AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 1996
REGISTRATION NO. 333-00371
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WATSCO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
FLORIDA 59-0778222
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
------------------------
<TABLE>
<S> <C>
RONALD P. NEWMAN
CHIEF FINANCIAL OFFICER
WATSCO, INC.
2665 SOUTH BAYSHORE DRIVE 2665 SOUTH BAYSHORE DRIVE
SUITE 901 SUITE 901
MIAMI, FLORIDA 33133 MIAMI, FLORIDA 33133
(305) 858-0828 (305) 858-0828
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
COPIES OF COMMUNICATION TO:
CESAR L. ALVAREZ, ESQUIRE E. WILLIAM BATES, II, ESQUIRE
JORGE L. FREELAND, ESQUIRE KING & SPALDING
GREENBERG, TRAURIG, HOFFMAN, 120 WEST 45TH STREET, 32ND FLOOR
LIPOFF, ROSEN & QUENTEL, P.A. NEW YORK, NEW YORK 10036
1221 BRICKELL AVENUE (212) 556-2100
MIAMI, FLORIDA 33131
(305) 579-0500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
investment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED
MAXIMUM PROPOSED
NUMBER OF OFFERING MAXIMUM
SHARES PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS TO BE PER OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 1,840,000 $17.00 $31,280,000 $ 1,348.28
$.50 par value per share............ shares
===========================================================================================
<FN>
(1) Includes 240,000 shares as to which the registrant has granted the
Underwriters an option solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933.
(3) The registrant is registering an additional 230,000 shares of Common Stock
at the proposed offering price indicated above. A fee of $10,131.90 was paid
at the time of the initial filing.
</FN>
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be
sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such State.
SUBJECT TO COMPLETION--DATED FEBRUARY 8, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
1,600,000 Shares
[WATSCO LOGO]
Common Stock
- --------------------------------------------------------------------------------
Of the 1,600,000 shares of common stock, par value $.50 per share (the 'Common
Stock'), offered hereby, 1,200,000 shares are being sold by Watsco, Inc.
('Watsco' or the 'Company') and 400,000 shares are being sold by certain selling
shareholders of the Company (the 'Selling Shareholders'). See 'Selling
Shareholders.' The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
The Company has two classes of common stock: Common Stock and Class B Common
Stock. The Common Stock is substantially identical to the Company's Class B
Common Stock except with respect to voting power, with the Common Stock having
one vote per share and the Class B Common Stock having ten votes per share. The
holders of Common Stock are currently entitled to vote as a separate class to
elect 25% of the Board of Directors.
The Common Stock and the Class B Common Stock are listed on the New York Stock
Exchange and American Stock Exchange under the symbols 'WSO' and 'WSOB,'
respectively. On February 6, 1996, the last reported sale prices of the Common
Stock and Class B Common Stock on the New York Stock Exchange and the American
Stock Exchange were $17.00 and $16.875 per share, respectively.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
Per Share.... $ $ $ $
Total(3)..... $ $ $ $
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated to be $325,000
and expenses payable by the Selling Shareholders estimated to be $3,372.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 240,000 additional shares of the Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , the total Proceeds to Company will be $ and the total
Proceeds to Selling Shareholders will be $ . See 'Underwriting.'
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about February , 1996.
PRUDENTAL SECURTES INCORPORATED ROBERT W. BAIRD & CO.
INCORPORATED
February , 1996
<PAGE>
watsco
Map of the United States color coded for air
conditioning usage (in hours) per year according to
Consumer Reports and the Company's and Three States'
distribution locations.
/+ inside open circle/ - Three States Supply Company, Inc. locations
/bullet/ - Watsco locations
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR CLASS B COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE, THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
(I) HAS BEEN ADJUSTED TO REFLECT A 5% STOCK DIVIDEND PAID ON APRIL 30, 1992 AND
A THREE-FOR-TWO STOCK SPLIT EFFECTED ON MAY 15, 1995 AND (II) ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
THE COMPANY
Watsco, Inc. ('Watsco' or the 'Company') is the largest distributor of
residential central air conditioners in the United States, with leading
positions in Florida, Texas and California, the three largest air conditioning
markets in the country, as well as significant positions in Alabama, Arkansas,
Arizona, Louisiana, Nevada and North Carolina. In 1989, the Company embarked on
a strategy of establishing a network of distribution facilities across the
sunbelt where U.S. population growth is greatest, weather patterns are
predictably hot and air conditioning is seen as a necessity. Since initiating
this strategy, the Company's revenues have increased from $25 million in 1988 to
$284 million in 1994 and earnings per share have increased at a compound annual
growth rate of 22%. Watsco has acquired eight air conditioning distributors and
believes it is the only company pursuing a consolidation strategy by making
significant acquisitions in the highly fragmented air conditioning distribution
industry. The Company estimates there are approximately 900 air conditioning
distributors in the sunbelt. The Company achieved internal sales growth of 16%
and 10% for 1994 and the nine months ended September 30, 1995, respectively.
The Company estimates that the market for residential central air
conditioners and related supplies in the sunbelt was over $7 billion in 1994 and
has grown at an annual rate of 5.6% since 1990. The replacement market has
increased substantially in size over the past ten years, surpassing the
homebuilding market in significance as a result of the aging of the installed
base of residential central air conditioners, the introduction of new energy
efficient models and the upgrading of existing homes to central air
conditioning. According to the Air Conditioning and Refrigeration Institute
('ARI'), over 61 million central air conditioner units have been installed in
the United States since 1975. Many of the units installed from the mid-1970s to
the mid-1980s are reaching the end of their useful lives, thus providing a
growing replacement market. The Company also sells to the homebuilding market
and is well positioned to benefit from increases in housing starts.
The Company focuses on satisfying the needs of the higher margin
replacement market, where customers demand immediate, convenient and reliable
service. The Company believes that its size and financial resources allow it to
provide superior customer service by offering a complete product line of
equipment, parts and supplies, multiple warehouse locations and well-stocked
inventories. The Company sells its products from 70 branch warehouses to over
13,600 air conditioning and heating contractors and dealers. The Company also
produces over 4,000 electronic and mechanical components for air conditioning,
heating and refrigeration equipment that are sold to over 5,000 wholesale
distributors and original equipment manufacturers ('OEMs').
In 1995, Watsco acquired four distributors which reported aggregate 1994
revenues of approximately $47 million. All of the Company's significant
acquisitions to date have been nondilutive to its shareholders. In December
1995, the Company entered into a letter of intent to acquire Three States Supply
Company, Inc. ('Three States'), a Memphis, Tennessee based distributor of
building materials used primarily in the air conditioning and heating industry.
Three States reported revenues of approximately $45 million in 1994. The Company
believes that Three States serves over 5,000 customers from its nine locations
in Tennessee, Arkansas, Mississippi, Alabama and Missouri. The Company's
acquisition of Three States is subject to various conditions, including the
negotiation of an asset purchase agreement, and accordingly there can be no
assurance that such purchase will be consummated. For additional information
regarding the Company's acquisition of Three States, see 'Business--Three States
Acquisition,' 'Selected Financial Data' and Unaudited Pro Forma Combined
Financial Statements.
3
<PAGE>
In February 1996, the Company entered into a Stock Exchange Agreement and
Plan of Reorganization (the 'Exchange Agreement') with Rheem Manufacturing
Company ('Rheem') to acquire Rheem's common stock in three of the Company's
distribution subsidiaries (the 'Minority Interests') in exchange for $23 million
of unregistered Common Stock of Watsco. The shares of Common Stock received by
Rheem will be Restricted Securities as defined in Rule 144 under the Securities
Act of 1933, as amended. The actual number of shares of Common Stock to be
issued to Rheem will be determined based upon the average closing sales price of
the Common Stock on the New York Stock Exchange for the ten trading days
preceding the closing of the transactions contemplated by the Exchange
Agreement. Rheem's shares of the 6.5% Series A Preferred Stock of a subsidiary
will not be acquired by the Company in the transaction. Assuming Rheem is issued
shares of Common Stock pursuant to the Exchange Agreement at $17.00 per share
(the last reported sale price of the Common Stock on February 6, 1996), Rheem
would receive 1,352,941 shares of Common Stock in exchange for its Minority
Interests. Based upon the foregoing assumption, upon completion of the Offering
and consummation of the transactions contemplated by the Exchange Agreement,
Rheem would own approximately 18.4% of the outstanding Common Stock of the
Company. The closing of the transaction, which is expected to occur in the first
quarter of 1996 is subject to certain conditions precedent, including the
receipt of approval from the Federal Trade Commission. See
'Business--Relationship with Rheem Manufacturing Company' and Unaudited Pro
Forma Combined Financial Statements.
The Company also owns Dunhill Personnel System, Inc. ('Dunhill'), a
well-known provider of permanent and temporary personnel services to business,
professional and service organizations, government agencies, health care
providers, and other employers. As of December 31, 1995, Dunhill had 138
franchisees and licensees and 14 Company-owned offices in 38 states, Puerto Rico
and Canada and accounted in the nine months ended September 30, 1995 for less
than 10% of the Company's revenues.
The Company's principal executive offices are located at 2665 South
Bayshore Drive, Suite 901, Miami, Florida 33133 and its telephone is (305)
858-0828. Unless the context otherwise requires, the terms 'Watsco' and the
'Company' as used in this Prospectus refer to Watsco, Inc. and its subsidiaries.
DEPENDENCE ON KEY SUPPLIER
The Company's primary source for air conditioners is Rheem, the second
largest manufacturer of residential central air conditioners in the United
States. Because approximately 55% of the aggregate purchases of the Company's
distribution subsidiaries for the nine months ended September 30, 1995 are
manufactured by Rheem, the Company is presently dependent on the acceptance of
Rheem products. However, the Company believes that if Rheem products are not
available it will be able to sell other manufacturers' products. See
'Business--Relationship with Rheem Manufacturing Company.'
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of this offering and assuming the issuance of 1,352,941
shares of Common Stock to Rheem in connection with the Exchange Agreement,
Albert H. Nahmad, the Company's Chairman and President, and a limited
partnership controlled by him, collectively will retain beneficial ownership of
approximately 5.2% of the Common Stock and 60.4% of the Class B Common Stock and
will have approximately 32.5% of the combined voting power of the outstanding
Common Stock and Class B Common Stock. Mr. Nahmad will continue to have the
voting power to elect all but three members of the Company's nine-person Board
of Directors. See 'Management.'
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the:
Company............................................................... 1,200,000 shares
Selling Shareholders.................................................. 400,000 shares
Common Stock to be Outstanding after the Offering(1)(2):
Common Stock.......................................................... 7,354,477 shares
Class B Common Stock.................................................. 1,480,681 shares
Total............................................................ 8,835,158 shares
Use of Proceeds by the Company............................................. To acquire Three States, to repay a
portion of the Company's outstanding
borrowings under its revolving
credit facilities, and for general
corporate purposes, including
possible future acquisitions. The
acquisition of Three States is not
contingent upon the consummation of
this offering.
Common Stock--New York Stock Exchange Symbol............................... WSO
Class B Common Stock--American Stock Exchange Symbol....................... WSOB
</TABLE>
- ------------------------
(1) Assumes, as of December 31, 1995, (i) no exercise of outstanding options to
purchase an aggregate of 724,780 shares of the Company's Common Stock and
337,366 shares of the Company's Class B Common Stock, par value $.50 per
share ('Class B Common Stock'), (ii) no conversion of the Company's
outstanding 10% Convertible Subordinated Debentures due 1996 ('Convertible
Debentures'), which are convertible into 223,071 shares of Class B Common
Stock, and (iii) the consummation of the Exchange Agreement with Rheem at an
assumed exchange price of $17.00 per share of Common Stock (the last
reported sale price of the Common Stock on February 6, 1996).
(2) Excluding the Exchange Agreement with Rheem, but giving effect to the
Offering, the number of shares of Common Stock to be Outstanding after the
Offering would be 6,001,536 and the Total outstanding would be 7,482,217.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------- -----------------------------------------
(UNAUDITED)
PRO FORMA PRO FORMA
PRO FORMA COMBINED PRO FORMA COMBINED
COMBINED AS ADJUSTED COMBINED AS ADJUSTED
1992 1993 1994 1994(1) 1994(2) 1994 1995 1995(1) 1995(2)
-------- -------- -------- --------- ----------- -------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues....................$194,633 $230,656 $283,731 $ 283,731 $ 328,672 $213,884 $250,190 $ 250,190 $ 286,424
Gross profit(3)................... 45,559 51,930 63,212 63,212 73,651 48,666 56,547 56,547 65,152
Operating income.................. 9,930 11,390 15,043 14,910 16,975 12,630 15,527 15,427 17,237
Net income........................ 2,918 5,041(4) 5,762 7,265 8,710 4,923 6,033 7,677 8,957
Earnings per share:
Primary......................... $.70 $.85(4) $.89 $.93 $.97 $.77 $.91 $.96 $.98
Fully diluted(5)................ .64 .82(4) .87 .91 .95 .74 .87 .93 .94
Supplemental earnings per share:
Primary......................... $.73(4)
Fully diluted(5)................ .71(4)
Weighted average shares
outstanding:
Primary......................... 4,159 5,869 6,326 7,679 8,879 6,308 6,508 7,861 9,061
Fully diluted(5)................ 5,091 6,339 6,646 7,999 9,199 6,604 6,930 8,283 9,483
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------------------------
(UNAUDITED)
PRO FORMA
PRO FORMA COMBINED
ACTUAL COMBINED(6) AS ADJUSTED(7)
-------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $ 44,985 $ 44,985 $ 60,930
Total assets................................................................. 147,565 152,885 175,178
Long-term obligations........................................................ 7,867 7,867 7,867
Minority interests........................................................... 12,780 -- --
Shareholders' equity......................................................... 52,604 68,704 87,606
</TABLE>
- ------------------------
(1) Gives effect to the acquisition of Rheem's Minority Interests as if it
occurred as of the beginning of the periods shown. See 'Business--
Relationship with Rheem Manufacturing Company.'
(2) Gives effect to the acquisition of Rheem's Minority Interests, the Three
States acquisition and the issuance of 1,200,000 shares of Common Stock
offered hereby by the Company as if they occurred as of the beginning of the
periods shown. There can be no assurance that the Three States acquisition
will be consummated. See 'Business--Relationship with Rheem Manufacturing
Company' and 'Three States Acquisition.'
(3) Total revenues less cost of sales and direct service expenses.
(4) Historical net income and earnings per share information includes the effect
of a non-recurring receipt of insurance proceeds, which increased net income
by $706,000. Supplemental earnings per share excluding this item was $.73
and $.71 for primary and fully diluted earnings per share, respectively.
(5) Calculated assuming conversion of the Convertible Debentures.
(6) Gives effect to the acquisition of Rheem's Minority Interests as if it
occurred on September 30, 1995.
(7) Gives effect to the acquisition of Rheem's Minority Interests and the Three
States acquisition as if they occurred on September 30, 1995 and the sale of
1,200,000 shares of Common Stock offered hereby by the Company at an assumed
offering price of $17.00 per share (the last reported sale price of the
Common Stock on February 6, 1996) after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company and
the application of the net proceeds therefrom. See 'Use of Proceeds' and
'Capitalization.'
6
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock offered hereby by the Company, assuming an offering price of $17.00
per share (the last reported sale price of the Common Stock on February 6, 1996)
and after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company, are anticipated to be approximately
$18.9 million ($22.7 million if the Underwriters' over-allotment option is
exercised in full). The Company intends to use a portion of its net proceeds to
purchase the assets and assume certain liabilities of Three States at an
anticipated purchase price of approximately $14 million. The Company anticipates
using the remainder of the net proceeds to repay a portion of the Company's
outstanding borrowings under its revolving credit facilities, for potential
acquisitions and for general corporate purposes.
The acquisition of Three States is not contingent upon the completion of
this offering. If the Three States acquisition is not consummated, the Company
anticipates using the proceeds allocated for such use to repay a portion of the
Company's outstanding borrowings under its revolving credit facilities.
The indebtedness of the Company to be repaid will include up to $4.9
million ($18.9 million if the Three States acquisition is not consummated) of
revolving credit borrowings under the Company's various existing bank credit
facilities. At December 31, 1995, such indebtedness bore interest at floating
rates ranging from 6.6% to 6.8% (a weighted average interest rate of 6.7% at
December 31, 1995) with maturity dates ranging from June 30, 1996 to December
31, 1998. See Note 4 to the Company's Consolidated Financial Statements. In
1995, the Company incurred indebtedness of approximately $11.9 million under its
revolving credit facilities for acquisitions and additional borrowings were used
primarily to fund working capital requirements of the Company's distribution
subsidiaries.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term investment grade or U.S.
government interest bearing securities.
The Company continually evaluates potential acquisitions and has had
discussions with a number of potential acquisition candidates; however, the
Company has no agreement with respect to any potential acquisition other than
Three States. Should suitable acquisitions or working capital needs arise that
would require additional financing, the Company believes that its financial
position and earnings history provide a solid basis for obtaining additional
financing resources at competitive rates and terms.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock being offered by the Selling Shareholders. See 'Selling
Shareholders.'
7
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization (including short
term debt) of the Company as of September 30, 1995 and on a pro forma bases
giving effect to (i) the acquisition of Rheem's Minority Interests and (ii) the
Three States acquisition and the issuance and sale of the 1,200,000 shares of
Common Stock offered hereby by the Company at an assumed offering price of
$17.00 per share (the last reported sale price of the Common Stock on February
6, 1996), after deduction of estimated underwriting discounts and commissions
and offering expenses payable by the Company and the application of the
estimated net proceeds therefrom. See 'Use of Proceeds.' There can be no
assurance that the Three States acquisition will be consummated. This table
should be read in conjunction with the Consolidated Financial Statements of the
Company and of Three States and the related notes, the pro forma financial
information and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------------------------
PRO FORMA
PRO FORMA COMBINED
ACTUAL COMBINED AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term obligations............................... $ 744 $ 744 $ 744
Borrowings under revolving credit agreements(1)........................ 49,433 49,433 49,433
-------- --------- -----------
50,177 50,177 50,177
-------- --------- -----------
Long-term obligations:
Bank and other debt............................................... 4,026 4,026 4,026
12% Subordinated Note due 1998.................................... 2,500 2,500 2,500
10% Convertible Subordinated Debentures due 1996.................. 1,341 1,341 1,341
-------- --------- -----------
Total long-term obligations.................................. 7,867 7,867 7,867
-------- --------- -----------
Shareholders' equity(2):
Common Stock, $.50 par value, 40,000,000 shares
authorized; 4,783,129 issued and outstanding; 6,136,070
issued and outstanding, pro forma combined(3);
7,336,070 issued and outstanding, pro forma
combined as adjusted(3)........................................ 2,392 3,157 3,757
Class B Common Stock, $.50 par value, 4,000,000 shares authorized;
1,485,171 issued and outstanding..................................... 742 742 742
Paid-in capital................................................... 19,205 34,540 52,842
Retained earnings................................................. 30,265 30,265 30,265
-------- --------- -----------
Total shareholders' equity................................... 52,604 68,704 87,606
-------- --------- -----------
Total capitalization.................................... $110,648 $ 126,748 $ 145,650
-------- --------- -----------
-------- --------- -----------
</TABLE>
- ------------------------
(1) Assumes cash consideration of $16.3 million for the acquisition of the
assets and assumption of certain liabilities of Three States as of September
30, 1995. Since September 30, 1995, Three States has paid down certain
indebtedness, which reduced its net assets, and the Company anticipates that
the cash consideration to be paid by it for the assets and assumption of
certain liabilities of Three States in the first quarter of 1996 will be
approximately $14 million.
