SHUTDOWNS In August 2002, management decided to shutdown the Company's commercial operations in Sacramento, CA and Pensacola, FL as well as the single family operations in southern Virginia. For the three months and six months ended June 30, 2002, these operations have collectively lost net of tax benefit $5.2 million and $5.3 million, respectively. Management estimates an additional $7.3 million loss ($4.4 million net of tax benefit) will be incurred to shutdown these operations. The major portion of these losses relate to the commercial operations in Sacramento, CA. As a result of the shutdown of these locations, the Company has evaluated the carrying value of the goodwill associated with the commercial segment as required under SFAS No. 142 "Goodwill and Other Intangible Assets". At this point no impairment of goodwill is indicated. The expected future shutdown costs are summarized as follows (unaudited, in thousands): Severance and retention payments $ 1,200 Asset impairment 900 Operations runout 5,200 ------------ Total $ 7,300 ============

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

6 4. LONG TERM DEBT Long-term debt consists of the following (in thousands):

On April 1, 1999, we entered into the Credit Facility with a total commitment of $95.0 million. The Credit Facility was subsequently amended and extended to mature on March 31, 2004. The Credit Facility bears interest, at our option, at the base rate of the arranging bank plus an applicable margin, or at LIBOR plus an applicable margin. During the first quarter of 2002, we amended the Credit Facility again to allow for, among other things, the settlement of the lawsuit described in note 5 to the consolidated financial statements. The Credit Facility requires the Company to maintain compliance with certain specified financial covenants including minimum amounts of EBITDA, maximum ratios of funded debt to EBITDA, a minimum fixed charge coverage ratio, a minimum net worth, capital expenditure limitations and other restrictive covenants. Additionally, the terms of the Credit Facility limit the ability of the Company to incur additional indebtedness, dispose of assets, make acquisitions or other investments, and to make various other payments. After amending the Credit Facility in August 2002, the Company is in compliance with its covenants. As partial consideration to the banks for the amendment, certain fees were paid and interest rates were increased. The Company anticipates that interest expense will increase by approximately $0.4 million in the second half of 2002 as a result of the amendment. As a component of the August 2002 amendment, the total commitment under the Credit Facility was reduced to $90.0 million through December 31, 2002. The commitment was further reduced to $85.0 million through December 31, 2003 and $80.0 million thereafter. As of June 30, 2002, the Company had borrowings of $72.0 million, leaving $18.0 million in availability under the Credit Facility, after taking into consideration the reduction in the commitment to $90.0 million. Pursuant to the August 2002 amendment to the Credit Facility, the Company may not pay any interest on the Senior Subordinated Notes until compliance with the covenants of the Credit Facility is provided to the banks. This provision may cause the Company to delay making the semi-annual interest payment by approximately one week. The provisions of the indenture covering the Senior Subordinated Notes allow a grace period of one month on the interest payments. 5. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who were holders of approximately one-half of AMPAM's Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. On April 1, 2002, the parties finalized a settlement agreement and general release pursuant to which the defendants and related parties tendered all of their preferred stock and AMPAM paid the defendants and related 7 parties $3.1 million. Upon transfer of consideration, AMPAM retired the preferred stock and realized an increase in Additional Paid in Capital of $3.8 million representing the liquidation value of the preferred stock received net of the proceeds attributable to the preferred stock and costs incurred to facilitate the settlement. As of April 1, 2002, the defendants and their related parties held 524,410 shares of preferred stock with a liquidation value of $6,817,330 and were due approximately $500,000 for outstanding but undeclared dividends, all of which were included in the settlement. The parties have no further duties, obligations, or liabilities to each other related to the acquisition agreement or preferred stock and have released any and all claims against each other. Three remaining holders of preferred stock, hold 524,410 combined shares. The remaining preferred stockholders have exercised their right under the terms of the preferred stock designation to require the Company to purchase all of their preferred stock. Restrictions within the terms of the Company's Credit Facility preclude redemption of the preferred stock and the payment of further dividends. Because the preferred stock has been put to AMPAM, the liquidation value of these shares have been classified as "Other long-term liabilities" on the balance sheet as of June 30, 2002. Although legal proceedings have been threatened to pursue judgment for the liquidation value of the preferred stock, the Company is not aware