(2) Does not include, as of September 30, 1995, (i) 720,583 shares of Common
Stock and 338,153 shares of Class B Common Stock issuable upon the exercise
of outstanding stock options, and (ii) 223,071 shares of Class B Common
Stock issuable upon conversion of the Company's Convertible Debentures.
(3) Gives effect to the issuance of 1,352,941 shares of Common Stock at an
assumed price of $17.00 per share (the last reported sale price of the
Common Stock on February 6, 1996) to acquire Rheem's Minority Interests.
8
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been listed on the New York Stock Exchange
under the symbol 'WSO' since June 1994. Prior to such time, the Company's Common
Stock was listed on the American Stock Exchange under the symbol 'WSOA.' At the
time of the listing of the Common Stock on the New York Stock Exchange, the
Company's Class A Common Stock was redesignated Common Stock. The Company's
Class B Common Stock is listed on the American Stock Exchange under the symbol
'WSOB.'
The following table sets forth the high and low sale prices of the Common
Stock from January 1, 1993 to June 15, 1994 as reported by the American Stock
Exchange; the high and low sale prices of the Common Stock from June 16, 1994 to
present as reported by the New York Stock Exchange; and the high and low sale
prices of the Class B Common Stock as reported by the American Stock Exchange
for the periods indicated (in each case rounded to the nearest eighth, after
adjusting for the three-for-two stock split effected on May 15, 1995).
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK
-------------------------- --------------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1993
First Quarter................................................ $ 9 1/8 $ 7 5/8 $ 9 1/4 $ 7 3/4
Second Quarter............................................... 10 1/2 8 7/8 10 1/2 8 7/8
Third Quarter................................................ 11 3/8 9 1/8 11 1/8 9 3/8
Fourth Quarter............................................... 9 3/4 7 7/8 9 7/8 8 1/4
1994
First Quarter................................................ 10 1/4 8 5/8 10 1/4 8 7/8
Second Quarter............................................... 11 3/8 9 5/8 11 1/4 9 7/8
Third Quarter................................................ 11 3/8 10 1/8 11 1/8 10 3/8
Fourth Quarter............................................... 11 1/8 10 3/8 11 10 1/4
1995
First Quarter................................................ 11 7/8 10 1/2 11 5/8 10 5/8
Second Quarter............................................... 13 3/4 11 3/4 13 1/2 11 5/8
Third Quarter................................................ 17 3/8 13 3/8 16 3/4 13 1/2
Fourth Quarter............................................... 17 7/8 16 3/8 17 1/2 16
1996
First Quarter (through February 6, 1996)..................... 18 3/4 16 7/8 18 7/8 16 1/2
</TABLE>
On February 6, 1996, the last reported sale prices for each of the Common
Stock and the Class B Common Stock on the New York Stock Exchange and the
American Stock Exchange were $17 and $16 7/8 per share, respectively.
9
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data have been derived from the Company's
Consolidated Financial Statements which have been audited by Arthur Andersen
LLP, independent certified public accountants. The selected financial data as of
September 30, 1995 and for the nine months ended September 30, 1994 and 1995
have been derived from the unaudited consolidated financial statements of the
Company. In the Company's opinion, such consolidated financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for such periods. The results of operations for the nine months ended
September 30, 1995 are not necessarily indicative of results that may be
expected for the full year. The selected financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' included elsewhere in this Prospectus.
The selected pro forma financial information presented below is derived
from the Unaudited Pro Forma Combined Financial Statements appearing elsewhere
herein, which gives effect to: (i) the acquisition of Rheem's Minority
Interests, (ii) the Three States acquisition, using the purchase method of
accounting, and (iii) the issuance and sale of the Common Stock offered hereby
by the Company, and the application of the net proceeds therefrom. The
acquisition of Three States is subject to various conditions, including the
negotiation of an asset purchase agreement, and accordingly there can be no
assurance that such acquisition will be consummated. The pro forma information
is presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if either
the Three States acquisition or the offering had been consummated, nor
necessarily indicative of the future operating results or financial position of
the Company. The pro forma information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------- -------------------------------
(UNAUDITED)
PRO FORMA
PRO FORMA COMBINED PRO FORMA
COMBINED AS ADJUSTED COMBINED
1990 1991 1992 1993 1994 1994(1) 1994(2) 1994 1995 1995(1)
-------- -------- -------- -------- -------- --------- ----------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues..........$117,749 $169,318 $194,633 $230,656 $283,731 $ 283,731 $ 328,672 $213,884 $250,190 $ 250,190
Gross profit(3)......... 30,470 40,906 45,559 51,930 63,212 63,212 73,651 48,666 56,547 56,547
Operating income........ 7,006 8,576 9,930 11,390 15,043 14,910 16,975 12,630 15,527 15,427
Interest expense........ (2,896) (4,059) (3,197) (2,756) (3,155) (3,155) (3,155) (2,278) (3,064) (3,064)
Insurance proceeds...... -- -- -- 1,130 -- -- -- -- -- --
Income taxes............ (1,531) (1,973) (2,746) (3,819) (4,630) (4,630) (5,562) (4,065) (4,867) (4,867)
Minority interests(4)... (728) (1,010) (1,470) (1,287) (1,636) -- -- (1,446) (1,744) --
Net income.............. 1,975 1,990 2,918 5,041(5) 5,762 7,265 8,710 4,923 6,033 7,677
Earnings per share:
Primary............... $.61 $.50 $.70 $.85(5) $.89 $.93 $.97 $.77 $.91 $.96
Fully diluted(6)...... .56 .48 .64 .82(5) .87 .91 .95 .74 .87 .93
Weighted average shares
outstanding:
Primary............... 3,190 3,987 4,159 5,869 6,326 7,679 8,879 6,308 6,508 7,861
Fully diluted(6)...... 4,141 4,929 5,091 6,339 6,646 7,999 9,199 6,604 6,930 8,283
Cash dividends declared
per share:
Common Stock............ $.19 $.22 $.15 $.16 $.17 $.13 $.14
Class B Common Stock.... .17 .20 .14 .16 .17 .13 .14
<CAPTION>
PRO FORMA
COMBINED
AS ADJUSTED
1995(2)
-----------
<S> <C>
INCOME STATEMENT DATA:
Total revenues.......... $ 286,424
Gross profit(3)......... 65,152
Operating income........ 17,237
Interest expense........ (3,064)
Insurance proceeds...... --
Income taxes............ (5,700)
Minority interests(4)... --
Net income.............. 8,957
Earnings per share:
Primary............... $.98
Fully diluted(6)...... .94
Weighted average shares
outstanding:
Primary............... 9,061
Fully diluted(6)...... 9,483
Cash dividends declared
per share:
Common Stock............
Class B Common Stock....
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30, 1995
----------------------------------------------------- ----------------------
(UNAUDITED)
PRO FORMA
1990 1991 1992 1993 1994 ACTUAL COMBINED(7)
------- ------- ------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $22,048 $23,763 $27,800 $ 39,262 $ 40,095 $ 44,985 $ 44,985
Total assets........................ 82,322 81,767 81,138 109,685 119,664 147,565 152,885
Long-term obligations............... 16,867 14,830 13,539 7,848 6,724 7,867 7,867
Minority interests.................. 6,637 7,373 8,229 11,553 11,857 12,780 --
Shareholders' equity................ 18,935 20,832 25,272 41,754 46,816 52,604 68,704
<CAPTION>
PRO FORMA
COMBINED
AS ADJUSTED(8)
--------------
<S> <C>
BALANCE SHEET DATA:
Working capital..................... $ 60,930
Total assets........................ 175,178
Long-term obligations............... 7,867
Minority interests.................. --
Shareholders' equity................ 87,606
</TABLE>
10
<PAGE>
- ------------------------
(1) Gives effect to the acquisition of Rheem's Minority Interests as if it
occurred as of the beginning of the periods shown. See
'Business--Relationship with Rheem Manufacturing Company.'
(2) Gives effect to the acquisition of Rheem's Minority Interests, the Three
States acquisition and the issuance of 1,200,000 shares of Common Stock
offered hereby by the Company as if they occurred as of the beginning of the
periods shown. There can be no assurance that the Three States acquisition
will be consummated. See 'Business--Relationship with Rheem Manufacturing
Company' and 'Three States Acquisition.'
(3) Total revenues less cost of sales and direct service expenses.
(4) Represents the pro rata share of earnings allocated to Rheem as a result of
its 20% ownership interests in Gemaire and Comfort Supply and 50% ownership
interest (49.5% prior to January 1, 1992) in Heating & Cooling. See Note 1
to the Company's Consolidated Financial Statements.
(5) Includes the effect of a non-recurring receipt of insurance proceeds, which
increased net income by $706,000. Excluding this item, primary and fully
diluted earnings per share would have been $.73 and $.71, respectively.
(6) Calculated assuming conversion of the Convertible Debentures.
(7) Gives effect to the acquisition of Rheem's Minority Interests as if it
occurred on September 30, 1995.
(8) Gives effect to the acquisition of Rheem's Minority Interests and the Three
States acquisition as if they occurred on September 30, 1995 and the sale of
1,200,000 shares of Common Stock offered hereby by the Company at an assumed
offering price of $17.00 per share (the last reported sale price of the
Common Stock on February 6, 1996) after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company and
the application of the net proceeds therefrom. See 'Use of Proceeds' and
'Capitalization.'
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
From its inception through 1988, Watsco was primarily a manufacturer of
replacement parts for air conditioning, heating and refrigeration equipment. In
January 1989, the Company significantly increased its presence in the climate
control industry through its acquisition of 80% (and Rheem acquired 20%) of the
capital stock of Gemaire Distributors, Inc. ('Gemaire'), a distributor of
residential central air conditioners in Florida, for an aggregate purchase price
of approximately $17.1 million. In October 1990, the Company acquired 50% and
Rheem acquired 50% of the capital stock of Heating & Cooling Supply, Inc.
('Heating & Cooling'), a distributor of residential central air conditioners in
southern California, Arizona and Nevada, for an aggregate purchase price of
approximately $31.5 million. In April 1993, the Company acquired 80% and Rheem
acquired 20% of the capital stock of Comfort Supply, Inc. ('Comfort Supply'), a
distributor of residential central air conditioners in Texas, for an aggregate
purchase price of approximately $4.0 million. In March 1995, Gemaire purchased
the operating assets and assumed certain liabilities of H.B. Adams, Inc., a
wholesale distributor of air conditioning, heating and refrigeration products
located in Tampa, Florida, for approximately $7.8 million. In October 1995, the
Company purchased the operating assets and assumed certain liabilities of
Central Air Conditioning Distributors, Inc. ('Central Air Conditioning'), a
North Carolina-based distributor of air conditioning, heating and refrigeration
products, for approximately $9.0 million. The Company signed a letter of intent
in December 1995 to acquire the assets and assume certain liabilities of Three
States, a Tennessee-based wholesale distributor of air conditioning, heating and
building supplies. Other smaller acquisitions have been made over the past three
years to gain market share and to enter into new market areas. In February 1996,
the Company entered into the Exchange Agreement with Rheem to acquire Rheem's
Minority Interests in the Company's distribution subsidiaries. The Company
expects the transactions contemplated by the Exchange Agreement to close in the
first quarter of 1996.
RESULTS OF OPERATIONS
The following table presents for the periods indicated certain items of the
Company's Consolidated Financial Statements for the years ended December 31,
1993 and 1994 and for the nine months ended September 30, 1994 and 1995,
expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ----------------
1993(1) 1994 1994 1995
------- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues....................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales and direct service expenses............................ 77.5 77.7 77.2 77.4
------- ----- ----- -----
Gross profit.................................................... 22.5 22.3 22.8 22.6
Selling, general and administrative expenses......................... 17.6 17.0 16.8 16.4
------- ----- ----- -----
Operating income................................................ 4.9 5.3 6.0 6.2
Investment income, net............................................... .2 -- -- .1
Interest expense..................................................... 1.2 1.1 1.1 1.2
Income taxes......................................................... 1.4 1.6 1.9 2.0
Minority interests................................................... .6 .6 .7 .7
------- ----- ----- -----
Net income...................................................... 1.9% 2.0% 2.3% 2.4%
------- ----- ----- -----
------- ----- ----- -----
</TABLE>
- ------------------------
(1) Excludes non-recurring income from the receipt of insurance proceeds.
12
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 WITH NINE MONTHS ENDED
SEPTEMBER 30, 1994
Revenues for the nine months ended September 30, 1995 increased $36.3
million, or 17%, compared to the same period in 1994. The distribution
subsidiaries' revenues increased $35.1 million, or 20%. Excluding the effect of
acquisitions, revenues for the distribution subsidiaries increased $17.7
million, or 10%. This increase in sales was mainly due to increased sales of
replacement air conditioners in each of the Company's primary distribution
markets. Revenues in the Company's manufacturing operations increased $134,000,
or 1%, primarily due to new product offerings to aftermarket customers which
have more than offset lower sales to overstocked OEM customers. Revenues in the
personnel services operations increased $1.0 million, or 5%, reflecting higher
demand for temporary help services and greater customer acceptance of new
product offerings such as professional staffing and technical temporaries.
Gross profit for the nine months ended September 30, 1995 increased $7.9
million, or 16%, as compared to the same period in 1994. Excluding the effect of
acquisitions, gross profit increased $3.9 million, or 8%, primarily as a result
of the aforementioned revenue increases. Gross profit margin for the nine month
period decreased to 22.6% in 1995 from 22.8% in 1994, with 1995 acquisitions
having no effect on gross profit margin. These decreases were primarily due to
the increased sale of lower margin products by the distribution subsidiaries and
new product start-up costs in the manufacturing operations.
Selling, general and administrative expenses for the nine months ended
September 30, 1995 increased $5.0 million, or 14%, compared to the same period
in 1994, primarily due to selling and delivery costs related to increased sales.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $2.1 million, or 6%, also due to revenue increases. Selling,
general and administrative expenses as a percent of revenues decreased to 16.4%
in 1995 from 16.8% in 1994, with 1995 acquisitions having no effect on such
percentage. This decrease was the result of a larger revenue base over which to
spread fixed costs.
Interest expense for the nine months ended September 30, 1995 increased
$786,000, or 35%, compared to the same period in 1994, due to higher interest
rates and additional borrowings used to finance acquisitions and increased
inventory levels required by sales growth and stocking requirements in new
branch locations. Excluding the effect of acquisitions, interest expense
increased $444,000, or 19%, primarily due to higher interest rates and higher
average monthly borrowings.
The effective tax rate for the nine months ended September 30, 1995 was
38.5% compared to 39.0% for the same period in 1994. The decrease is primarily a
result of a proportionately larger share of taxable income generated in states
with higher tax rates during 1994 as compared to 1995.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 WITH YEAR ENDED DECEMBER 31, 1993
Revenues in 1994 increased $53.1 million, or 23%, over 1993. The
distribution subsidiaries' revenues increased $48.3 million, or 27%. Excluding
the effect of acquisitions, revenues for the distribution subsidiaries increased
$28.6 million, or 16%. This increase in sales was mainly due to hot weather in
the western market, strong replacement sales in Florida and increased export
sales. Revenues in the Company's manufacturing operations increased $2.1
million, or 10%, primarily due to the introduction of new products. Revenues in
the personnel services segment increased $2.7 million, or 10%, reflecting
greater demand for temporary help services.
Gross profit in 1994 increased $11.3 million, or 22%, over the prior year.
Excluding the effect of acquisitions, gross profit increased $7.3 million, or
14%, primarily as a result of the increase in revenues
13
<PAGE>
described above. Gross profit margin decreased from 22.5% in 1993 to 22.3% in
1994 with acquisitions not changing gross profit margin significantly.
Selling, general and administrative expenses in 1994 increased $7.6
million, or 19%, over the prior year, primarily due to the full year effect of
the 1993 acquisitions. Excluding the effect of acquisitions, selling, general
and administrative expenses increased $4.0 million, or 10%, from the prior year
due to increased selling and delivery costs caused by increased sales. As a
percentage of revenues, selling, general and administrative expenses decreased
from 17.6% in 1993 to 17.0% in 1994 and, excluding the effect of acquisitions,
decreased from 17.6% in 1993 to 16.9% in 1994. This decrease was the result of a
larger revenue base over which to spread fixed costs.
Other income in 1993 includes the non-recurring receipt of insurance
proceeds of $1.1 million for business interruption claims related to Hurricane
Andrew.
Interest expense in 1994 increased $399,000, or 14%, from the prior year
due to higher borrowings from acquired businesses and interest rate increases
during 1994.
The effective income tax rate in 1994 increased to 38.5% compared to 37.6%
in the prior year. The increase was primarily a result of the proportionately
larger share of taxable income generated in higher tax rate states in 1994
compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has adequate availability of capital from operations and
revolving credit facilities to fund current operations and anticipated growth,
including expansion in the Company's current and targeted market areas, through
1996. At November 30, 1995, the Company's subsidiaries had aggregate borrowing
commitments from lenders under existing revolving credit agreements of $72.0
million, of which $12.2 million was unused and available. The weighted average
interest rate for these commitments is 6.7%. The total amount of borrowing
commitments expiring in 1996 is $12.0 million.
Certain of the subsidiaries' revolving credit agreements contain provisions
limiting the payment of dividends to their shareholders. The Company does not
anticipate that these limitations on dividends will have a material effect on
the Company's ability to meet its cash obligations. For a discussion of the
financial and other terms of the revolving credit facilities, see Note 4 to the
Company's Consolidated Financial Statements.
Working capital increased to $45.0 million at September 30, 1995 from $40.1
million at December 31, 1994 due to higher levels of accounts receivable caused
by higher sales volume and improved cash flow which lowers the amount of
inventory financed by revolving credit facilities.
Cash and cash equivalents increased $1.4 million during the nine months
ended September 30, 1995. Principal sources of cash were profitable operations,
increased borrowings under revolving credit agreements, and proceeds from the
sale of marketable securities, primarily consisting of tax exempt municipal
bonds. The principal uses of cash were to fund acquisitions, finance capital
expenditures, reduce long-term obligations and fund working capital needs.
Inventory purchases are substantially funded by borrowings under the
subsidiaries' revolving credit agreements.
The Company expects to use a portion of the net proceeds of this offering
to pay for the acquisition of Three States. However, the acquisition of Three
States is not contingent upon the completion of this offering. In the event this
offering is not consummated, or if the net proceeds are not equal to the
purchase
14
<PAGE>
price, the Company has received indications from its lenders that it will be
able to obtain financing for the acquisition.
In February 1996, the Company entered into the Exchange Agreement with
Rheem pursuant to which the Company will exchange $23 million of unregistered
Common Stock of the Company for Rheem's Minority Interest in Gemaire (20%),
Comfort Supply (20%) and Heating & Cooling (50%). See 'Business-- Relationship
with Rheem Manufacturing Company.' The Company believes the restructuring will
enhance its ability to obtain future financings and to effect acquisitions.
In February 1996, the Company received a proposal from one of its lenders
to syndicate a master $125 million unsecured revolving credit facility. This
facility would replace all of the Company's existing revolving credit facilities
and provide the Company up to $53 million of additional availability to fund
future growth.
The Company continually evaluates potential acquisitions and has had
discussions with a number of potential acquisition candidates; however, the
Company has no agreement with respect to any potential acquisition other than
Three States. Should suitable acquisitions or working capital needs arise that
would require additional financing, the Company believes that its financial
position and earnings history provide a solid basis for obtaining additional
financing resources at competitive rates and terms.
SEASONALITY
Sales of residential central air conditioners, heating equipment and parts
and supplies manufactured and distributed by the Company have historically been
seasonal. Demand related to the residential replacement market generally peaks
in the third quarter for air conditioners (the Company's principal distribution
product) and in the fourth quarter for heating equipment. Demand related to the
new construction market varies according to the season, with increased demand
generally from March through October. See Note 14 to the Company's Consolidated
Financial Statements.
15
<PAGE>
BUSINESS
GENERAL
The Company is the largest distributor of residential central air
conditioners in the United States, with leading positions in Florida, Texas and
California, the three largest air conditioning markets in the country, as well
as significant positions in Alabama, Arkansas, Arizona, Louisiana, Nevada and
North Carolina. In 1989, the Company embarked on a strategy of establishing a
network of distribution facilities across the sunbelt where U.S. population
growth is greatest, weather patterns are predictably hot and air conditioning is
seen as a necessity. Since initiating this strategy, the Company's revenues have
increased from $25 million in 1988 to approximately $284 million in 1994 and
earnings per share have increased at a compound annual growth rate of 22%.
Watsco has acquired eight air conditioning distributors and believes it is the
only company pursuing a consolidation strategy by making significant
acquisitions in the highly fragmented air conditioning distribution industry.
The Company estimates there are 900 air conditioner distributors in the sunbelt.
The Company achieved internal sales growth of 16% and 10% for 1994 and the nine
months ended September 30, 1995, respectively.
The following table sets forth for the periods indicated revenues and
operating income (net income before interest expense, net investment income,
insurance proceeds and unallocated corporate overhead expenses) attributable to
the Company's businesses (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Climate control segment:
Distribution.................................... $146,269 $181,524 $229,796 $174,110 $209,241
Manufacturing................................... 22,871 21,543 23,637 17,314 17,448
-------- -------- -------- -------- --------
Total climate control segment................ 169,140 203,067 253,433 191,424 226,689
Personnel services segment........................ 25,493 27,589 30,298 22,460 23,501
-------- -------- -------- -------- --------
Total...................................... $194,633 $230,656 $283,731 $213,884 $250,190
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OPERATING INCOME:
Climate control segment:
Distribution.................................... $ 10,025 $ 11,643 $ 14,694 $ 12,038 $ 15,233
Manufacturing................................... 2,128 946 1,707 1,479 1,040
-------- -------- -------- -------- --------
Total climate control segment................ 12,153 12,589 16,401 13,517 16,273
Personnel services segment........................ (131) 422 1,216 1,033 882
-------- -------- -------- -------- --------
Total...................................... $ 12,022 $ 13,011 $ 17,617 $ 14,550 $ 17,155
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
RESIDENTIAL CENTRAL AIR CONDITIONING INDUSTRY
The Company estimates that in 1994 the market for residential central air
conditioners and related supplies in the sunbelt is over $7 billion and has
grown at an annual rate of 5.6% since 1990. Residential central air conditioners
are manufactured primarily by seven major companies that account for a
substantial majority of the units shipped. These companies are: Carrier Air
Conditioning, Inc., Rheem Manufacturing Company, Lennox Industries, Inc., The
Trane Company, Inter-City Products Corporation, York Air Conditioning &
Refrigeration, Inc., and Goodman Manufacturing Corporation.
16
<PAGE>
The major manufacturers distribute their products primarily through
independent distributors who in turn supply the equipment and related parts and
supplies to contractors and dealers nationwide who sell to, and install the
products for, the consumer. Several of the major manufacturers distribute a
significant portion of their products through factory-owned distribution
organizations. Rheem distributes substantially all of its central air
conditioners through independent distributors.
Residential central air conditioners are sold to the replacement and the
homebuilding markets. The replacement market has increased substantially in size
over the past ten years, surpassing the homebuilding market in significance as a
result of the aging of the installed base of residential central air
conditioners, the introduction of new energy efficient models and the upgrading
of existing homes to central air conditioning. According to the ARI, over 61
million central air conditioners have been installed in the United States since
1975. Many of the units installed from the mid-1970s to the mid-1980s are
reaching the end of their useful lives, thus providing a growing replacement
market. The mechanical life of central air conditioners varies by region due to
usage and is estimated to range from 8 to 12 years in Florida and Texas to
approximately 18 years in California.
BUSINESS STRATEGY
The Company focuses on satisfying the needs of the higher margin
replacement market, where customers demand immediate, convenient and reliable
service. Therefore, the Company has adopted a strategy of (i) offering complete
product lines, including all equipment and components necessary to install or
repair a central air conditioner, (ii) utilizing multiple warehouse locations in
a single metropolitan market for increased customer convenience, and (iii)
maintaining large, well-stocked inventories to ensure that customer orders are
filled on site in a timely manner. This strategy provides the Company with a
competitive advantage over its smaller, lesser-capitalized competitors who are
unable to maintain the same inventory levels and product variety as the Company.
The Company believes it has a competitive advantage over factory-owned
distributors who typically do not maintain inventories of all parts and
equipment and whose limited number of warehouse locations make it difficult to
meet the time-sensitive demands of the replacement market.
The Company also sells to the homebuilding market. The Company believes
that its reputation for reliable, high quality service and its relationships
with contractors, who generally serve both the replacement and new construction
markets, allows it to compete effectively in this segment of the market.
Homebuilding, in many of the markets the Company serves, remains below levels of
the mid-1970s to mid-1980s. However, should homebuilding increase in those
markets, the Company is well positioned to benefit from such increases.
The Company's acquisition strategy is to establish a network of
distribution facilities across the sunbelt and, since 1989, it has acquired
eight air conditioning distributors. The Company believes it is the only company
pursuing a consolidation strategy by making significant acquisitions in the
highly fragmented air conditioning distribution industry. As of December 31,
1995, the Company operated 70 branch warehouses in nine states. This geographic
diversification across the sunbelt minimizes the impact of unseasonably mild
weather on the replacement of air conditioners. The Three States acquisition
will further diversify the Company geographically with the addition of nine
branches in five states.
The following is a description of the Company's acquisitions completed in
1995:
Airite, Inc. In February 1995, the Company acquired Airite, Inc., a
wholesale distributor of residential central air conditioners with branches in
Shreveport and Monroe, Louisiana and Texarkana, Texas. Airite sells to nearly
400 licensed air conditioning and heating contractors and the Company believes
that Airite had 1994 revenues of approximately $3.5 million.
17
<PAGE>
H.B. Adams, Inc. In March 1995, the Company acquired certain assets of
H.B. Adams, Inc. H.B. Adams is a wholesale distributor of air conditioning,
heating and refrigeration products and operates seven branches in the Tampa,
Florida market area, the second largest market for air conditioning equipment in
Florida. The Company believes that H.B. Adams had fiscal 1995 revenues of
approximately $20.2 million.
Environmental Equipment & Supplies, Inc. In June 1995, the Company
acquired certain assets of Environmental Equipment and Supplies, Inc.
Environmental Equipment is a wholesale distributor of air conditioning and
heating equipment and sells to approximately 300 licensed air conditioning and
heating contractors. Environmental Equipment operates from two branches in Fort
Smith and Jonesboro, Arkansas. Environmental Equipment reported revenues in 1994
of approximately $5.6 million.
Central Air Conditioning Distributors, Inc. In October 1995, the Company
acquired certain assets of Central Air Conditioning, Inc., a wholesale
distributor of residential central air conditioners and related products.
Central Air Conditioning sells to approximately 1,200 licensed air conditioning
and heating contractors from five branches in North Carolina. Central Air
Conditioning reported revenues of approximately $17.6 million in 1994.
THREE STATES ACQUISITION
In December 1995, the Company entered into a letter of intent with respect
to the proposed acquisition of Three States, a distributor of building materials
used primarily in the air conditioning and heating industry. Three States
reported revenues of approximately $45 million in 1994. The Company believes
that Three States serves over 5,000 customers from its nine locations in Memphis
and Nashville, Tennessee; Little Rock and Fort Smith, Arkansas; Jackson,
Mississippi; Huntsville, Alabama; and St. Louis, Missouri.
The terms of the letter of intent among the Company, Three States and the
99.8% stockholder of Three States provide that the Company will acquire the
assets and assume certain liabilities of Three States. The purchase price will
be calculated as of the closing date of the acquisition and is expected to be
approximately $14 million, subject to adjustment. The consummation of the
acquisition is subject to the negotiation of definitive agreements and certain
other conditions, including satisfactory due diligence review by the Company and
the absence of material adverse changes in the operation or condition of Three
States, and accordingly there can be no assurance that the Company's acquisition
of Three States will be consummated.
The Company expects to use a portion of the net proceeds of this offering
to pay for the acquisition of Three States. However, the acquisition of Three
States is not contingent upon the completion of this offering. In the event this
offering is not consummated, or if the net proceeds are not equal to the
purchase price, the Company has received indications from its lenders that it
will be able to obtain financing for the acquisition. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
DISTRIBUTION OPERATIONS
Products. The Company markets a complete line of residential central air
conditioners (primarily under the Rheem brand name) and related parts and
supplies and maintains sufficient inventory to meet its customers' immediate
needs. The Company's strategy is to provide every product a contractor generally
would require in order to install or repair a residential or light commercial
central air conditioner. Such
18
<PAGE>
products include residential central air conditioners ranging from 1 1/2 to 5
tons*, light commercial air conditioners ranging up to 20 tons, insulation,
grills, sheet metal and other ductwork, copper tubing, concrete pads, and tape.
In addition, the Company also sells products such as electric and gas heating
units, air-to-air heat pumps and rooftop equipment. Sales of air conditioning
and heating equipment accounted for approximately 66% and 63% of the
distribution subsidiaries' revenues for 1994 and the nine months ended September
30, 1995, respectively. Sales of parts and supplies (currently approximately
28,000 different parts and supplies) comprised the remaining portions of
revenues. In 1994 and the nine months ended September 30, 1995, purchases of
Rheem products represented approximately 57% and 55%, respectively, of the
aggregate purchases of the Company's distribution subsidiaries. Any significant
interruption in the delivery of Rheem's products would inhibit the Company's
ability to continue to maintain its current inventory levels and could adversely
affect the Company's business. The Company's future results of operations are
also materially dependent upon the continued market acceptance of Rheem products
and the ability of Rheem to continue to manufacture products that comply with
laws relating to environmental and efficiency standards.
Distribution and Sales. The Company operates out of 70 branch warehouses
located in regions of the sunbelt which the Company believes have favorable
demographic trends. The Company maintains well-stocked inventories at each
warehouse location to meet the immediate needs of its customers. This is
accomplished by transporting inventory between warehouses daily and either
directly delivering products to customers with the Company's fleet of 137 trucks
or making the products available for pick-up at the nearest branch. The Company
has 111 commissioned salespeople who average 16 years of experience in the
residential central air conditioning equipment industry.
Customers and Customer Service. The Company sells to contractors and
dealers who service the new construction and replacement markets for residential
and light commercial central air conditioners. In 1995, the Company served over
13,600 customers, with no single customer accounting for more than 2% of
consolidated revenues. The Company focuses on providing products where and when
the customer needs them, technical support by phone or on site as required, and
quick and efficient service at the branch locations. Management believes that
the Company successfully competes with other distributors in the residential and
light commercial central air conditioning market primarily on the basis of its
experienced sales organization, strong service support, high quality reputation,
extensive branch network and broad product lines.
MANUFACTURING OPERATIONS
The Company produces over 4,000 electronic and mechanical components for
air conditioning, heating and refrigeration equipment that are sold to over
5,000 wholesale distributors and OEMs, with no single customer accounting for
more than 1% of consolidated revenues. The Company's products include:
components, such as line tap and specialty valves, motor compressor protectors,
liquid sight glasses, warm air controls; and equipment, such as vacuum pumps,
and refrigerant recovery systems. Many of the Company's products are patented
and compete in the market place based on uniqueness as well as quality and
price. The Company's OEM customers include most of the major air conditioning
manufacturers, including Rheem, Carrier Air Conditioning, Inc., and Inter-City
Products Corporation.
The Company conducts research and development to improve the quality and
performance of its manufactured products and to develop new products and product
line improvements. The Company performs research and development both in-house
and by extensive field testing of products. The
- ------------------------
* The cooling capacity of air conditioning units is measured in tons. One ton of
cooling capacity is equivalent to 12,000 BTUs and is generally adequate to air
condition approximately 500 square feet of residential space.
19
<PAGE>
Company's engineering staff, consisting of 11 employees, develops new customized
products to end-user specification and continuously improves, supplements and
enhances product lines with newly developed products.
RELATIONSHIP WITH RHEEM MANUFACTURING COMPANY
The Company believes that it maintains a unique and mutually beneficial
relationship with Rheem, the second largest manufacturer of residential central
air conditioners in the United States. Rheem has a well-established reputation
of producing high-quality, competitively priced products. The Company believes
that Rheem's current product offerings, quality, serviceability and brand-name
recognition allow the Company to operate favorably against its competitors. To
maintain brand-name recognition, Rheem provides national advertising and
participates with the Company in cooperative advertising programs and
promotional incentives that are targeted to both contractors and homeowners. The
Company estimates the replacement market currently accounts for approximately
65% of industry sales in the United States and is expected to increase as units
installed in the 1970s and 1980s wear out and are replaced or updated to more
energy-efficient models. The Company believes Rheem's products have wide
acceptance in the replacement market based on their high efficiency and low
noise level, two key homeowner considerations. Additionally, Rheem has
demonstrated the flexibility to manufacture products to international
specifications to meet export demands.
The Company is Rheem's largest distributor and has been granted exclusive
rights under distribution agreements for Rheem brand-name products in each of
the most significant market areas and many of the major metropolitan areas in
the United States sunbelt including: the State of Florida; the eastern half of
Texas (including the Dallas, Houston, San Antonio and Austin metropolitan
areas), southern and central California; the State of Arizona; the State of
Nevada; western North Carolina (including the Charlotte metropolitan area) and
additional territories in Louisiana, Alabama and Arkansas. The Company also has
distribution rights for the Rheem brand-name or Weatherking brand-name
(manufactured by Rheem) in substantially all of Central America, South America
and the Caribbean.
Rheem acquired minority ownership interests in Gemaire (20%), Comfort
Supply (20%) and Heating & Cooling Supply (50%) as a joint venture partner in
the acquisition of each of these subsidiaries. In February 1996, the Company and
Rheem restructured their relationship by entering into the Exchange Agreement
which the Company believes will enhance its ability to obtain future financings
and to effect acquisitions. The terms of the Exchange Agreement provide for the
exchange of $23 million of unregistered Common Stock of the Company (1,352,941
shares assuming the last reported sales price of the Common Stock on February 6,
1996 of $17.00) for Rheem's Minority Interests. The actual number of shares of
Common Stock to be issued to Rheem will be determined based upon the average
closing sales price of the Common Stock on the New York Stock Exchange for the
ten trading days preceding the closing of the transactions contemplated by the
Exchange Agreement. Based upon the foregoing assumption, upon completion of the
Offering and consummation of the transactions contemplated by the Exchange
Agreement, Rheem would own approximately 18.4% of the outstanding Common Stock
of the Company. The closing of the transaction, which is expected to occur in
the first quarter of 1996, is subject to certain conditions precedent, including
the receipt of approval from the Federal Trade Commission. After the closing of
the transactions contemplated by the Exchange Agreement, the Chief Executive
Officer of Rheem shall be listed in Watsco's proxy as a nominee to the Company's
board of directors.
The Company's distribution subsidiaries operate under distribution
agreements with Rheem. It is contemplated under the Exchange Agreement that the
distribution agreements of three of the distribution subsidiaries (Gemaire,
Comfort Supply and Heating & Cooling) will extend through 2006 with annual
renewals thereafter. The fourth distribution agreement (Central Air
Conditioning) can be terminated at any time without cause by either party. The
Gemaire, Comfort Supply and Heating & Cooling distribution
20
<PAGE>
agreements contain provisions limiting the sale of products that are directly
competitive with Rheem products. Based on the acceptance of other complimentary,
non-competitive equipment products and the Company's additional focus on the
sales of parts and supplies, the Company does not believe that these limitations
have a material effect on its operations. Except for the limitations set forth
in Gemaire's, Comfort Supply's and Heating & Cooling's distribution agreements,
the Company may distribute other manufacturers' lines of air conditioning
equipment.
The Company and Rheem have modified certain other agreements with respect
to each of the distribution subsidiaries on terms that are favorable to the
Company. The previous agreements (see Note 10 to the Company's Consolidated
Financial Statements) provided Rheem with the right to 'call' from the Company
and the Company with the right to 'put' to Rheem the Company's ownership
interests in Gemaire, Comfort Supply and Heating & Cooling during specified
periods according to prescribed valuation formulas. The Company believes that
the modifications included in the Exchange Agreement effectively eliminated the
put/call agreements because the rights to 'put' or 'call' become exercisable
primarily upon occurrence of certain insolvency events.
PERSONNEL SERVICES
Dunhill, founded in 1952, is one of the nation's best known personnel
service networks. Through franchised, licensed, and company-owned offices in 38
states, Puerto Rico and Canada, Dunhill provides permanent placement and
temporary help services to business, professional and service organizations,
government agencies, health care providers, and other employers. As of December
31, 1995, Dunhill's operations consisted of 115 franchised permanent placement
offices and 18 franchised, 5 licensed, and 14 company-owned temporary personnel
service offices. Dunhill's franchisees operate their businesses autonomously
within the framework of the Company's policies and standards, and recruit,
employ, and pay their own employees, including temporary employees. Dunhill's
permanent placement division recruits primarily middle-management, sales,
technical, administrative, and support personnel for permanent employment in a
wide variety of industries and positions. The fees paid by employers to Dunhill
for its permanent placement services are typically contingent upon the Company's
successful placement of an employee and are generally a percentage of the annual
compensation to be paid to the new employee.