of any legal proceedings initiated by the remaining preferred stockholders, and the Company is negotiating with them in an effort to reach an amicable resolution. Additionally, because the Company has not purchased the preferred stock, pursuant to the terms of the preferred stock designation, the Company may not engage in the following activities without the affirmative vote of not less than a majority of the holders of the preferred stock, voting together as a single class: (i) incur any additional indebtedness for borrowed money other than borrowings under any credit facility to which the Company is a party at such time and as in effect when any redemption payment becomes due and is unpaid or at the time any dividend payment becomes due and is unpaid; (ii) effect (or make any agreement or become obligated to effect) any (a) sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries which individually or in the aggregate would constitute a significant subsidiary, (b) consolidation or merger involving the Company or any of its subsidiaries, or (c) dissolution, liquidation or winding-up of the Company or any of its subsidiaries; provided however that in no event shall the Company effect any sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries to affiliates of the Company; (iii) make (or permit any subsidiary to make) any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company and except for any such loans and advances which do not in the aggregate exceed $250,000; (iv) make any loan or advance to any person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business; or (v) acquire, by purchase, exchange, merger or otherwise, all or substantially all of the properties or assets of any other corporation or entity. The Company is also involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such outstanding legal actions will have a material adverse effect on the Company's financial position or results of operations. 8 INSURANCE AMPAM is self insured for health care, workers' compensation, and general, property and auto liability up to predetermined amounts above which third party insurance applies. Other types of exposures, including an umbrella policy, are insured through third party insurance. Management believes an adequate provision for claims or losses incurred by the Company has been reflected in the consolidated balance sheets. INTEREST RATE SWAP In order to mitigate the interest rate risk associated with our variable rate debt, AMPAM entered into an interest rate swap with a notional amount of $30 million that will expire September 28, 2002. The Company's risk management policy related to this swap agreement is to hedge the exposure to interest rate movements on a portion of its long-term debt. Payments are made based on a fixed rate of 3.51% and received on a LIBOR based variable rate (1.86% at June 30, 2002), reducing the fixed rate associated with this transaction to 6.76%. The swap is settled on a quarterly basis with the interest rate differential received or paid by AMPAM recognized as an adjustment to interest expense. Any change in value of this contract, real or hypothetical, would be significantly offset by an inverse change in the value of the variable rate (LIBOR) on the Credit Facility. On June 30, 2002, the Company had a derivative liability of $130,000 included in the "Accounts payable and accrued expenses" section of the balance sheet. A corresponding amount, net of income tax benefit of $51,000, was recorded as a component of stockholders' equity as "Accumulated other comprehensive loss". 6. GOODWILL In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the accounting and reporting for acquired goodwill and other intangible assets, and provides that goodwill should not be amortized. Rather, it must be tested for impairment annually or more frequently if circumstances indicate potential impairment. SFAS 142 was effective January 1, 2002. SFAS 142 also required the Company to complete a transitional goodwill impairment test within six months from the date of adoption. The adoption of SFAS 142 on January 1, 2002, resulted in a write-down of goodwill of approximately $34.7 million. This charge, which comes from the Company's commercial operations, is non-cash in nature and does not adversely affect the Company's financial covenant compliance with its lenders. The write-down of goodwill was recorded, net of tax benefit of $0.1 million, as a cumulative effect of a change in an accounting principle. Prospectively, the Company will annually evaluate the carrying amount of goodwill associated with its operating segments using a discounted cash flow methodology to identify any potential impairment of goodwill. 