Dunhill receives an initial fee from all licensees and franchisees, and
on-going revenues from (i) temporary help licensees of approximately 7% of the
licensee's gross receipts and (ii) royalty fees from permanent placement and
temporary help franchisees of approximately 7% and 1 1/2% to 3%, respectively,
of gross franchisee receipts. Licenses and franchises are generally granted for
5 and 10 year terms, respectively, and are typically renewable at the option of
the licensee or franchisee for additional terms of 5 and 10 years, respectively.
COMPETITION
All of the Company's businesses operate in highly competitive environments.
The Company's distribution business competes with a number of distributors and
also with air conditioner manufacturers who distribute a significant portion of
their products through factory-owned distribution organizations. Many of the
manufacturers which have distribution organizations are larger and have greater
financial resources than those of the Company. Competition within any given
geographic market is based upon product availability, customer service, price
and quality. The Company's manufacturing business has several major competitors,
a few of which are larger and have greater financial resources. Dunhill competes
with numerous other large and small national, regional, and local personnel
service providers. Competitive pressures or other factors could cause the
Company's products or services to lose market acceptance or result in
significant price erosion, all of which would have a material adverse effect on
the Company's profitability.
21
<PAGE>
MANAGEMENT
Certain information concerning directors and executive officers of the
Company and the Presidents of the principal subsidiaries of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Albert H. Nahmad 55 Chairman of the Board and President
Ronald P. Newman 49 Chief Financial Officer, Secretary and Treasurer
D.A. Coape-Arnold 78 Director
David B. Fleeman(1) 82 Director
James S. Grien(2) 38 Director
Paul F. Manley(1)(3) 59 Director
Bob L. Moss(2) 48 Director
Roberto Motta 82 Director
Alan H. Potamkin 47 Director
PRINCIPAL SUBSIDIARY PRESIDENTS
Kenneth A. Perkins 58 President of Gemaire
Donald H. Huslage 64 President of Heating & Cooling
Eric A. Young 37 President of Comfort Supply
Michael B. Huff 34 President of Central Air Conditioning
Neal Fischer 44 President of Watsco Components, Inc.
Daniel H. Abramson 46 President of Dunhill
</TABLE>
- ------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Stock Option Committee of the Board of Directors.
(3) Member of the Audit Committee of the Board of Directors.
ALBERT H. NAHMAD has served as Chairman of the Board and President of the
Company since 1973. Mr. Nahmad is the general partner of Alna Capital
Associates, a New York limited partnership, which is the principal shareholder
of the Company. Mr. Nahmad also serves as a member of the Board of Directors of
the Panama Canal Commission, a United States federal agency. Additionally Mr.
Nahmad is a director of American Bankers Insurance Group, Inc. and Pediatrix
Medical Group, Inc., publicly held companies.
RONALD P. NEWMAN has served as Chief Financial Officer, Secretary and
Treasurer of the Company since 1982. Prior to joining the Company, Mr. Newman, a
certified public accountant, was associated with the accounting firm of Arthur
Young & Company from 1977 to 1982.
D.A. COAPE-ARNOLD has been a director of the Company since 1981. Since
1988, Mr. Coape-Arnold has also served as Chairman of the Board and Chief
Executive Officer of Dunhill. From 1982 to present, Mr. Coape-Arnold has served
as a consultant for a variety of businesses. From 1978 until 1982, he served as
Vice President of publicly held Wickes Corporation. From 1961 to 1978, Mr.
Coape-Arnold served as Vice President and Group Executive of publicly held W.R.
Grace & Co.
DAVID B. FLEEMAN has been a director of the Company since 1977. Since 1956,
Mr. Fleeman has served as the Managing Partner of Fleeman Builders, a Florida
general partnership engaged primarily in real estate development.
JAMES S. GRIEN has been a director of the Company since 1994. Mr. Grien is
a Managing Director in the Investment Banking Group of Prudential Securities
Incorporated and has been employed by Prudential Securities Incorporated in
various positions since 1989.
22
<PAGE>
PAUL F. MANLEY has been a director of the Company since 1984. Mr. Manley
served as Executive Director of the law firm of Holland & Knight from 1987 to
1991. From 1982 to 1987, Mr. Manley served as Vice President of Planning at
Sensormatic Electronics Corporation, a publicly held manufacturer of electronic
article surveillance systems. Prior to 1982, Mr. Manley served as the Managing
Partner of the Miami office of Arthur Young & Company.
BOB L. MOSS has been a director of the Company since 1992. Since 1986 Mr.
Moss has served as President and Chief Executive Officer of Centex-Rooney
Enterprises, Inc., Florida's largest general contractor and a subsidiary of
publicly held Centex Corporation.
ROBERTO MOTTA has been a director of the Company since 1975. Mr. Motta has
been engaged as a private investor in various business activities for more than
five years.
ALAN H. POTAMKIN has been a director of the Company since 1994. Since 1970,
Mr. Potamkin has served as President of Potamkin Companies, one of the nation's
largest retail automobile dealers. In addition, Mr. Potamkin is an owner of
various media properties and an owner of Office Depot, Inc. franchises in
eastern Europe.
KENNETH A. PERKINS, a co-founder of Gemaire in 1969, has served as its
President since 1987. From 1969 to 1987, he served as Gemaire's Vice
President--Marketing. Mr. Perkins has over 29 years of experience in the air
conditioning industry.
DONALD H. HUSLAGE has served as President of Heating & Cooling since 1995.
Mr. Huslage has also served from 1993 to present as Chairman of the Board of
Comfort Supply and from 1990 to 1993 as President of Comfort Supply. Mr. Huslage
has over 43 years of experience in the air conditioning industry.
ERIC A. YOUNG has served as President of Comfort Supply since 1993. From
1991 to 1993 he was employed as Executive Vice President of Comfort Supply.
MICHAEL B. HUFF has served as President of Central Air Conditioning since
1995. From 1978 to 1995 he was employed in various capacities by Central Air
Conditioning.
NEAL FISCHER joined the Company in 1986 and has served as President of the
Company's manufacturing subsidiaries since 1991. From 1986 to 1991 he served as
Controller of the Company's manufacturing subsidiaries.
DANIEL H. ABRAMSON has served as President of Dunhill since 1994. From 1992
to 1994, he served as Executive Vice President of Dunhill's professional search
division. From 1986 to 1992, he owned and operated Dunhill Professional Search
of Providence, Inc., a Dunhill franchisee.
The Company's Articles of Incorporation provide for the Board of Directors
to have up to nine members, to be divided as nearly as possible in three equal
divisions to serve in staggered terms of three years. Each division currently
consists of one director to be elected by the holders of Common Stock and two
directors to be elected by the holders of Class B Common Stock. The number of
members comprising the Board of Directors is presently set at eight, three of
whom are Common Stock directors and five of whom are Class B directors. At
present Messrs. Manley (Common Stock), Nahmad (Class B) and Coape-Arnold (Class
B) serve until the 1996 annual meeting of shareholders, Messrs. Potamkin (Common
Stock) and Motta (Class B) serve until the 1997 annual meeting of shareholders
and Messrs. Grien (Common Stock), Fleeman (Class B) and Moss (Class B) serve
until the 1998 annual meeting of shareholders. Upon completion of this offering
and assuming the issuance of 1,352,941 shares of Common Stock to Rheem in
connection with the Exchange Agreement, Albert H. Nahmad, the Company's Chairman
and President, and a limited partnership controlled by him, collectively will
retain beneficial ownership of approximately 5.2%
23
<PAGE>
of the Common Stock and 60.4% of the Class B Common Stock and will have
approximately 32.5% of the combined voting power of the outstanding Common Stock
and Class B Common Stock. Mr. Nahmad will continue to have the voting power to
elect all but three members of the Company's nine-person Board of Directors.
SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock by the Selling Shareholders as of the
date of this Prospectus, as adjusted to reflect (i) the sale of the Common Stock
offered hereby and (ii) the issuance of 1,352,941 shares of Common Stock
issuable to Rheem pursuant to the Exchange Agreement, assuming Rheem is issued
shares of Common Stock at $17.00 per share (the last reported sale price of the
Common Stock on February 6, 1996). See 'Business--Relationship with Rheem
Manufacturing Company.'
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK
----------------------------------------------------------------------- -------------------
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP % OF CLASS BENEFICIAL
PRIOR TO OFFERING AFTER OFFERING AFTER OFFERING OWNERSHIP
----------------- ----------------- AND ISSUANCE -----------------
NUMBER OF % OF NUMBER OF NUMBER OF % OF OF SHARES TO NUMBER OF % OF
SHARES CLASS SHARES OFFERED SHARES CLASS RHEEM SHARES CLASS
--------- ----- -------------- --------- ----- -------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alna Capital Associates(1)......... 162,510 3.4% 25,720 136,790 2.3% 1.9% 677,345 41.2%
505 Park Avenue
New York, NY 10022
Albert H. Nahmad(2)................ 469,685 9.2 50,000 393,966 6.3 5.2 1,183,559 60.4
2665 S. Bayshore Drive
Suite 901
Miami, FL 33133
Oliver M. Butler and
Marjorie E. Butler
Declaration of Trust(3)............ 286,405 6.0 286,405 -- -- -- -- --
6978 Del Cerro Blvd.
San Diego, CA 92120
O.M. Butler(4)..................... 294,280 6.1 7,875 -- -- -- -- --
6978 Del Cerro Blvd.
San Diego, CA 92120
Ronald P. Newman(5)................ 91,415 1.9 30,000 61,415 1.0 .8 51,416 3.4
2665 S. Bayshore Drive
Suite 901
Miami, FL 33133
</TABLE>
- ------------------------
(1) Alna Capital Associates is a New York limited partnership of which Mr.
Nahmad owns a 43% interest and is the sole general partner ('Alna Capital').
Mr. Nahmad is Chairman of the Board and President of the Company. See
'Management.' The number of shares of Class B Common Stock indicated
includes (i) 512,211 shares directly owned and (ii) 165,134 shares issuable
upon the conversion of the Company's Convertible Debentures.
(2) Includes 162,510 shares of Common Stock and 677,345 shares of Class B Common
Stock indicated as beneficially owned by Alna Capital. See footnote (1)
above. The number of shares of Common Stock indicated also includes (i)
8,401 shares directly owned; (ii) 8,599 shares owned pursuant to the Watsco,
24
<PAGE>
Inc. Profit Sharing Retirement Plan; (iii) 3,300 shares owned by Mr.
Nahmad's children; and (iv) 286,875 shares issuable upon the exercise of
presently exercisable options granted pursuant to the Company's 1991 Stock
Option Plan. The number of shares of Class B Common Stock indicated includes
(i) 192,955 shares directly owned; (ii) 291,375 shares issuable upon the
exercise of presently exercisable options granted pursuant to the 1991 Stock
Option Plan; and (iii) 21,884 shares issuable upon the conversion of the
Company's Convertible Debentures.
(3) The Oliver M. Butler and Marjorie E. Butler Declaration of Trust is a trust
organized under the laws of California and Mr. Butler and his wife are
Co-Trustees.
(4) The number of shares of Common Stock indicated (i) includes 286,405 shares
owned by the Oliver M. Butler and Marjorie E. Butler Declaration of Trust
and (ii) 7,875 shares issuable upon the exercise of presently exercisable
options granted pursuant to the 1991 Stock Option Plan. Mr. Butler served as
Chairman of the Board of Heating & Cooling and as a director of the Company
from October 1990 until his resignation in December 1995.
(5) The number of shares of Common Stock indicated includes (i) 3,513 shares
directly owned; (ii) 4,420 shares owned pursuant to the Watsco, Inc. Profit
Sharing Retirement Plan; (iii) 1,702 shares owned by Mr. Newman's spouse;
and (iv) 81,780 shares issuable upon the exercise of presently exercisable
options granted pursuant to the 1991 Stock Option Plan. The number of shares
of Class B Common Stock indicated includes (i) 14,403 shares directly owned
and (ii) 37,013 shares issuable upon the exercise of presently exercisable
options granted pursuant to the 1991 Stock Option Plan. Mr. Newman is Chief
Financial Officer, Secretary and Treasurer of the Company. See 'Management.'
25
<PAGE>
UNDERWRITING
The Underwriters named below (the 'Underwriters'), for whom Prudential
Securities Incorporated and Robert W. Baird & Co. Incorporated are acting as the
representatives (the 'Representatives'), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase from
the Company and the Selling Shareholders the number of shares of Common Stock
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Prudential Securities Incorporated........................................................
Robert W. Baird & Co. Incorporated........................................................
---------
Total.............................................................................. 1,600,000
---------
---------
</TABLE>
The Company and the Selling Shareholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Shareholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of $ per
share to certain other dealers. After the public offering, the offering price
and the concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 240,000 additional
shares of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to 1,600,000 shares.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Company, each of the Company's directors and executive officers and the
Selling Shareholders holding 325,980 shares of Common Stock (excluding the
shares of Common Stock offered hereby) and 812,652 shares of Class B Common
Stock have agreed that they will not, directly or indirectly, offer, sell, offer
to sell, contract to sell, pledge, grant any option to purchase or otherwise
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other disposition) of any shares of
Common Stock or Class B Common Stock or any securities convertible into, or
exchangeable
26
<PAGE>
or exercisable for, shares of Common Stock or Class B Common Stock, without the
prior written consent of Prudential Securities Incorporated on behalf of the
Underwriters for a period of 120 days after the date of this Prospectus, except
for issuances pursuant to the exercise of employee stock options outstanding as
of the date of this Prospectus or pursuant to the terms of convertible
securities of the Company outstanding as of the date of this Prospectus.
The shares of Common Stock issued to Rheem will be 'Restricted Securities'
as defined in Rule 144 under the Securities Act ('Rule 144') and will be subject
to all the limitations on resale imposed by Rule 144. In general, under Rule 144
as currently in effect, a person may not freely transfer Restricted Securities
for two years. Thereafter, any affiliate of the Company or any person (or
persons whose shares are aggregated in accordance with the Rule) who has
beneficially owned Restricted Securities for at least two years would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1.0% of the outstanding shares of Common Stock
(approximately 73,544 shares based upon the number of shares outstanding after
the offering and the consummation of the Exchange Agreement) or the reported
weekly average trading volume of the Common Stock on the New York Stock Exchange
for the four weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale restrictions and notice requirements and to the
availability of current public information concerning the Company. Persons who
have not been affiliates of the Company for at least three months and who have
held their shares for more than three years are entitled to sell Restricted
Securities without regard to the volume, manner of sale, notice and public
information requirements of Rule 144.
James S. Grien, a director of the Company, is a Managing Director in the
Investment Banking Group of Prudential Securities Incorporated, one of the
Representatives.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A., Miami, Florida. Certain legal matters will be passed upon
for the Underwriters by King & Spalding. King & Spalding will rely upon the
opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. as to all
matters of Florida law.
EXPERTS
The financial statements, schedules and five-year selected financial data
included in this Prospectus and elsewhere in the registration statement, to the
extent and for the periods indicated in their reports, have been audited by
Arthur Andersen LLP, independent certified public accountants, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The financial statements of Three States as of December 31, 1994 and for
the period then ended included in this Prospectus have been audited by Rhea &
Ivy, P.L.C., independent certified public accountants, as stated in their report
appearing herein, and have been so included in reliance upon the authority of
said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the 'Commission'). Such reports, proxy
27
<PAGE>
statements and other information filed by the Company can be inspected and
copied at the Public Reference Section of the Commission maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and at Suite 1400, 500 W.
Madison Street, Chicago, Illinois 60661, and copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy
statements and other information can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005 or the American
Stock Exchange, 86 Trinity Place, New York, New York 10006.
This Prospectus constitutes a part of a Registration Statement on Form S-3
filed by the Company with the Commission under the Securities Act of 1933, as
amended. This Prospectus omits certain information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Company and the
securities offered hereby. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and in such instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 1-5581) with the
Commission are incorporated herein by reference: (1) the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994; (2) the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30,
1995 and September 30, 1995; and (3) the Company's Registration Statement on
Form 8-A filed May 4, 1994, registering the Company's Common Stock under Section
12(b) of the Exchange Act. All documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
subsequent to the date hereof and prior to the termination of the offering of
the Common Stock registered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
such documents. Any statements contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that the statement contained
herein or in any other subsequently filed document which also is, or is deemed
to be, incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. The Company
will provide without charge to each person to whom this Prospectus is delivered,
upon a written or oral request of such person, a copy of any or all of the
foregoing documents incorporated by reference into this Prospectus (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents). Request for such copies should be delivered
to Ronald P. Newman, Chief Financial Officer, 2665 South Bayshore Drive, Miami,
Florida 33133, telephone (305) 858-0828.
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REGISTRANT
WATSCO, INC. AND SUBSIDIARIES--
Report of Independent Certified Public Accountants--Arthur Andersen LLP.................................... F-2
Consolidated Balance Sheets as of December 31, 1993, December 31, 1994
and September 30, 1995 (unaudited)....................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1992,
December 31, 1993 and December 31, 1994 and for the Nine Months Ended
September 30, 1994 and 1995 (unaudited).................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1992, December 31, 1993 and December 31, 1994 and
for the Nine Months Ended September 30, 1995 (unaudited)................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1992,
December 31, 1993 and December 31, 1994 and for the Nine Months Ended
September 30, 1994 and 1995 (unaudited).................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
BUSINESS TO BE ACQUIRED
THREE STATES SUPPLY COMPANY, INC.--
Report of Independent Certified Public Accountants--Rhea & Ivy, P.L.C...................................... F-25
Balance Sheets as of December 31, 1994 and September 30, 1995 (unaudited).................................. F-26
Statements of Income and Retained Earnings for Year Ended December 31, 1994
and for the Nine Months Ended September 30, 1994 and 1995 (unaudited).................................... F-27
Statements of Cash Flows for the Year Ended December 31, 1994
and for the Nine Months Ended September 30, 1994 and 1995 (unaudited).................................... F-28
Notes to Financial Statements.............................................................................. F-29
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1995........................................ F-34
Unaudited Pro Forma Combined Statements of Income for the Year Ended
December 31, 1994 and for the Nine Months Ended September 30, 1995....................................... F-35
Notes to Unaudited Pro Forma Combined Financial Statements................................................. F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF WATSCO, INC.:
We have audited the accompanying consolidated balance sheets of Watsco,
Inc. (a Florida corporation) and subsidiaries as of December 31, 1993 and 1994,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Watsco, Inc. and
subsidiaries as of December 31, 1993 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
We have also audited, in accordance with generally accepted auditing
standards, the balance sheets as of December 31, 1990, 1991 and 1992, and the
related statements of income, shareholders' equity and cash flows for each of
the two years in the period ended December 31, 1992 (none of which are presented
herein), and have expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the selected financial
data for each of the five years in the period ending December 31, 1994,
appearing on page 10, is fairly stated in all material respects in relation to
the financial statements from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
March 13, 1995 (except with respect to
the matters discussed in Note 15, as to
which the date is February 6, 1996).