7. OPERATING SEGMENTS The Company modified its internal organizational structure during the fourth quarter of 2001 and divided its business into three reporting segments: single family residential, multifamily residential and commercial. These operating segments offer similar products and services with differing complexities to distinct customer groups. They are managed separately because each business requires different operating and marketing strategies. All three reporting segments operate domestically, with no 9 intersegment or foreign sales. These segments share similar growth strategies and provide plumbing and HVAC services; however, the different segments provide services to different customers, and have different competitors. The single family residential market includes housing projects, small condominium projects, and town house development. The multifamily residential market includes large condominium and apartment projects. The commercial market includes retail establishments, office buildings, hotels, assisted-living centers, waste water and water purification plants, manufacturing plants and other industrial complexes and public and private institutional buildings including schools, hospitals, dormitories, military and other governmental facilities, stadiums, arenas, convention centers, airports and prisons. The financial information presented for each segment does not allocate corporate overhead costs. Corporate expenses in the periods presented included costs related to operational, sales and marketing, accounting and administrative support. Corporate assets primarily include cash, deferred tax assets, debt issuance costs, goodwill and other intangible assets, fixed assets related to the Company's corporate office and non-trade accounts receivable. Net intersegment receivables and payables are reflected in total assets in the following table. Segment information for the quarters ended June 30, 2002 and 2001 is as follows (unaudited, in thousands):

10 Segment information for the six months ended June 30, 2002 and 2001 is as follows (unaudited, in thousands):

8. COMPREHENSIVE INCOME/(LOSS) Total Comprehensive Income/(Loss) for the three months ended June 30, 2001 and 2002 was $4.0 million and $(3.5) million, respectively. Total Comprehensive Income/(Loss) for the six months ended June 30, 2001 and 2002 was $4.5 million and $(37.6) million, respectively. 9. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.145, among other things, amends SFAS No.4 and SFAS No. 64, to require that gains and losses from the extinguishment of debt generally be classified within continuing operations. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 and early application is encouraged. At June 30, 2002, "Other Noncurrent Assets" included $0.6 million of capitalized costs associated with the Credit Facility and $2.6 million of capitalized costs associated with the Senior Subordinated Notes. Additionally, the discount related to the Senior Subordinated Notes was $1.3 million at June 30, 2002. These amounts are amortized as a component of interest expense. Historically, these items were presented as an extraordinary gain or loss upon early extinguishment of the related indebtedness. Under SFAS No. 145, such items are expensed 11 within income from continuing operations if the related indebtedness is retired. The Company has no such plans for retirement at this time. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has followed the requirements of SFAS No. 146 in accounting for the location shutdown described in note 3. 12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER DETAILED INFORMATION REGARDING AMPAM INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 AND OTHER REPORTS FILED BY US WITH THE SECURITIES AND EXCHANGE COMMISSION. This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Exchange Act to be covered by safe harbors created thereby. Such forward-looking statements are made only as of the date of this report and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned that such information involves risks and uncertainties, including those created by general market conditions, competition and the possibility that events may occur which limit the ability of American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM", the "Company", "we" or "us") to maintain or improve its operating results. Such risks, uncertainties and other important factors include, among others, retention of key management, a national economic downturn or one or more regional downturns in construction, shortages of labor and specialty building materials, difficulty in obtaining or increased costs associated with debt financing, seasonal fluctuations in the demand for plumbing and HVAC systems, and the use of incorrect project cost estimates which are used to determine our percentage of completion and revenue on uncompleted jobs. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success, as well as other statements which include words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and the inclusion of such information should not be regarded as a representation that it will occur. GENERAL American Plumbing and Mechanical, Inc. and subsidiaries ("AMPAM", the "Company", "we" or "us") is the largest company in the United States focused primarily on the plumbing contracting services industry. The Company also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services. We provide plumbing, mechanical and HVAC installation services to single family residential, multifamily residential and commercial construction customers. 13 RESULTS OF OPERATIONS In August 2002, management decided to shutdown our commercial operations in Sacramento, CA and Pensacola, FL as well as our single family operations in southern Virginia. For the three months and six months ended June 30, 2002, these operations have collectively incurred net losses of $5.2 and $5.3, respectively. Management estimates an additional $7.3 million pretax loss will be incurred to shut down these operations. The major portion of these losses relate to our commercial operations in Sacramento, CA. The expected future shut down costs are summarized as follows (in thousands): Severance and retention payments $ 1,200 Asset impairment 900 Operations runout 5,200 ------------- Total $ 7,300 =============