F-2
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 1,093 $ 1,744 $ 3,190
Marketable securities.................................................. 1,501 3,227 1,281
Accounts receivable, net............................................... 30,257 34,811 47,413
Inventories............................................................ 48,959 49,259 61,654
Prepaid expenses and other current assets.............................. 4,875 4,608 5,123
-------- -------- -------------
Total current assets..................................................... 86,685 93,649 118,661
-------- -------- -------------
Property, plant and equipment, net....................................... 6,554 8,829 10,537
Intangible assets, net................................................... 13,449 13,164 14,353
Other assets............................................................. 2,997 4,022 4,014
-------- -------- -------------
$109,685 $119,664 $ 147,565
-------- -------- -------------
-------- -------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............................... $ 1,069 $ 1,781 $ 744
Borrowings under revolving credit agreements........................... 26,151 32,034 49,433
Accounts payable....................................................... 15,483 13,108 15,921
Accrued liabilities.................................................... 4,720 6,631 7,578
-------- -------- -------------
Total current liabilities................................................ 47,423 53,554 73,676
-------- -------- -------------
Long-term obligations:
Bank and other debt.................................................... 3,672 2,719 4,026
Subordinated note...................................................... 2,500 2,500 2,500
Convertible subordinated debentures.................................... 1,676 1,505 1,341
-------- -------- -------------
7,848 6,724 7,867
-------- -------- -------------
Deferred income taxes.................................................... 1,107 713 638
Minority interests....................................................... 11,553 11,857 12,780
Commitments and contingencies (Notes 2 and 12)
Shareholders' equity:
Common Stock, $.50 par value, 4,596,648, 4,658,010 and 4,783,129 shares
issued and outstanding in 1993 and 1994 and September 30, 1995,
respectively........................................................ 2,298 2,329 2,392
Class B Common Stock, $.50 par value, 1,487,928, 1,492,725 and
1,485,171 shares issued and outstanding in 1993 and 1994 and
September 30, 1995, respectively.................................... 744 746 742
Paid-in capital........................................................ 18,131 18,565 19,205
Retained earnings...................................................... 20,581 25,176 30,265
-------- -------- -------------
Total shareholders' equity............................................... 41,754 46,816 52,604
-------- -------- -------------
$109,685 $119,664 $ 147,565
-------- -------- -------------
-------- -------- -------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales....................................... $169,140 $203,067 $253,433 $191,424 $226,689
Service fees and royalties...................... 25,493 27,589 30,298 22,460 23,501
-------- -------- -------- -------- --------
Total revenues.................................... 194,633 230,656 283,731 213,884 250,190
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales................................... 129,262 157,213 197,397 148,183 175,603
Direct service expenses......................... 19,812 21,513 23,122 17,035 18,040
Selling, general and administrative expenses.... 35,629 40,540 48,169 36,036 41,020
-------- -------- -------- -------- --------
Total costs and expenses.......................... 184,703 219,266 268,688 201,254 234,663
-------- -------- -------- -------- --------
Operating income.................................. 9,930 11,390 15,043 12,630 15,527
-------- -------- -------- -------- --------
Other income (expense):
Investment income, net.......................... 401 383 140 82 181
Interest expense................................ (3,197) (2,756) (3,155) (2,278) (3,064)
Insurance proceeds.............................. -- 1,130 -- -- --
-------- -------- -------- -------- --------
(2,796) (1,243) (3,015) (2,196) (2,883)
-------- -------- -------- -------- --------
Income before income taxes and
minority interests.............................. 7,134 10,147 12,028 10,434 12,644
Income taxes...................................... (2,746) (3,819) (4,630) (4,065) (4,867)
Minority interests................................ (1,470) (1,287) (1,636) (1,446) (1,744)
-------- -------- -------- -------- --------
Net income........................................ $ 2,918 $ 5,041 $ 5,762 $ 4,923 $ 6,033
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Primary earnings per share........................ $.70 $.85 $.89 $.77 $.91
Fully diluted earnings per share.................. $.64 $.82 $.87 $.74 $.87
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE
------------------- PAID-IN RETAINED FROM STOCK
SHARES AMOUNT CAPITAL EARNINGS ISSUANCE
--------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991............................... 3,733,628 $ 1,867 $ 3,612 $ 15,392 $ (39)
5% stock dividend.......................................... 186,447 93 1,132 (1,225)
Conversion of debentures into Common Stock................. 126,434 63 705
Issuance of Common Stock................................... 79,200 40 523
Contribution to 401(k) plan................................ 11,788 6 92
Exercise of stock options.................................. 259,641 130 512
Common stock cash dividends, $.150 per share of Common
Stock and $.143 per Class B share........................ (588)
Reduction of receivable from stock issuance................ 39
Net income................................................. 2,918
--------- ------ ------- -------- ----------
BALANCE AT DECEMBER 31, 1992............................... 4,397,138 2,199 6,576 16,497 --
Conversion of debentures into Common Stock................. 444,009 222 2,385
Issuance of Common Stock................................... 1,200,000 600 8,895
Contribution to 401(k) plan................................ 12,847 6 105
Exercise of stock options.................................. 30,582 15 170
Common stock cash dividends, $.16 per share of Common Stock
and $.16 per Class B share............................... (887)
Dividends on 6.5% Series A preferred stock of subsidiary... (70)
Net income................................................. 5,041
--------- ------ ------- -------- ----------
BALANCE AT DECEMBER 31, 1993............................... 6,084,576 3,042 18,131 20,581 --
Conversion of debentures into Common Stock................. 28,330 14 178
Contribution to 401(k) plan................................ 12,680 6 131
Exercise of stock options.................................. 25,149 13 125
Common stock cash dividends, $.17 per share of Common Stock
and $.17 per Class B share................................. (1,037)
Dividends on 6.5% Series A preferred stock of subsidiary... (130)
Net income................................................. 5,762
--------- ------ ------- -------- ----------
BALANCE AT DECEMBER 31, 1994............................... 6,150,735 3,075 18,565 25,176 --
Conversion of debentures into Common Stock (unaudited)..... 24,403 12 152
Exercise of stock options and warrants (unaudited)......... 93,162 47 488
Common stock cash dividends, $.05 per share of Common Stock
and $.05 per Class B share (unaudited)..................... (847)
Dividends on 6.5% Series A preferred stock of
subsidiary (unaudited)................................... (97)
Net income (unaudited)..................................... 6,033
--------- ------ ------- -------- ----------
BALANCE AT SEPTEMBER 30, 1995 (UNAUDITED).................. 6,268,300 $ 3,134 $19,205 $ 30,265 $ --
--------- ------ ------- -------- ----------
--------- ------ ------- -------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1992 1993 1994 1994 1995
------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 2,918 $ 5,041 $ 5,762 $ 4,923 $ 6,033
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................ 1,878 1,849 2,345 1,633 2,057
Provision for doubtful accounts.............................. 834 315 597 639 575
Net investment gains......................................... (172) (161) (6) (3) (13)
Deferred income tax benefit.................................. (246) (455) (237) (95) (75)
Noncash stock contribution to 401(k) plan.................... 98 111 137 -- --
Minority interests, net of dividends paid.................... 856 549 304 714 926
Changes in operating assets and liabilities, net of effects
of acquisitions in 1993 and 1995:
Accounts receivable........................................ (2,441) (1,155) (5,151) (7,820) (9,305)
Inventories................................................ 969 1,462 (300) (11,839) (6,128)
Accounts payable and accrued liabilities................... 1,635 (5,676) (797) 8,347 2,022
Other, net................................................. (636) (936) (229) 152 (137)
------- ------- ------- -------- -------
Net cash provided by (used in) operating activities............ 5,693 944 2,425 (3,349) (4,045)
------- ------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired................ -- (3,547) -- -- (8,175)
Capital expenditures, net...................................... (1,957) (2,994) (4,148) (2,224) (3,165)
Net proceeds from (purchases of) marketable securities
transactions............................................... 1,044 (906) (2,258) (816) 1,986
------- ------- ------- -------- -------
Net cash used in investing activities.......................... (913) (7,447) (6,406) (3,040) (9,354)
------- ------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations............................ (1,374) (3,874) (222) (421) (2,145)
Net borrowings (repayments) under revolving credit
agreements..................................................... (5,170) 1,865 5,883 8,063 17,399
Net proceeds from issuances of common stock.................... 957 9,680 138 71 535
Cash dividends................................................. (588) (887) (1,037) (770) (847)
Other, net..................................................... 39 (70) (130) (97) (97)
------- ------- ------- -------- -------
Net cash provided by (used in) financing activities............ (6,136) 6,714 4,632 6,846 14,845
------- ------- ------- -------- -------
Net increase (decrease) in cash and cash equivalents........... (1,356) 211 651 457 1,446
Cash and cash equivalents at beginning of period............... 2,238 882 1,093 1,093 1,744
------- ------- ------- -------- -------
Cash and cash equivalents at end of period..................... $ 882 $ 1,093 $ 1,744 $ 1,550 $ 3,190
------- ------- ------- -------- -------
------- ------- ------- -------- -------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid.............................................. $ 1,476 $ 5,215 $ 4,709 $ 2,808 $ 1,639
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Interest paid.................................................. $ 3,329 $ 3,056 $ 3,149 $ 2,411 $ 1,022
------- ------- ------- -------- -------
------- ------- ------- -------- -------
</TABLE>
During the year ended December 31, 1994 and the nine months ended September
30, 1995, $192,000 and $164,000, respectively, of 10% Convertible Subordinated
Debentures due 1996 were converted into Class B Common Stock.
In connection with acquisitions during 1993 and the nine months ended
September 30, 1995, the Company assumed liabilities of $19,832,000 and
$4,003,000, respectively. (See Notes 8 and 15).
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Watsco, Inc.
('Watsco') and its subsidiaries (the 'Company'). All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company's
consolidated subsidiaries that are less than wholly-owned include 80% equity
interests in Gemaire Distributors, Inc. ('Gemaire') and Comfort Supply, Inc.
('Comfort Supply'), and a 50% equity interest in Heating & Cooling Supply, Inc.
('Heating & Cooling'). Watsco has an option to increase its equity interest in
Heating & Cooling to 50.25%. Minority interests in the accompanying consolidated
financial statements include the portions of net income and equity of Gemaire,
Comfort Supply and Heating & Cooling owned by Rheem Manufacturing Company
('Rheem').
The accompanying unaudited consolidated financial statements as of
September 30, 1995 and for the nine months ended September 30, 1994 and 1995
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to the consolidated
financial statements of the Company included herein. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the nine months ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products for its
manufacturing and distribution businesses and upon delivery of services for its
personnel services business.
INVENTORIES
Effective January 1, 1994, certain of the Company's subsidiaries changed
their method of accounting for inventories from the last-in, first-out ('LIFO')
method to the first-in, first-out ('FIFO') method. The Company believes that the
FIFO method provides a better matching of current costs and current revenues and
provides a more meaningful presentation of these subsidiaries' financial
position. These subsidiaries' inventories represented approximately 12% of the
Company's consolidated inventories at the date of the change. Following the
change, all of the Company's inventories are valued at the lower of FIFO cost or
market. The effect of this accounting change was not material to the Company's
previously reported or current year results of operations; accordingly, prior
year amounts have not been restated.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation of
property, plant and equipment is provided on the straight-line method. Buildings
and improvements are being depreciated over estimated useful lives ranging from
5-40 years. Estimated useful lives for other depreciable assets range from 3-10
years.
F-7
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization of $1,275,000,
$1,639,000 and $1,936,000 at December 31, 1993 and 1994 and September 30, 1995,
respectively, consists of goodwill arising from the excess of the cost of
acquired businesses over the fair value of their tangible net assets. Goodwill
is amortized on a straight-line basis over 40 years. The Company periodically
reviews goodwill based upon expectations of undiscounted cash flows and
operating income to assess whether recorded amounts are fully recoverable.
Amortization expense related to goodwill amounted to $312,000, $358,000,
$364,000 and $297,000 in 1992, 1993, 1994 and the nine months ended September
30, 1995, respectively.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, 'Accounting for Income Taxes' ('SFAS No. 109').
Under SFAS No. 109, deferred tax assets and liabilities reflect the future tax
consequences of the difference between the financial reporting and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities'. The adoption of this statement did not have a material
effect on the Company's consolidated operating results or financial position in
1994. At December 31, 1993 and 1994 and September 30, 1995, marketable
securities consists primarily of tax exempt municipal bonds. Such marketable
securities have been classified as 'available for sale' by the Company. At
December 31, 1994 and September 30, 1995, the cost of such securities
approximates market value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its temporary cash investments with high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution or investment. Concentrations of credit risk
with respect to accounts receivable are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
many different geographical regions. The Company establishes and monitors an
allowance for doubtful accounts based on the credit risk of specific customers,
historical trends and other information. At December 31, 1993 and 1994 and
September 30, 1995, the allowance for doubtful accounts was $3,012,000,
$2,681,000 and $3,181,000, respectively.
F-8
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income, less
subsidiary preferred stock dividends in 1993 and 1994 and the nine months ended
September 30, 1994 and 1995, by the total of the weighted average number of
shares outstanding and common stock equivalents. Fully diluted earnings per
share additionally assumes, if dilutive, conversion of the 10% Convertible
Subordinated Debentures due 1996 (the 'Class B Debentures'), with earnings being
increased for interest expense, net of income taxes, that would not have been
incurred had conversion taken place at the beginning of the year.
Shares used to calculate earnings per share (restated in 1992, 1993 and
1994 to reflect a 3-for-2 stock split effected May 15, 1995--see Note 15) are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding 3,985,320 5,744,052 6,107,275 6,095,794 6,171,227
Dilutive stock options and warrants......... 173,763 124,530 218,853 211,888 336,831
--------- --------- --------- --------- ---------
Shares for primary earnings per share 4,159,083 5,868,582 6,326,128 6,307,682 6,508,058
Assumed conversion of debenture............. 816,187 470,461 267,561 274,032 246,278
Additional dilution of stock options and
warrants.................................. 116,032 -- 52,573 22,584 175,909
--------- --------- --------- --------- ---------
Shares for fully diluted earnings per
share..................................... 5,091,302 6,339,043 6,646,262 6,604,298 6,930,245
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
2. INVENTORIES
Inventories consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1993 1994 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................................ $ 3,921 $ 4,058 $ 4,633
Work-in-process.............................................. 721 1,152 1,380
Finished goods............................................... 44,317 44,049 55,641
------- ------- -------------
$48,959 $49,259 $ 61,654
------- ------- -------------
------- ------- -------------
</TABLE>
Rheem is a major supplier to the Company under long-term distribution
agreements. Purchases under these agreements were $90,435,000, $113,117,000 and
$93,609,000, or 57%, 57% and 55% of the Company's distribution subsidiaries'
aggregate purchases in 1993 and 1994 and the nine months ended September 30,
1995, respectively. Included in accounts payable in the consolidated balance
sheets are
F-9
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
2. INVENTORIES--(CONTINUED)
amounts owed to Rheem totaling $6,267,000 and $4,207,000 at December 31, 1993
and 1994, respectively. At December 31, 1994, the Company had non-cancelable
purchase commitments to Rheem of approximately $15,890,000.
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1993 1994 1995
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings................................................ $ 3,550 $ 4,023 $ 4,266
Machinery and equipment........................................... 8,990 10,021 11,054
Furniture and fixtures............................................ 3,542 5,461 7,597
------- -------- -------------
16,082 19,505 22,917
Less: accumulated depreciation and amortization................... (9,528) (10,676) (12,380)
------- -------- -------------
$ 6,554 $ 8,829 $ 10,537
------- -------- -------------
------- -------- -------------
</TABLE>
4. REVOLVING CREDIT AGREEMENTS
Borrowings under revolving credit agreements consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1993 1994 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Variable-rate revolving note of Gemaire............................ $ 4,200 $ 7,400 $ 23,700
Variable-rate revolving note of Heating & Cooling.................. 18,035 19,260 17,833
Variable-rate revolving note of Comfort Supply..................... 3,916 5,374 7,900
------- ------- -------------
$26,151 $32,034 $ 49,433
------- ------- -------------
------- ------- -------------
</TABLE>
At December 31, 1994, borrowings under the Gemaire revolving note, which
expires in 1998, may not exceed $15,000,000 and are subject to maintenance of
certain levels of accounts receivable and inventories. At Gemaire's option,
interest is at 3/8% below the bank's prime rate or a fixed rate equal to the
LIBOR rate plus 1.0% and is payable quarterly. The note is secured by
substantially all of Gemaire's assets (with an aggregate carrying value of
$23,672,000 at December 31, 1994) and is without recourse to Watsco. In
connection with the purchase of certain assets from H.B. Adams, Inc. ('H.B.
Adams') on March 13, 1995 (see Note 15), Gemaire amended its existing revolving
credit agreement such that aggregate borrowings available under the agreement
were increased to $27,000,000. Under the amended agreement, at Gemaire's option,
interest is at 1 5/8% below the bank's prime rate, payable quarterly, or a fixed
rate equal to the LIBOR rate plus .75%, payable at the end of the fixed period.
F-10
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
4. REVOLVING CREDIT AGREEMENTS--(CONTINUED)
At December 31, 1994, borrowings under the Heating & Cooling revolving
note, which expires in 1995, may not exceed $23,000,000 and are subject to
maintenance of certain levels of accounts receivable and inventories. At Heating
& Cooling's option, interest is at 1/4% above the bank's prime rate or a fixed
rate 1.50% over the lower of the Eurodollar rate or the bank's certificate of
deposit rate for deposits of similar duration and is payable monthly. The note
is secured by substantially all of Heating & Cooling's assets (with an aggregate
carrying value of $33,636,000 at December 31, 1994) and is without recourse to
Watsco. In September 1995, Heating & Cooling entered into a new revolving note,
which expires in 1998. Under the new revolving note, borrowings may not exceed
$25,000,000 and are subject to maintenance of certain levels of accounts
receivable and inventories. At Heating & Cooling's option, interest is at 1/2%
below the bank's prime rate, or a fixed rate equal to the LIBOR rate plus .90%
or the bank's certificate of deposit rate plus .90% or offshore rates for
deposits of similar duration and is payable monthly.
At December 31, 1994, borrowings under the Comfort Supply revolving note,
which expires in 1996, may not exceed $12,000,000 and are subject to maintenance
of certain levels of accounts receivable and inventories. At Comfort Supply's
option, interest is at the lesser of the bank's prime rate (prime rate less
1 5/8% at September 30, 1995), or a fixed rate equal to the LIBOR rate plus 1.0%
(plus .75% at September 30, 1995) and is payable monthly. The note is secured by
substantially all of Comfort Supply's assets (with an aggregate carrying value
of $15,558,000 at December 31, 1994) and is without recourse to Watsco. The
Company expects to extend or obtain replacement financing for the revolving note
prior to its expiration.