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

Three months ended June 30, 2001 compared to three months ended June 30, 2002 Revenues decreased $11.9 million, from $160.7 million for the three months ended June 30, 2001, to $148.8 million for the three months ended June 30, 2002. Our most significant revenue decreases were in our ongoing commercial operations in Ohio and San Diego($11.0 million), Austin, TX single family operations ($5.5 million) and Orlando, FL multifamily operations ($3.0 million). The revenue decrease in the noted markets was attributable to the weaker economy and increased competition, which resulted in fewer contracts being received and lower contract amounts. These decreases were partially offset by revenue increases in our startup operations of $5.8 million, excluding our commercial startup in Sacramento, CA which had a revenue increase of $7.5 million. 14 Gross profit decreased $11.9 million, from $28.2 million for the three months ended June 30, 2001, to $16.3 million for the three months ended June 30, 2002. Our locations that are being shut down accounted for $6.6 million of the decrease. The gross profit decrease at locations that are being shut down is due to losses resulting from unfavorable changes in job estimates and poor field performance. The decrease in gross profit from ongoing operations of $5.3 million is due to overall lower volume and gross margins. These decreases were partially offset by a $1.0 million increase in gross profit from our start up operations (excluding our commercial startup in Sacramento, CA). Gross margin decreased from 17.5% for the three months ended June 30, 2001 to 11.0% for the three months ended June 30, 2002, primarily due to lower margins at locations that are being shut down. Gross margin from ongoing operations decreased from 18.1% for the three months ended June 30, 2001 to 16.6% for the three months ended June 30, 2002. While gross margins from our startups have improved from 6.9% for the three months ended June 30, 2001 to 12.9% for the three months ended June 30, 2002, they contributed to the overall decline of our gross margin from ongoing operations because startups represented a larger component of our volume during 2002. Additionally, declining gross margins in our ongoing commercial operations resulted from higher field overhead costs as a percentage of revenues. Selling, general and administrative expenses increased $2.8 million, from $14.9 million for the three months ended June 30, 2001, to $17.7 million for the three months ended June 30, 2002. The increase in selling, general and administrative expenses was primarily due to increased property and casualty insurance and increased costs to support the increased volume of our start-ups. The goodwill amortization for the three months ended June 30, 2001 was $1.4 million. As a result of our adoption of SFAS 142, we no longer amortize goodwill. See note 6 to the consolidated financial statements for further discussion of this item. Interest expense decreased $0.5 million, from $4.7 million for the three months ended June 30, 2001, to $4.2 million for the three months ended June 30, 2002. The decrease in interest expense was attributable to lower average levels of debt and lower interest rates. Net income (loss) decreased $7.6 million, from net income of $4.0 million for the three months ended June 30, 2001, to net loss of ($3.6) million for the three months ended June 30, 2002 The net loss was primarily due to the losses incurred by the locations that are being shutdown. There was also a decrease in the net income from ongoing operations as a result of lower revenues and gross margins. Six months ended June 30, 2001 compared to six months ended June 30, 2002 Revenues decreased $13.6 million from $304.1 million for the six months ended June 30, 2001, to $290.5 million for the six months ended June 30, 2002. Our most significant revenue decreases were in our ongoing commercial operations in Ohio and San Diego($15.6 million), Austin, TX single family operations ($12.6 million) and Orlando, FL multifamily operations ($6.4 million). The revenue decrease in the noted markets was attributable to the weaker economy and increased competition, which resulted in fewer contracts being received and lower contract amounts. These decreases were partially offset by revenue increases in our startup operations of $12.3 million, excluding our commercial startup in Sacramento, CA which had a revenue increase of $17.4 million. Gross profit decreased $13.4 million, from $50.7 million for the six months ended June 30, 2001, to $37.3 million for the six months ended June 30, 2002. Our locations that are being shutdown accounted for $6.2 million of the decrease. The gross profit decrease at locations that are being shut down is due to losses resulting from unfavorable changes in job estimates and poor field performance. The decrease in gross profit from ongoing operations of $7.2 million is due to overall lower volume and gross margins. 