The Company also has an unsecured $3,000,000 line of credit facility with a
bank expiring in May 1997. At the Company's option, borrowings under the
facility bear interest at the lesser of the bank's prime rate (prime rate less
1 5/8% at September 30, 1995), or a fixed rate equal to the LIBOR rate plus .75%
and is payable quarterly. At December 31, 1994 and September 30, 1995, there
were no outstanding borrowings under the facility.
The terms of the Gemaire, Heating & Cooling and Comfort Supply revolving
credit agreements restrict the transfer of their net assets and limit the
payment of dividends to their shareholders. At December 31, 1994, Watsco's
proportionate share of the aggregate net assets of Gemaire, Heating & Cooling
and Comfort Supply was $19,812,000 of which $4,296,000 was unrestricted.
At December 31, 1993 and 1994, the weighted average interest rate for the
borrowings under revolving credit agreements was 5.5% and 7.6%, respectively.
The weighted average rates were 7.1%, 5.7% and 6.7% during 1992, 1993 and 1994,
respectively.
F-11
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
5. LONG-TERM OBLIGATIONS
Bank and other debt (net of current portion) consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
8 1/2% first mortgage note............................................ $ 382 $ 254 $ 155
Variable-rate second mortgage note.................................... 879 -- 603
Variable-rate term note of Gemaire.................................... 1,700 1,300 1,000
Other................................................................. 711 1,165 2,268
------ ------ -------------
$3,672 $2,719 $ 4,026
------ ------ -------------
------ ------ -------------
</TABLE>
At December 31, 1994, the first mortgage note is payable in monthly
installments of approximately $13,000, including interest and the second
mortgage note has an outstanding principal amount of $879,000 and bears interest
at the bank's prime rate (8.5% at December 31, 1994). The first mortgage note
had an original maturity in 1988 and the second mortgage note matured during
1995. In August 1995, these notes were combined into a replacement promissory
note payable in monthly installments of approximately $13,000, bearing interest
at 8.25% and maturing in 2002. The mortgage notes are secured by land and
buildings with a net carrying value of $961,000 at December 31, 1994.
The Gemaire note, which matures in 1999, is payable in quarterly
installments of $100,000, plus interest at a fixed rate of 5.8%. The note is
secured along with the amounts outstanding under Gemaire's revolving credit
agreement (see Note 4).
The subordinated note represents an unsecured note payable to Rheem by
Heating & Cooling. The note bears interest at 12%, payable quarterly, and
matures in 1998.
The Company's convertible subordinated debentures outstanding at December
31, 1994 represent Class B Debentures that may be converted into Class B Common
Stock at $6.74 per share. During 1994 and the nine months ended September 30,
1995, Class B Debentures totaling $192,000 and $164,000 were converted into
28,330 and 24,403 shares, respectively, of Class B Common Stock. If conversion
does not occur on the remaining Class B Debentures, the Company is required to
provide for annual sinking fund payments of $167,000 aggregate principal amount
and to redeem the remainder on September 12, 1996. Redemption, at par plus
accrued interest, may be made by the Company at any time. At December 31, 1993
and 1994, Class B Debentures in the aggregate principal amount of $1,863,000 and
$1,672,000, respectively, were convertible into Class B Common Stock. Directors
and an affiliate of the Company owned $1,747,000 and $1,567,500 of Class B
Debentures at December 31, 1993 and 1994, respectively.
Annual maturities of long-term obligations for the years subsequent to
December 31, 1994 are as follows: $1,781,000 in 1995; $2,242,000 in 1996;
$694,000 in 1997; $3,005,000 in 1998; $180,000 in 1999 and $603,000 thereafter.
F-12
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
6. INCOME TAXES
SFAS No. 109 requires the use of the asset and liability approach for
financial accounting and reporting for income taxes. As permitted under SFAS No.
109, prior years' financial statements have not been restated. Accordingly, the
disclosures beginning in 1993 are in accordance with the new rules. The adoption
of this statement did not have a material effect on the consolidated financial
position or results of operations of the Company during 1993.
The income tax provision consists of (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Federal.............................................................. $2,304 $3,314 $3,991
State................................................................ 442 505 639
------ ------ ------
$2,746 $3,819 $4,630
------ ------ ------
------ ------ ------
Current.............................................................. $2,992 $4,274 $4,867
Deferred............................................................. (246) (455) (237)
------ ------ ------
$2,746 $3,819 $4,630
------ ------ ------
------ ------ ------
</TABLE>
A reconciliation of the provision for federal income taxes from the federal
statutory income tax rate to the effective income tax rate as reported is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate....................................................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit................................... 4.1 3.3 3.5
Amortization of intangible assets............................................ 1.6 1.2 1.0
Other, net................................................................... (1.2) (.9) --
---- ---- ----
38.5% 37.6% 38.5%
---- ---- ----
---- ---- ----
</TABLE>
F-13
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
6. INCOME TAXES--(CONTINUED)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Included in other current assets--
Accounts receivable reserves.................................................... $ 1,198 $ 1,005
Capitalized inventory costs and inventory reserves.............................. 1,724 1,860
Other........................................................................... 114 217
------- -------
3,036 3,082
------- -------
Included in other noncurrent assets--
Net operating loss carryforwards of subsidiary.................................. 947 868
Other........................................................................... -- 211
------- -------
947 1,079
------- -------
Deferred tax liabilities:
Included in accrued liabilities--
Inventory....................................................................... -- (157)
Other........................................................................... -- (178)
------- -------
-- (335)
------- -------
Included in noncurrent liabilities--
Depreciation and amortization................................................... (313) (397)
Lease transaction............................................................... (436) --
Other........................................................................... (358) (316)
------- -------
(1,107) (713)
------- -------
Total net deferred tax assets.............................................. $ 2,876 $ 3,113
------- -------
------- -------
</TABLE>
A subsidiary of the Company has available net operating loss carryforwards
('NOLs') of approximately $2.6 million which are available to offset future
taxable income in equal annual amounts of approximately $232,000 through 2005.
SFAS No. 109 requires that the tax benefit of such NOLs be recorded as an asset
to the extent that management assesses the utilization of such NOLs to be more
likely than not. Management has determined, based on the subsidiary's recent
operating earnings and expectations for the future, that operating income of the
subsidiary will be sufficient to fully utilize the available NOLs.
F-14
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
7. STOCK OPTION AND BENEFIT PLANS
The Company has the following stock option plans in effect:
1991 Stock Option Plan--for directors, officers and key employees, under
which options for an aggregate of 1,372,500 shares of Common Stock and Class B
Common Stock may be granted. Options as to 949,099 and 968,699 shares of Common
Stock and 373,388 and 375,637 shares of Class B Common Stock have been granted
as of December 31, 1994 and September 30, 1995, respectively. The terms of the
plan require the option price per share to be equivalent to fair market value.
Options are for a term of ten years and may be exercised as determined by the
Option Committee. The Option Committee may waive the vesting period and permit
options to be exercised immediately.
1983 Executive Stock Option Plan--for directors, officers and key
employees. This plan expired in February 1993; therefore, no additional options
may be granted. Options as to 48,547 shares of Common Stock and 8,978 shares of
Class B Common Stock are outstanding under this plan at December 31, 1994. The
terms of the plan required the option price per share to be equivalent to fair
market value. Options are for a term of ten years and, generally, may be
exercised in annual 20% installments beginning one year after grant. The Option
Committee may waive the vesting period and permit options to be exercised
immediately.
Summarized information for the above plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1992 1993 1994 1995
-------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding at beginning of period......... 872,968 865,711 1,032,612 1,066,286
Granted............................................ 837,355 219,750 104,025 31,250
Exercised.......................................... (801,457) (31,144) (46,426) (22,712)
Cancelled.......................................... (43,155) (21,705) (23,925) (16,088)
-------- --------- --------- -------------
Options outstanding at end of period............... 865,711 1,032,612 1,066,286 1,058,736
-------- --------- --------- -------------
-------- --------- --------- -------------
Exercisable at end of period....................... 263,892 533,685 791,788 873,732
-------- --------- --------- -------------
-------- --------- --------- -------------
Available for future grant......................... 423,034 120,738 50,013 28,164
-------- --------- --------- -------------
-------- --------- --------- -------------
Average prices of options exercised................ $5.55 $5.00 $6.61 $6.43
-------- --------- --------- -------------
-------- --------- --------- -------------
Price range of options outstanding at end of
period........................................... $4.13 $4.21 $5.00 $5.00
to to to to
$8.50 $10.67 $11.00 $15.25
</TABLE>
The Company has a profit sharing retirement plan for its employees (other
than Heating & Cooling's) which is qualified under Section 401(k) of the
Internal Revenue Code. The Company makes an annual matching contribution equal
to 50% of eligible employee compensation deferrals (not to exceed 1.5% of
compensation), in cash or the Company's common stock, to the plan on behalf of
its employees. Heating & Cooling sponsors a separate 401(k) plan and makes a
matching cash contribution. For the years ended December 31, 1992, 1993 and
1994, aggregate contributions to these plans were $165,000, $207,000 and
$268,000, respectively.
F-15
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
7. STOCK OPTION AND BENEFIT PLANS--(CONTINUED)
In 1993, Watsco implemented a reverse split-dollar insurance program for
its officers providing Watsco with limited interests in the policies including
death benefits aggregating approximately $5 million plus any prepaid and
unearned premiums. Under the insurance program, the officers retain all
incidents of ownership in excess of the Company's limited interests. For the
years ended December 31, 1993 and 1994, the Company recorded expense of $45,000
and $49,000, respectively, related to this program.
The Company has a Key Executive Non-Qualified Deferred Compensation Plan.
At December 31, 1994, there were two individuals participating in this plan. For
the years ended December 31, 1992, 1993 and 1994, the Company recorded expense
of $95,000, $45,000 and $158,000, respectively, related to this plan.
8. ACQUISITIONS
Effective April 23, 1993, Watsco acquired 80% and Rheem acquired 20% of the
common stock of Comfort Supply, a Texas-based distributor of residential central
air conditioners and related parts and supplies, for approximately $4,022,000.
The cash consideration paid by Watsco amounted to $3,418,000 and was made out of
a portion of the proceeds from the sale of Watsco's Common Stock completed in
February 1993 (see Note 11).
On June 12, 1993, Heating & Cooling purchased certain accounts and notes
receivable, inventory and other operating assets from Air Conditioning Sales,
Inc. ('ACS'), a wholesale distributor of residential central air conditioners
and related parts and supplies operating four distribution centers in central
California. Consideration for the purchase included the assumption of certain
liabilities aggregating $5,080,000 (including $2,042,000 payable to Rheem), a
cash payment of $2,073,000 to an escrow account for the settlement of certain
obligations of the seller and a cash payment to the seller of $211,000. In
connection with this transaction, Heating & Cooling issued $2,000,000 of its
6.5% Series A Preferred Stock (the 'H&C Preferred Stock') to Rheem in settlement
of a like amount of accounts payable due Rheem. The H&C Preferred Stock is in
preference to the common stock of Heating & Cooling in any dissolution or
winding up and may be redeemed at any time at the option of Heating & Cooling.
Cumulative dividends are paid annually on January 1. The H&C Preferred Stock is
included in minority interests in the accompanying consolidated balance sheets.
The above acquisitions were accounted for under the purchase method of
accounting and, accordingly, the results of operations of the acquired companies
have been included in the consolidated statements of income beginning on the
dates of acquisition. The excess of the aggregate purchase price over the
tangible net assets acquired of $1,705,000 is being amortized on a straight-line
basis over 40 years.
F-16
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
8. ACQUISITIONS--(CONTINUED)
The unaudited pro forma information of the Company as if the above
acquisitions had occurred on January 1, 1992 and giving effect to the
three-for-two stock split, is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1992 1993
-------- --------
<S> <C> <C>
Revenues..................................................................... $247,376 $249,630
Net income................................................................... $ 3,283 $ 5,072
Primary earnings per share................................................... $ .71 $ .85
Fully diluted earnings per share............................................. $ .65 $ .82
</TABLE>
The unaudited pro forma information is not necessarily indicative of either
the results of operations that would have occurred had the above companies been
acquired and the Company actually been combined during the years presented or of
future results of operations of the combined companies.
9. INSURANCE PROCEEDS
Following Hurricane Andrew in August 1992, the Company filed insurance
claims for business interruption. In June 1993, the Company received net
proceeds of $1,130,000 from its insurance carrier.
10. PUT/CALL AGREEMENTS
The Company and Rheem have executed a shareholder agreement with respect to
Gemaire that provides, among other things that annually during any election
period, as defined, after the year ended December 31, 1992, the Company could
'put' its ownership interest in Gemaire to Rheem and, after the year ended
December 31, 1996, Rheem could 'call' the Company's ownership interest in
Gemaire, at a price based on a valuation formula. The put/call price is defined
as the Company's ownership percentage multiplied by the greater of (i) an amount
equal to (a) seven times the average of Gemaire's highest EBIT (earnings before
interest and taxes) for each of the three out of the four full fiscal years
immediately preceding the date the put/call price is being calculated, less (b)
the total amount of Gemaire's interest-bearing bank debt as reflected in the
most recent fiscal year audited financial statements or (ii) an amount equal to
(a) Gemaire's tangible net book value as of the closing date, plus (b) goodwill
arising out of the acquisition of Gemaire.
For the years ended December 31, 1991, 1992, 1993 and 1994, EBIT for
Gemaire was $4,449,000, $5,327,000, $6,351,000 and $7,659,000, respectively, and
interest-bearing bank debt and book value were $9,100,000 and $11,411,000,
respectively, at December 31, 1994.
The Company and Rheem have also executed a shareholder agreement with
respect to Heating & Cooling which provides, among other things, that annually
during any election period, as defined, after the year ended December 31, 1995,
the Company can 'put' its ownership interest in Heating & Cooling to Rheem and
after the year ended December 31, 1996, that Rheem can 'call' the Company's
ownership
F-17
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
10. PUT/CALL AGREEMENTS--(CONTINUED)
interest in Heating & Cooling, at a price based on a valuation formula. The
put/call price is defined as the Company's ownership percentage multiplied by
the greater of (i) an amount equal to (a) six times Heating & Cooling's highest
annual EBIT during the four full fiscal years immediately preceding the date of
the exercise less (b) specified long-term debt as of the date of the balance
sheet for the fiscal year immediately preceding the exercise date, less (c) a
working capital adjustment, as defined, if any; or (ii) an amount equal to (a)
Heating & Cooling's tangible net book value as of the closing date, plus (b) the
goodwill arising out of the acquisition of Heating & Cooling by the Company,
plus (c) $5,000,000.
For the years ended December 31, 1991, 1992, 1993 and 1994, EBIT for
Heating & Cooling was $4,254,000, $4,708,000, $2,892,000 and $3,532,000,
respectively, and its book value was $12,846,000 at December 31, 1994. The
specified long-term debt and working capital adjustment, if any, cannot be
calculated until the year of exercise.
The Company and Rheem have also executed a shareholder agreement with
respect to Comfort Supply which provides, among other things, that annually
during any election period, as defined, after the year ended December 31, 1996,
the Company can 'put' its ownership interest in Comfort Supply to Rheem and that
Rheem can 'call' the Company's ownership interest in Comfort Supply, at a price
based on a valuation formula. The put/call price is defined as the Company's
ownership percentage multiplied by the greater of: (i) an amount equal to seven
times the average of Comfort Supply's highest EBIT for each of the three out of
the four full fiscal years immediately prior to the election period or (ii) an
amount equal to (a) Comfort Supply's tangible net book value as of the closing
date, plus (b) goodwill arising out of the acquisition of Comfort Supply, plus
(c) $2,000,000.
For the fiscal years ended December 22, 1993 and December 23, 1994, EBIT
for Comfort Supply was $2,721,000 and $3,503,000, respectively, and its book
value was $5,325,000 at December 22, 1994.
See Note 15 for an update of the put/call agreements.
Combined summarized financial information of Gemaire, Heating & Cooling and
Comfort Supply, net of minority interests, is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenues........................... $146,269 $181,524 $229,796 $174,110 $209,241
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income............................... $ 3,175 $ 4,555 $ 5,199 $ 4,370 $ 5,557
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total assets............................. $ 59,730 $ 84,749 $ 88,719 $102,826 $116,842
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
11. SHAREHOLDERS' EQUITY
The authorized capital stock of the Company at December 31, 1993 and 1994
is 10,000,000 shares of Common Stock (redesignated from Class A Common Stock in
June 1994) and 4,000,000 shares of Class B
F-18
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
11. SHAREHOLDERS' EQUITY--(CONTINUED)
Common Stock. Common Stock and Class B Common Stock share equally in the
earnings of the Company, and are identical in most other respects except (i)
Common Stock has limited voting rights, each share of Common Stock being
entitled to one vote on most matters and each share of Class B Common Stock
being entitled to ten votes; (ii) shareholders of Common Stock are entitled to
elect 25% of the Board of Directors (rounded up to the nearest whole number) and
Class B shareholders are entitled to elect the balance of the Board of
Directors; (iii) cash dividends may be paid on Common Stock without paying a
cash dividend on Class B Common Stock and no cash dividend may be paid on Class
B Common Stock unless at least an equal cash dividend is paid on Common Stock;
and (iv) Class B Common Stock is convertible at any time into Common Stock on a
one for one basis at the option of the shareholder.
In April 1992, the Company declared a 5% stock dividend on its Common Stock
and Class B Common Stock and issued 117,558 shares of Common Stock and 68,889
shares of Class B Common Stock.
In September 1992, the Company registered for sale 450,000 shares of its
Common Stock and subsequently sold 79,200 shares and realized net proceeds of
$563,000.
In February 1993, the Company completed the sale of 1,200,000 shares of
Common Stock resulting in net proceeds of $9,495,000. In connection with the
sale of these shares, the Company deregistered the remainder of the unsold
shares related to the September 1992 registration described above.
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1994, the Company is obligated under non-cancelable
operating leases of real property and equipment used in its operations for
minimum annual rentals as follows: $3,704,000 in 1995; $2,769,000 in 1996;
$2,264,000 in 1997; $1,327,000 in 1998; $745,000 in 1999 and $903,000
thereafter. Rental expense for the years ended December 31, 1992, 1993 and 1994
was $2,865,000, $3,584,000 and $4,026,000, respectively.
The Company is from time to time involved in routine litigation. Based on
the advice of litigation counsel, the Company believes that such actions
presently pending will not have a material adverse impact on the Company's
consolidated financial position or results of operations.