15 These decreases were partially offset by a $1.9 million increase in gross profit from our start up operations (excluding our commercial startup in Sacramento, CA). Gross margin decreased from 16.7% for the six months ended June 30, 2001 to 12.9% for the six months ended June 30, 2002, primarily due to lower margins at the locations that are being shut down. Gross margin from ongoing operations decreased from 17.1% for the six months ended June 30, 2001 to 16.2% for the six months ended June 30, 2002. While gross margins from our startups have improved from 5.5% for the six months ended June 30, 2001 to 12.3% for the six months ended June 30, 2002, they contributed to the overall decline of our margin from ongoing operations because startups represented a larger component of our volume during 2002. Selling, general and administrative expenses increased $4.7 million, from $29.1 million for the six months ended June 30, 2001, to $33.8 million for the six months ended June 30, 2002. The increase in selling, general and administrative expenses was primarily due to higher property and casualty insurance costs and increased costs to support the increased volume at our startup locations. The goodwill amortization for the six months ended June 30, 2001 was $2.8 million. As a result of our adoption of SFAS 142, we no longer amortize goodwill. See note 6 to the consolidated financial statements for further discussion of this item. Interest expense decreased $1.1 million for the six months ended June 30, 2002 as compared to the same period in 2001. This was a result of lower average levels of debt and lower interest rates. The cumulative effect of an accounting change represents the charge we recorded to reflect the transitional impairment adjustment required by SFAS 142. The goodwill write-down of $34.6 million (net of tax benefit) was generated by our commercial segment. Net income (loss) decreased $42.5 million, from net income of $4.8 million for the six months ended June 30, 2001, to net loss of ($37.7) million for the six months ended June 30, 2002 The net loss was primarily due to the write-down of goodwill associated with the commercial segment and the losses associated with locations that are being shutdown. There was also a decrease in the net income from ongoing operations as a result of lower revenues and gross margins. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION AMPAM recognizes revenue from construction contracts on the percentage-of-completion method measured by the percentage of cost incurred to total estimated costs for each contract. Contract costs include all direct material and labor costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income, the effects of which are recognized in the period the revisions are determined. Revenues from services are recognized when services are performed. 16 The current asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2002 the Company had $64.7 million in working capital and $166.6 million of outstanding long-term indebtedness, including capital lease obligations totaling $1.0 million. For the six months ended June 30, 2002, net cash used in operating activities was $4.5 million. This use of cash was primarily attributable to losses incurred at locations that are being shutdown and to an increase in working capital. Cash used in investing activities was $2.3 million which primarily relates to the capital expenditures of $2.5 million, offset by proceeds from sales of property and equipment. Cash provided by financing activities for the six months ended June 30, 2002, was $8.5 million and was primarily obtained from net borrowings on our Credit Facility offset by a $2.6 million payment for the preferred shares received in the lawsuit discussed in note 5 to the consolidated financial statements. For the six months ended June 30, 2001, net cash provided by operating activities was $4.7 million resulting primarily from operations. Cash used in investing activities was $5.7 million which primarily relates to the capital expenditures of $4.4 million and earnout payments of $1.6 million. Cash provided by financing activities for the six months ended June 30, 2001, was $1.9 million and was primarily obtained from net borrowings on our Credit Facility offset by a $1.4 million earnout distribution to former shareholders of AMPAM Christianson. On April 1, 1999, we entered into the Credit Facility with a total commitment of $95.0 million. The Credit Facility was subsequently amended and extended to mature on March 31, 2004. The Credit Facility bears interest, at our option, at the base rate of the arranging bank plus an applicable margin, or at LIBOR plus an applicable margin. During the first quarter of 2002, we amended the Credit Facility again to allow for, among other things, the settlement of the lawsuit described in note 5 to the consolidated financial statements. During August 2002, the Credit Facility was further amended to provide covenant relief. As partial consideration to the banks for the amendment, certain fees were paid and interest rates were increased. The Company anticipates that interest expense will increase by approximately $0.4 million in the second half of 2002 as a result of the amendment. After the latest amendment, we are in compliance with all covenants of the Credit Facility. As a component of the August 2002 amendment, the total commitment under the Credit Facility was reduced to $90.0 million through December 31, 2002. The commitment was further reduced to $85.0 million through December 31, 2003 and $80.0 million thereafter. As of June 30, 2002, we had borrowings of $72.0 million, leaving $18.0 million available under the Credit Facility, after taking into consideration the reduction in the commitment to $90.0 million. The goodwill impairment resulting from the adoption of SFAS 142 during the first quarter did not adversely affect the Company's financial covenant compliance with its lenders. Pursuant to the August 2002 amendment to the Credit Facility, the Company may not pay any interest on the Senior Subordinated Notes until compliance with the covenants of the Credit Facility is provided to the banks. Current forecasts indicate continued compliance with the existing covenants through the maturity of the Credit Facility in April 2004. The provision in the August amendment may cause the Company to delay making the semi-annual interest payment by approximately one week. The provisions of the indenture covering the Senior Subordinated Notes allow a grace period of one month on the interest payments. In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who were holders of approximately one-half 17 of AMPAM's Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. On April 1, 2002, the parties finalized a settlement agreement and general release pursuant to which the defendants and related parties tendered all of their preferred stock and AMPAM paid the defendants and related parties $3.1 million. Upon transfer of consideration, AMPAM retired the preferred stock and realized an increase in Additional Paid in Capital of $3.8 million representing the liquidation value of the preferred stock received net of the proceeds attributable to the preferred stock and costs incurred to facilitate the settlement. As of April 1, 2002, the defendants and their related parties held 524,410 shares of preferred stock with a liquidation value of $6,817,330 and were due approximately $500,000 for outstanding but undeclared dividends, all of which were included in the settlement. The parties have no further duties, obligations, or liabilities to each other related to the acquisition agreement or preferred stock and have released any and all claims against each other. Three remaining holders of preferred stock, hold 524,410 combined shares. The remaining preferred stockholders have exercised their right under the terms of the preferred stock designation to require the Company to purchase all of their preferred stock. Restrictions within the terms of the Company's Credit Facility preclude redemption of the preferred stock and the payment of further dividends. Because the preferred stock has been put to AMPAM, the liquidation value of these shares have been classified as "Other long-term liabilities" on the balance sheet as of June 30, 2002. Although legal proceedings have been threatened to pursue judgment for the liquidation value of the preferred stock, the Company is not aware of any legal proceedings initiated by the remaining preferred stockholders, and the Company is negotiating with them in an effort to reach an amicable resolution. See note 5 to the consolidated financial statements for further discussion of this item. We anticipate that our cash flow from operations and borrowings under the Credit Facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements, and planned capital expenditures for property and equipment through the maturity of the Credit Facility in April 2004. Management will seek additional sources of capital before the Credit Facility is due. SEASONALITY The plumbing and mechanical contracting services industry is influenced by seasonal factors, which generally result in lower activity during winter months than in other periods. As a result, we expect that our revenues and profits will generally be lower in the first and fourth quarters of each fiscal year, and higher in the second and third quarters. ITEM 3. Quantitative and Qualitative Disclosures About Market Risks We are exposed to various market risks primarily related to potential adverse changes in interest rates. In the normal course of business, we employ established policies and procedures to manage this risk. Our exposure to changes in interest rates primarily results from our short-term and long-term debt with both fixed and floating interest rates. AMPAM's debt with fixed interest rates consists of Senior Subordinated Notes and capital leases. Our debt with variable interest rates consists primarily of the Credit Facility. In order to mitigate the interest rate risk associated with our variable rate debt, we entered into an interest rate swap with a notional amount of $30 million that will expire September 28, 2002. Our risk management policy related to this swap agreement is to hedge the exposure to interest rate movements 18 on a portion of our long-term debt. Under the extension, payments are made based on a fixed rate of 3.51% and received on a LIBOR based variable rate (1.86% at June 30, 2002), reducing the fixed rate associated with this transaction to 6.76%. The swap is settled on a quarterly basis with the interest rate differential received or paid by AMPAM recognized as an adjustment to interest expense. Any change in value of this contract, real or hypothetical, would be significantly offset by an inverse change in the value of the variable rate (LIBOR) on the Credit Facility. A one percent increase in the interest rate on the variable rate debt would result in an annual increase of $0.7 million in interest expense. On June 30, 2002, we had a derivative liability of $130,000 included in the accounts payable and accrued liabilities section of the balance sheet. A corresponding amount, net of income tax benefit of $51,000, was recorded as a component of stockholders' equity as accumulated other comprehensive loss. Other than the items mentioned above, there were no other material quantitative or qualitative changes during the first six months of fiscal 2002 in the Company's market risk sensitive instruments. 