13. INDUSTRY SEGMENT INFORMATION
At December 31, 1994, the Company operated principally in two industry
segments. Operations in the Climate Control segment are conducted through the
Company's three distribution subsidiaries, Gemaire, Heating & Cooling and
Comfort Supply, which distribute residential central air conditioners to both
the homebuilding and replacement markets. This segment's operations also include
the Watsco Components, Inc., Cam-Stat, Inc. and Rho Sigma, Inc. subsidiaries
which manufacture and sell air conditioning, heating and refrigeration
components and accessories to original equipment manufacturers and the service
and repair markets. Operations in the Personnel Services segment are through
Dunhill Personnel System, Inc., which provides temporary help and permanent
placement services throughout the United States and Canada. There are no sales
between industry segments. Operating profit is total revenues less operating
expenses.
F-19
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
13. INDUSTRY SEGMENT INFORMATION--(CONTINUED)
Identifiable assets by industry are those assets that are used in the Company's
operations in each segment. Corporate assets consist primarily of cash and cash
equivalents, marketable securities and real property. Export sales totaled
approximately $4,676,000, $3,555,000 and $6,606,000 for the years ended December
31, 1992, 1993 and 1994, respectively.
<TABLE>
<CAPTION>
CLIMATE PERSONNEL
CONTROL SERVICES OTHER CONSOLIDATED
-------- --------- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Revenues.................................................. $203,067 $ 27,589 $ 230,656
-------- --------- ------------
-------- --------- ------------
Operating income.......................................... $ 12,589 $ 422 $ 13,011
-------- ---------
-------- ---------
Insurance proceeds........................................ 1,130
Interest expense.......................................... (2,756)
Unallocated corporate expenses............................ (1,621)
Investment income, net.................................... 383
------------
Income before income taxes and minority interests......... $ 10,147
------------
------------
Identifiable assets....................................... $ 99,628 $ 6,817 $ 106,445
-------- ---------
-------- ---------
Corporate assets.......................................... 3,240
------------
Total assets.............................................. $ 109,685
------------
------------
Depreciation and amortization............................. $ 1,165 $ 150 $ 176 $ 1,491
-------- --------- ------ ------------
-------- --------- ------ ------------
Capital expenditures, net................................. $ 2,470 $ 36 $ 488 $ 2,994
-------- --------- ------ ------------
-------- --------- ------ ------------
YEAR ENDED DECEMBER 31, 1994
Revenues.................................................. $253,433 $ 30,298 $ 283,731
-------- --------- ------------
-------- --------- ------------
Operating income.......................................... $ 16,401 $ 1,216 $ 17,617
-------- ---------
-------- ---------
Interest expense.......................................... (3,155)
Unallocated corporate expenses............................ (2,574)
Investment income, net.................................... 140
------------
Income before income taxes and minority interests......... $ 12,028
------------
------------
Identifiable assets....................................... $106,415 $ 7,952 $ 114,367
-------- ---------
-------- ---------
Corporate assets.......................................... 5,297
------------
Total assets.............................................. $ 119,664
------------
------------
Depreciation and amortization............................. $ 1,851 $ 270 $ 224 $ 2,345
-------- --------- ------ ------------
-------- --------- ------ ------------
Capital expenditures, net................................. $ 3,455 $ 316 $ 377 $ 4,148
-------- --------- ------ ------------
-------- --------- ------ ------------
</TABLE>
F-20
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
13. INDUSTRY SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
CLIMATE PERSONNEL
CONTROL SERVICES OTHER CONSOLIDATED
-------- --------- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues.................................................. $226,689 $ 23,501 $ 250,190
-------- --------- ------------
-------- --------- ------------
Operating income.......................................... $ 16,273 $ 882 $ 17,155
-------- ---------
-------- ---------
Interest expense.......................................... (3,064)
Unallocated corporate expenses............................ (1,628)
Investment income, net.................................... 181
------------
Income before income taxes and minority interests......... $ 12,644
------------
------------
Identifiable assets....................................... $136,191 $ 7,939 $ 144,130
-------- ---------
-------- ---------
Corporate assets.......................................... 3,435
------------
Total assets.............................................. $ 147,565
------------
------------
Depreciation and amortization............................. $ 1,685 $ 141 $ 231 $ 2,057
-------- --------- ------ ------------
-------- --------- ------ ------------
Capital expenditures, net................................. $ 2,338 $ 378 $ 449 $ 3,165
-------- --------- ------ ------------
-------- --------- ------ ------------
</TABLE>
F-21
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
14. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly results of operations for the years ended
December 31, 1993 and 1994 and for the nine months ended September 30, 1995 are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER(1) QUARTER QUARTER TOTAL
------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993:
Revenues.............................................. $38,652 $ 59,546 $72,474 $59,984 $230,656
Gross profit.......................................... 9,031 13,732 16,094 13,073 51,930
Net income............................................ 343 2,216 1,830 652 5,041
Earnings per share(2):
Primary............................................ $.07 $.37 $.29 $.10 $.85
Fully diluted...................................... .07 .35 .28 .10 .82
YEAR ENDED DECEMBER 31, 1994:
Revenues.............................................. $55,252 $ 75,827 $82,805 $69,847 $283,731
Gross profit.......................................... 13,218 16,717 18,731 14,546 63,212
Net income............................................ 690 1,926 2,307 839 5,762
Earnings per share(2):
Primary............................................ $.11 $.30 $.36 $.13 $.89
Fully diluted...................................... .11 .29 .35 .13 .87
NINE MONTHS ENDED SEPTEMBER 30, 1995:
Revenues.............................................. $60,321 $ 91,062 $98,807
Gross profit.......................................... 14,735 20,144 21,668
Net income............................................ 901 2,301 2,831
Earnings per share(2):
Primary............................................ $.14 $.35 $.42
Fully diluted...................................... .13 .34 .41
</TABLE>
- ------------------------
(1) The second quarter of 1993 includes the non-recurring receipt of insurance
proceeds for business interruption claims made by the Company following
Hurricane Andrew, which had the effect of increasing net income by $706,000.
Excluding this item, fully diluted earnings per share was $.24 ($.25
primary) for the second quarter of 1993 and $.71 ($.73 primary) for the year
ended December 31, 1993.
(2) Quarterly earnings per share are calculated on an individual basis and,
because of rounding and changes in the weighted average shares outstanding
during the year, in total may not equal the amount calculated for the year
as a whole.
F-22
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
15. SUBSEQUENT EVENTS
On March 13, 1995, Gemaire purchased certain accounts receivable, inventory
and other operating assets and assumed certain liabilities of H.B. Adams, a
wholesale distributor of residential air conditioners and related parts and
supplies operating seven branch locations in central Florida. Cash consideration
paid by Gemaire totaled approximately $7.8 million and is subject to adjustment
upon the completion of an audit of the assets purchased and liabilities assumed.
On April 18, 1995, the Company's Board of Directors authorized, for both
classes of the Company's common stock, a three-for-two stock split effected in
the form of a 50% stock dividend payable on May 15, 1995 to shareholders of
record as of April 28, 1995. Shareholders' equity has been restated to give
retroactive effect to the stock split for all periods presented by reclassifying
from retained earnings or paid-in capital to common stock the par value of the
additional shares arising from the split. In addition, all references in the
consolidated financial statements to number of shares, per share amounts, stock
option data, and market prices of both classes of the Company's common stock
have been restated.
On June 5, 1995, the shareholders approved and amended the Company's
Amended and Restated Articles of Incorporation to increase the number of
authorized shares of Common Stock, par value $.50, to 40,000,000.
On October 26, 1995, the Company purchased certain accounts receivable,
inventory and other operating assets and assumed certain liabilities of Central
Air Conditioning Distributors, Inc., a Winston-Salem, North Carolina-based
wholesale distributor of air conditioning, heating and refrigeration products
operating five branch locations, for $9.0 million. The purchase price is subject
to adjustment upon the completion of an audit of the assets purchased and
liabilities assumed. In connection with this acquisition, the Company assumed
liabilities of $2.1 million. The excess of aggregate purchase price over the
fair value of the net assets acquired will be amortized on a straight-line basis
over 40 years.
In December 1995, the Company entered into an interest rate swap agreement
with a bank to hedge $10 million of variable-rate debt outstanding.
In December 1995, the Company entered into a letter of intent to acquire
the assets and certain liabilities of Three States Supply, Inc. ('Three
States'), a distributor of building materials used primarily in the heating and
air conditioning industry.
In January 1996, the Company and Rheem amended the Gemaire, Heating &
Cooling and Comfort Supply put/call agreements delaying Rheem's right to call
the Company's ownership interest in Gemaire, Heating & Cooling and Comfort
Supply until the election period, as defined, in 1998.
In January 1996, the Company filed a secondary offering with the Securities
and Exchange Commission to sell 1,600,000 shares of Common Stock during February
1996. Such shares will consist of 1,200,000 newly issued shares and 400,000
shares from selling shareholders. The Company plans to use the net proceeds to
acquire Three States, to repay a portion of the Company's outstanding borrowings
under its revolving credit facilities and for general corporate purposes,
including possible future acquisitions.
In February 1996, the Company entered into a Stock Exchange Agreement and
Plan of Reorganization (the 'Exchange Agreement') with Rheem to acquire Rheem's
minority interests in the common stock (the
F-23
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
15. SUBSEQUENT EVENTS--(CONTINUED)
'Minority Interests') of three of the Company's distribution subsidiaries in
exchange for $23 million of its unregistered Common Stock. Rheem's shares of the
6.5% Series A Preferred Stock issued by Heating & Cooling (described in Note 8)
will not be acquired by the Company in this transaction and continues to be
outstanding. The closing of the Company's acquisition of the Minority Interests
is subject to certain conditions precedent, including the receipt of approval
from the Federal Trade Commission. In connection with the Exchange Agreement,
the existing Rheem distribution agreements will be extended for an initial term
of ten (10) years which expire on the tenth anniversary of the Exchange
Agreement, with annual renewals thereafter.
The Put/Call Agreements discussed in Note 10 are effectively eliminated
under the terms of the Exchange Agreement because the rights to 'put' or 'call'
become exercisable primarily upon occurrence of certain insolvency events.
F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
THREE STATES SUPPLY COMPANY, INC.
We have audited the accompanying balance sheet of Three States Supply
Company, Inc. (a Tennessee corporation and subsidiary of UIS, Inc.) as of
December 31, 1994 and the related statements of income, retained earnings and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Three States Supply Company,
Inc. as of December 31, 1994 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
RHEA & IVY, P.L.C.
Memphis, Tennessee,
February 7, 1995 (except with respect to
the matter discussed in Note 7, as to
which the date is January 18, 1996)
F-25
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 355 $ 1,531
Accounts receivable, less allowance for doubtful accounts of $52,000 at December
31, 1994 and $111,000 at September 30, 1995 (unaudited)........................... 5,545 6,596
Inventories....................................................................... 6,663 6,039
Prepaid expenses.................................................................. 46 78
Deferred income taxes............................................................. 140 175
------------ -------------
Total current assets......................................................... 12,749 14,419
Property and equipment:
Land.............................................................................. 257 283
Buildings and leasehold improvements.............................................. 1,417 1,440
Machinery and equipment........................................................... 3,870 4,210
------------ -------------
5,544 5,933
Less: Accumulated depreciation.................................................... (2,744) (3,076)
------------ -------------
2,800 2,857
Other assets........................................................................ 10 --
------------ -------------
$ 15,559 $ 17,276
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 1,138 $ 1,906
Accrued compensation and other expenses........................................... 715 702
Income taxes payable.............................................................. 592 783
------------ -------------
Total current liabilities.................................................... 2,445 3,391
Noncurrent liabilities:
Due to parent company............................................................. 4,628 4,220
Deferred income taxes............................................................. 160 171
------------ -------------
Total noncurrent liabilities................................................. 4,788 4,391
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock--authorized, 20,000 shares of $10.00 par value; issued and
outstanding, 1,000 shares......................................................... 10 10
Retained earnings................................................................. 8,316 9,484
------------ -------------
Total shareholders' equity.......................................................... 8,326 9,494
------------ -------------
$ 15,559 $ 17,276
------------ -------------
------------ -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-26
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1994 1994 1995
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.................................................................... $ 44,941 $33,723 $36,234
Cost of sales................................................................ 34,896 26,161 27,735
------------ ------- -------
Gross profit............................................................... 10,045 7,562 8,499
Selling, general and administrative expenses................................. 8,374 6,486 6,795
------------ ------- -------
Operating income........................................................... 1,671 1,076 1,704
Other income and expense, net................................................ 208 171 225
------------ ------- -------
Income before income taxes................................................. 1,879 1,247 1,929
Income taxes................................................................. (738) (489) (761)
------------ ------- -------
Net income................................................................. 1,141 758 1,168
Retained earnings, beginning of period....................................... 7,175 7,175 8,316
------------ ------- -------
Retained earnings, end of period............................................. $ 8,316 $ 7,933 $ 9,484
------------ ------- -------
------------ ------- -------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-27
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1994 1994 1995
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................................. $ 1,141 $ 758 $ 1,168
------------ ------- -------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization........................................... 531 398 401
Provision (benefit) deferred income taxes............................... 15 -- (24)
Gain on disposal of property............................................ (27) (27) (15)
Cash provided by (used in) changes in assets and liabilities:
Accounts and notes receivable......................................... (657) (1,386) (1,051)
Prepaid expenses and other assets..................................... 5 (12) (22)
Inventories........................................................... (332) 256 624
Accounts payable...................................................... (470) (312) 768
Other accrued expenses................................................ 129 238 (13)
Income taxes payable.................................................. 104 1 191
------------ ------- -------
Total adjustments.................................................. (702) (844) 859
------------ ------- -------
Net cash provided by (used in) operating activities............. 439 (86) 2,027
------------ ------- -------
Cash flows from investing activities
Purchase of property and equipment......................................... (804) (749) (458)
Proceeds from the sale of property and equipment........................... 54 54 15
------------ ------- -------
Net cash used in investing activities........................... (750) (695) (443)
------------ ------- -------
Cash flows from financing activities
Advances from parent company............................................... 1,034 788 1,592
Repayments of advances from parent company................................. (500) -- (2,000)
------------ ------- -------
Net cash provided by (used in) financing activities............. 534 788 (408)
------------ ------- -------
Net increase in cash......................................................... 223 7 1,176
Cash, beginning of period.................................................... 132 132 355
------------ ------- -------
Cash, end of period.......................................................... $ 355 $ 139 $ 1,531
------------ ------- -------
------------ ------- -------
Supplemental disclosure of cash flow information:
State income taxes paid.................................................... $ 137 $ 102 $ 131
------------ ------- -------
------------ ------- -------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-28
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
NOTE (1)--SUMMARY OF ACCOUNTING POLICIES
Three States Supply Company, Inc., a Tennessee corporation (hereinafter
referred to as the 'Company') is a 99.8% owned subsidiary of UIS, Inc. (the
'Parent'). The Company is engaged in the wholesale distribution of building
materials primarily used in the air conditioning and heating industry.
The accompanying unaudited financial statements as of September 30, 1995
and for the nine month periods ended September 30, 1994 and 1995 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Except as disclosed herein, there has been no material
change in the information disclosed in the notes to the financial statements of
the Company included herein. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the nine month
period ended September 30, 1995 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and accounts receivable. The Company places its
temporary cash with high credit quality financial institutions. Concentrations
of credit risk with respect to accounts receivable are limited due to the large
numbers of customers comprising its customer base. The Company establishes and
monitors an allowance for doubtful accounts based on the credit risk of specific
customers, historical trends and other information.
INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined
using the last-in, first-out ('LIFO') method as more fully described in Note 2.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated useful lives, using the straight-line method. Leasehold improvements
are amortized over the lives of the respective leases or the useful lives of the
improvements, whichever is shorter.
Depreciation and amortization expense was $531,000 for the year ending
December 31, 1994.
The useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Buildings and leasehold improvements 5-20 years
Machinery and equipment 3-10 years
F-29
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
NOTE (1)--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
The taxable income of the Company is included in the consolidated tax
return of the Parent and, accordingly, taxes are reported using the separate
return method under a tax sharing arrangement with the Parent. Deferred tax
assets and liabilities reflect the future tax consequences of the differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
NOTE (2)--EFFECT OF LIFO INVENTORY ON OPERATIONS
Inventories consist primarily of finished goods and are stated at the lower
of cost, determined by the LIFO method, or market. If the first-in, first-out
('FIFO') method had been used for all inventories, inventories would have been
increased by $2,380,000 at December 31, 1994 and $2,486,000 at September 30,
1995 (unaudited) and cost of sales would have been decreased by $394,000 for the
year ended December 31, 1994 and $106,000 for the nine month period ended
September 30, 1995 (unaudited). The effect of the LIFO inventory decrement for
the nine month period ended September 30, 1995 (unaudited) had the effect of
reducing cost of sales by $104,000 for the period. A summary of inventory is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(UNAUDITED)
<S> <C> <C>
Inventories at FIFO....................................................... $ 9,043 $ 8,525
LIFO reserve.............................................................. (2,380) (2,486)
------------ -------------
Inventories at LIFO....................................................... $ 6,663 $ 6,039
------------ -------------
------------ -------------
</TABLE>
NOTE (3)--EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution savings and investment plan
whereby employees can elect to contribute up to 10% of their annual gross
earnings to the plan. The Company, at its discretion, may match 50% of the
employees' contributions of up to 5% of the employees' gross annual earnings (as
defined in the plan). The Company has elected to match the maximum allowable
under the plan. Contributions of $60,000 were recorded in the accompanying
income statement for the year ended December 31, 1994.
NOTE (4)--DUE TO PARENT COMPANY
The amount due to Parent represents cash advances to the Company from the
Parent and is noninterest bearing. It is not expected that the amount due will
be paid in the following year, therefore it is classified as a noncurrent
liability.
F-30
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
NOTE (5)--INCOME TAXES
The income tax provision for the year ended December 31, 1994 consists of
(in thousands):
Federal............................................................... $607
State................................................................. 131
----
$738
----
----
Current............................................................... $723
Deferred.............................................................. 15
----
$738
----
----
A reconciliation of the provision for federal income taxes from the federal
statutory rate of the Parent (35%) to the effective income tax rate as reported
for the year ended December 31, 1994 is as follows (in thousands):
Federal statutory rate................................................ 35.0%
State taxes, net of Federal benefit................................... 4.0%
Other, net............................................................ 0.3%
----
39.3%
----
----
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities at December 31, 1994 (in thousands):
Deferred tax assets, current:
Accounts receivable reserves......................................... $ 18
Capitalized inventory costs.......................................... 108
Other................................................................ 14
-----
$ 140
-----
-----
Deferred tax liabilities, noncurrent:
Depreciation and amortization........................................ $(145)
Other................................................................ (15)
-----
(160)
-----
Net deferred tax liability...................................... $ (20)
-----
-----
Management believes that it is more likely than not the deferred tax assets
will be utilized; accordingly, no valuation allowance is required.
F-31
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
NOTE (6)--COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations from leased warehouses.