19 PART II - OTHER INFORMATION ITEM 1. - Legal Proceedings In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who were holders of approximately one-half of AMPAM's Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. On April 1, 2002, the parties finalized a settlement agreement and general release pursuant to which the defendants and related parties tendered all of their preferred stock and AMPAM paid the defendants and related parties $3.1 million. Upon transfer of consideration, AMPAM retired the preferred stock and realized an increase in Additional Paid in Capital of $3.8 million representing the liquidation value of the preferred stock received net of the proceeds attributable to the preferred stock and costs incurred to facilitate the settlement. As of April 1, 2002, the defendants and their related parties held 524,410 shares of preferred stock with a liquidation value of $6,817,330 and were due approximately $500,000 for outstanding but undeclared dividends, all of which were included in the settlement. The parties have no further duties, obligations, or liabilities to each other related to the acquisition agreement or preferred stock and have released any and all claims against each other. There are three remaining holders of preferred stock, that hold 524,410 combined shares. The remaining preferred stockholders have exercised their right to require the Company to purchase all of their preferred stock. Restrictions within the terms of the Company's Credit Facility preclude redemption of the preferred stock and the payment of further dividends. Although legal proceedings have been threatened to pursue judgment for the liquidation value of the preferred stock, the Company is not aware of any legal proceedings initiated by the remaining preferred stockholders, and the Company is negotiating with them in an effort to reach an amicable resolution. From time to time we are involved in litigation relating to claims arising out of operations in the normal course of business. AMPAM maintains insurance coverage against potential claims in an amount which management believes to be adequate. Currently, we are not aware of any legal proceedings or pending claims that we believe will have a material adverse effect on our consolidated financial position or consolidated results of operations. ITEM 2. - Changes in Securities and Use of Proceeds None. ITEM 3. - Defaults Upon Senior Securities None ITEM 4. - Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of the Company's shareholders was held on May 30, 2002. (b) The meeting was held to consider and vote upon (i) election of three (3) Class III Directors, and (ii) the approval of Deloitte & Touche LLP as the Company's independent auditors for the 2002 fiscal year. 20 The votes cast with respect to the election of four Class III Directors are summarized as follows:

The votes cast with respect to approval of Deloitte & Touche LLP as the Company's independent auditors as follows:

Consequently, the stockholders elected each of the directors nominated by the Board, and approved Deloitte & Touche LLP as the Company's independent auditors for the 2002 fiscal year. ITEM 5. - Other Information None ITEM 6. - Exhibits and Reports on Form 8-K (a) The exhibits to this report are listed below *3.1 Amended and Restated Certificate of Incorporation (American Plumbing& Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.1). *3.2 Amended and Restated Bylaws (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.2). *3.3 Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.3). *4.1 Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc., State Street Bank and Trust Company and the other parties named therein with respect to $125,000,000 11 5/8% Senior Subordinated Notes due 2008 (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 4.1). 10.14 Agreement and Amendment to $95.0 million Senior Secured Credit Facility Agreement dated March 20, 2002 among American Plumbing & Mechanical, Inc., Bank One, NA and the other lenders party thereto. 10.15 Agreement and Second Amendment to $95.0 million Senior Secured Credit Facility Agreement dated August 12, 2002 among American Plumbing & Mechanical, Inc., Bank One, NA and the other lenders party thereto. 99.1 Certification of Robert A. Christianson pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of David C. Baggett pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Incorporated by reference The registrant filed no reports on Form 8-K during the period covered by this quarterly report. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN PLUMBING AND MECHANICAL, INC. Date: August 14, 2002 By: /s/ David C. Baggett ---------------------------------- David C. Baggett President, Chief Operating Officer and Chief Financial Officer 22 INDEX TO EXHIBITS

*Incorporated by reference

AMERICAN PLUMBING & MECHANICAL INC 10-Q