The following is a schedule by year of future minimum rental payments under
non-cancellable operating leases for each of the years ended December 31 (in
thousands):
1995.................................................................. $322
1996.................................................................. 213
1997.................................................................. 198
1998.................................................................. 145
1999.................................................................. 26
----
$904
----
----
Rent expense for leased facilities totaled $365,000 for the year ended
December 31, 1994.
NOTE (7)--SUBSEQUENT EVENT
In December 1995, the Parent entered into a letter of intent to sell the
net assets and business of the Company to Watsco, Inc. The transaction is
dependent upon the completion of a definitive purchase agreement. The
accompanying financial statements do not include the effects, if any, on the
carrying amount of assets and liabilities relative to the transaction
contemplated in the letter of intent.
F-32
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial information gives
effect to Watsco, Inc. and its subsidiaries' (the 'Company') proposed
acquisition of the assets and certain liabilities of Three States Supply
Company, Inc. ('Three States'), and the acquisition of Rheem's minority
interests in the common stock (the 'Minority Interests') of three of the
Company's distribution subsidiaries. Both transactions are expected to be
consummated during the first quarter of 1996. The Company's acquisition of Three
States is subject to various conditions, including the negotiation of an asset
purchase agreement, and accordingly there can be no assurance that such purchase
will be consummated. The closing of the Company's acquisition of the Minority
Interests is subject to certain conditions precedent, including the receipt of
approval from the Federal Trade Commission. Rheem's shares of the 6.5% Series A
Preferred Stock issued by Heating & Cooling (described in Note 8 to the
historical financial statements) was not acquired by the Company in this
transaction and continues to be outstanding. The pro forma information is based
on the historical financial statements of the Company and Three States. The
proposed acquisitions are being accounted for under the purchase method of
accounting.
The unaudited pro forma combined balance sheet as of September 30, 1995
gives effect to the acquisition of the Minority Interests, the Three States
acquisition and the issuance and sale by the Company of the Common Stock and the
application of the net proceeds therefrom as if they had been consummated on
September 30, 1995. This balance sheet combines the unaudited historical balance
sheets as of September 30, 1995 of the Company and Three States.
The unaudited pro forma combined income statement for the year ended
December 31, 1994 gives effect to the acquisition of the Minority Interests, the
Three States acquisition and the issuance and sale by the Company of the Common
Stock and the application of the net proceeds therefrom as if they had been
consummated on January 1, 1994. This pro forma income statement combines the
audited statements for the year ended December 31, 1994 of the Company and Three
States.
The unaudited pro forma combined income statement for the nine months ended
September 30, 1995 gives effect to the acquisition of the Minority Interests,
the Three States acquisition and the issuance and sale by the Company of the
Common Stock and the application of the net proceeds therefrom as if they had
been consummated on January 1, 1995. This pro forma income statement combines
the unaudited income statement for the nine months ended September 30, 1995 of
the Company and Three States.
The pro forma statements may not necessarily be indicative of the results
that would actually have been obtained had the acquisition of the Minority
Interests and the Three States acquisition occurred on the dates indicated or
which may be obtained in the future. In the opinion of the Company's management,
all adjustments necessary to present fairly such pro forma financial statements
have been included. This unaudited pro forma combined financial information
should be read in conjunction with the historical financial statements and
related notes of the Company and Three States, which appear elsewhere in this
Prospectus.
F-33
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
RELATED TO THE RELATED TO THE
ACQUISITION OF ACQUISITION OF
THE MINORITY THREE STATES
INTERESTS AND THE OFFERING PRO FORMA
------------------ PRO FORMA ---------------- COMBINED
COMPANY DR (CR) COMBINED THREE STATES DR (CR) AS ADJUSTED
-------- ------------------ --------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,190 $ 3,190 $ 1,531 $ 18,902(3) $ 7,327
(16,296)(4)
Marketable securities.... 1,281 1,281 -- 1,281
Accounts receivable,
net.................... 47,413 47,413 6,596 54,009
Inventories.............. 61,654 61,654 6,039 2,486(4) 70,179
Prepaid expenses and
other current assets... 5,123 5,123 253 (175)(4) 5,201
-------- ------------------ --------- ------------ ---------------- -----------
Total current assets....... 118,661 118,661 14,419 4,917 137,997
Property, plant and
equipment, net........... 10,537 10,537 2,857 -- 13,394
Intangible assets, net..... 14,353 $ 5,320(1) 19,673 -- 100(4) 19,773
Other assets............... 4,014 4,014 -- 4,014
-------- ------------------ --------- ------------ ---------------- -----------
$ 147,565 $ 5,320 $ 152,885 $ 17,276 $ 5,017 $ 175,178
-------- ------------------ --------- ------------ ---------------- -----------
-------- ------------------ --------- ------------ ---------------- -----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term
obligations............ $ 744 $ 744 $ -- $ 744
Borrowings under
revolving credit
agreement.............. 49,433 49,433 -- 49,433
Accounts payable and
accrued liabilities.... 23,499 23,499 3,391 26,890
-------- ------------------ --------- ------------ ---------------- -----------
Total current
liabilities............ 73,676 73,676 3,391 77,067
-------- ------------------ --------- ------------ ---------------- -----------
Long-term obligations:
Due to parent company.... -- -- 4,220 $ 4,220(4) --
Bank and other debt...... 4,026 4,026 -- 4,026
Subordinated note........ 2,500 2,500 -- 2,500
Convertible subordinated
debentures............. 1,341 1,341 -- 1,341
-------- ------------------ --------- ------------ ---------------- -----------
7,867 7,867 4,220 4,220 7,867
-------- ------------------ --------- ------------ ---------------- -----------
Deferred income taxes...... 638 638 171 171(4) 638
Preferred stock
of subsidiary............ (2,000)(1) 2,000 -- -- 2,000
Minority interests......... 12,780 12,780(1) -- -- -- --
Shareholders' equity:
Common Stock............. 2,392 (765)(1) 3,157 10 (600)(3) 3,757
10(4)
Class B Common Stock..... 742 742 -- 742
Paid-in capital.......... 19,205 (15,335)(1) 34,540 -- (18,302)(3) 52,842
Retained earnings........ 30,265 30,265 9,484 9,484(4) 30,265
-------- ------------------ --------- ------------ ---------------- -----------
Total shareholders'
equity................. 52,604 (16,100) 68,704 9,494 (9,408) 87,606
-------- ------------------ --------- ------------ ---------------- -----------
$ 147,565 $ (5,320) $ 152,885 $ 17,276 $ (5,017) $ 175,178
-------- ------------------ --------- ------------ ---------------- -----------
-------- ------------------ --------- ------------ ---------------- -----------
</TABLE>
The accompanying notes to unaudited pro forma combined financial statements
are an integral part of this statement.
F-34
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA
ADJUSTMENTS RELATED TO THE
RELATED TO THE ACQUISITION OF
ACQUISITION OF THE THREE STATES
MINORITY INTERESTS AND THE OFFERING PRO FORMA
------------------ PRO FORMA ---------------- COMBINED
COMPANY DR (CR) COMBINED THREE STATES DR (CR) AS ADJUSTED
-------- ------------------ --------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $283,731 $ 283,731 $ 44,941 $ 328,672
Cost of sales and direct
service expenses........ 220,519 220,519 34,896 $ (394)(5) 255,021
-------- ------------------ --------- ------------ ---------------- -----------
Gross profit............ 63,212 63,212 10,045 (394) 73,651
Selling, general and
administrative expenses 48,169 $ 133(2) $ 48,302 8,374 56,676
-------- ------------------ --------- ------------ ---------------- -----------
Operating income........ 15,043 133 14,910 1,671 (394) 16,975
Other income.............. 140 140 208 (104)(6) 452
Interest expense.......... 3,155 3,155 -- 3,155
-------- ------------------ --------- ------------ ---------------- -----------
Income before income
taxes and
minority interests.... 12,028 133 11,895 1,879 (498) 14,272
Income taxes.............. 4,630 4,630 738 194(7) 5,562
Minority interests........ 1,636 1,636(8) -- -- --
-------- ------------------ --------- ------------ ---------------- -----------
Net income.............. $ 5,762 $ (1,503) $ 7,265 $ 1,141 $ (304) $ 8,710
-------- ------------------ --------- ------------ ---------------- -----------
-------- ------------------ --------- ------------ ---------------- -----------
Earnings per share:
Primary................. $ .89 $ .93 $ .97
-------- --------- -----------
-------- --------- -----------
Fully diluted........... $ .87 $ .91 $ .95
-------- --------- -----------
-------- --------- -----------
Weighted average shares
outstanding:
Primary................. 6,326 1,353 7,679 1,200 8,879
-------- ------------------ --------- ---------------- -----------
-------- ------------------ --------- ---------------- -----------
Fully diluted........... 6,646 1,353 7,999 1,200 9,199
-------- ------------------ --------- ---------------- -----------
-------- ------------------ --------- ---------------- -----------
</TABLE>
The accompanying notes to unaudited pro forma combined financial statements
are an integral part of this statement.
F-35
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA
ADJUSTMENTS RELATED TO THE
RELATED TO THE ACQUISITION OF
ACQUISITION OF THE THREE STATES
MINORITY INTERESTS AND THE OFFERING PRO FORMA
------------------ PRO FORMA ---------------- COMBINED
COMPANY DR (CR) COMBINED THREE STATES DR (CR) AS ADJUSTED
-------- ------------------ --------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $250,190 $ 250,190 $ 36,234 $ 286,424
Cost of sales and direct
service expenses........ 193,643 193,643 27,735 $ (106)(5) 221,272
-------- ------------------ --------- ------------ ---------------- -----------
Gross profit............ 56,547 56,547 8,499 (106) 65,152
Selling, general and
administrative expenses 41,020 $ 100(2) 41,120 6,795 47,915
-------- ------------------ --------- ------------ ---------------- -----------
Operating income........ 15,527 100 15,427 1,704 (106) 17,237
Other income.............. 181 181 225 (78)(6) 484
Interest expense.......... 3,064 3,064 -- 3,064
-------- ------------------ --------- ------------ ---------------- -----------
Income before income
taxes and minority
interests............. 12,644 100 12,544 1,929 (184) 14,657
Income taxes.............. 4,867 4,867 761 72(7) 5,700
Minority interests........ 1,744 1,744(8) -- -- --
-------- ------------------ --------- ------------ ---------------- -----------
Net income.............. $ 6,033 $ (1,644) $ 7,677 $ 1,168 $ (112) $ 8,957
-------- ------------------ --------- ------------ ---------------- -----------
-------- ------------------ --------- ------------ ---------------- -----------
Earnings per share:
Primary................. $ .91 $ .96 $ .98
-------- --------- -----------
-------- --------- -----------
Fully diluted........... $ .87 $ .93 $ .94
-------- --------- -----------
-------- --------- -----------
Weighted average shares
outstanding:
Primary................. 6,508 1,353 7,861 1,200 9,061
-------- ------------------ --------- ---------------- -----------
-------- ------------------ --------- ---------------- -----------
Fully diluted........... 6,930 1,353 8,283 1,200 9,483
-------- ------------------ --------- ---------------- -----------
-------- ------------------ --------- ---------------- -----------
</TABLE>
The accompanying notes to unaudited pro forma combined financial statements
are an integral part of this statement.
F-36
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) Represents the purchase of Rheem Manufacturing Company's ('Rheem') Minority
Interests in Gemaire, Heating & Cooling and Comfort Supply (collectively,
the 'Distribution Subsidiaries') as follows:
Issuance of unregistered Common Stock of the Company................ $16,100
Minority interests in Distribution Subsidiaries...... .............. (12,780)
Subsidiary preferred stock included in Minority Interests not
purchased by the Company.......................................... 2,000
-------
Excess of purchase price over Minority Interests acquired........... $ 5,320
-------
-------
The unregistered Common Stock valuation was determined by an independent
appraisal and reflects a discount from the market value in light of the
restrictions on the disposition of shares.
(2) Represents the amortization of the excess of purchase price over Minority
Interests acquired. Such excess is amortized on a straight-line basis over
40 years.
(3) Represents the net proceeds from the issuance of 1,200,000 shares of the
Company's Common Stock at an assumed offering price of $17.00 per share
determined as follows:
Gross proceeds on 1,200,000 shares.................................. $20,400
Payment of estimated underwriters discount and offering expenses.... 1,498
-------
Net proceeds from Common Stock.................................... $18,902
-------
-------
(4) Represents the estimated purchase price for Three States determined as
follows:
Net assets of Three States.......................................... $ 9,494
Write-up of inventories to fair market value........................ 2,486
Due to parent company not assumed by the Company.................... 4,220
Net liability not assumed by the Company............................ (4)
Payment of acquisition expenses..................................... 100
-------
Total purchase price.............................................. $16,296
-------
-------
(5) The inventories included in the historical financial statements of Three
States are stated based on the last-in, first-out method. Subsequent to the
acquisition of Three States, such inventory amounts will be stated by the
Company based on the first-in, first-out ('FIFO') method. These amounts
represent an adjustment to cost of sales using the FIFO method as if Three
States valued inventories under this method as of the beginning of each
period presented in the accompanying pro forma combined financial
statements.
(6) Represents interest income generated on the remaining net proceeds of the
offering not used for the acquisition of Three States.
(7) Represents pro forma income taxes at the Company's blended statutory tax
rate of 39%.
(8) Represents the elimination of the minority interest in the net income of the
Distribution Subsidiaries. As a result of the transaction with Rheem
described in Note 1 above, the Company will own 100% of the Distribution
Subsidiaries.
F-37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary.................................... 3
Use of Proceeds....................................... 7
Capitalization........................................ 8
Price Range of Common Stock........................... 9
Selected Financial Data............................... 10
Management's Discussion and Analysis of
Financial Condition and Results
of Operations....................................... 12
Business.............................................. 16
Management............................................ 22
Selling Shareholders.................................. 24
Underwriting.......................................... 26
Legal Matters......................................... 27
Experts............................................... 27
Available Information................................. 27
Incorporation of Certain Documents
by Reference........................................ 28
Index to Financial Statements......................... F-1
1,600,000 Shares
[WATSCO LOGO]
Common Stock
-------------------------
P R O S P E C T U S
-------------------------
PRUDENTAL SECURTES INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
February , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
TO BE PAID BY
TO BE PAID BY THE SELLING
THE COMPANY SHAREHOLDERS
-------------- -------------
<S> <C> <C>
Securities and Exchange Commission registration fee.............................. $ 8,964 $ 2,517
NASD filing fee.................................................................. 2,978 855
New York Stock Exchange listing fees............................................. 4,235
Blue Sky fees and expenses....................................................... 6,500
Printing and engraving expenses.................................................. 60,000
Legal fees and expenses.......................................................... 135,000
Accounting fees and expenses..................................................... 50,000
Miscellaneous.................................................................... 57,323
-------------- -------------
Total..................................................................... $ 325,000 $ 3,372
-------------- -------------
-------------- -------------
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the New York Stock Exchange listing fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0850 of the Florida Business Corporation Act permits a Florida
corporation to indemnify a present or former director or officer of the
corporation (and certain other persons serving at the request of the corporation
in related capacities) for liabilities, including legal expenses, arising by
reason of service in such capacity if such person shall have acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and in any criminal proceeding if such person had
no reasonable cause to believe his conduct was unlawful. However, in the case of
actions brought by or in the right of the corporation, no indemnification may be
made with respect to any matter as to which such director or officer shall have
been adjudged liable, except in certain limited circumstances.
Article VII of the Company's Articles of Incorporation provides that the
Company shall indemnify any present or former director or officer of the Company
(and certain other persons serving at the request of the Company in related
capacities) for liabilities incurred in connection with litigation and by reason
of service in such capacity, except in relation to matters as to which he shall
be adjudged in such action to be liable for negligence or misconduct in the
performance of his duties.
Article VIII of the Company's bylaws provides that the Company shall
indemnify its officers and directors to the fullest extent permitted by law. The
Company maintains a standard policy of directors and officers liability
insurance covering directors and officers of the Company with respect to
liabilities incurred as a result of their service in such capacities.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Proposed form of Underwriting Agreement[dagger]
4.1 Company's Amended and Restated Articles of Incorporation (filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q dated June 30, 1995 and incorporated herein by reference).
4.2 Company's Amended Bylaws (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1985 and incorporated herein by reference).
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. as to the validity of the Common
Stock being registered.[dagger]
10.27 Revolving Credit Agreement dated October 26, 1995 by and between CAC Acquisition, Inc. and NationsBank of
Florida, N.A.[dagger]
10.28 Letter Agreement dated January 1, 1996 from Rheem Manufacturing Company related to the Subscription and
Shareholder Agreements of Gemaire Distributors, Inc., Heating & Cooling Supply, Inc. and Comfort
Supply, Inc.[dagger]
10.29 Stock Exchange Agreement and Plan of Reorganization dated February 6, 1996 by and between Watsco, Inc.
and Rheem Manufacturing Company.*
23.1 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (included in its opinion filed as
Exhibit 5.1).[dagger]
23.2 Consent of Arthur Andersen LLP*
23.3 Consent of Rhea & Ivy, P.L.C.*
</TABLE>
- ------------------------
* Filed herewith.
[dagger] Previously filed.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or
II-2
<PAGE>
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
(3) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Miami, State of Florida, on February
7, 1996.
WATSCO, INC.
By: /s/ RONALD P. NEWMAN
Ronald P. Newman, Chief Financial
Officer, Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<C> <S> <C>
/s/ ALBERT H. NAHMAD Chairman of the Board (principal executive February 7, 1996
Albert H. Nahmad officer)
/s/ RONALD P. NEWMAN Chief Financial Officer, Secretary and February 7, 1996
Ronald P. Newman Treasurer (principal financial and
accounting officer)
/s/ D. A. COAPE-ARNOLD Director February 7, 1996
D. A. Coape-Arnold
/s/ DAVID B. FLEEMAN Director February 7, 1996
David B. Fleeman
/s/ JAMES S. GRIEN Director February 7, 1996
James S. Grien
/s/ PAUL F. MANLEY Director February 7, 1996
Paul F. Manley
/s/ BOB L. MOSS Director February 7, 1996
Bob L. Moss
/s/ ROBERTO MOTTA Director February 7, 1996
Roberto Motta
/s/ ALAN H. POTAMKIN Director February 7, 1996
Alan H. Potamkin
</TABLE>
II-4
EXHIBIT 10.29
STOCK EXCHANGE AGREEMENT
AND PLAN OF REORGANIZATION
THIS STOCK EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is made and entered into as of the ___ day of February, 1996, by
and between WATSCO, INC., a Florida corporation ("Watsco"), and RHEEM
MANUFACTURING COMPANY, a Delaware corporation ("Rheem").
R E C I T A L S
A. Rheem currently owns (i) 200 shares of stock of Comfort Supply,
Inc., a Delaware corporation (the "Comfort Supply Stock"), (ii) 20 shares of
stock of Gemaire Distributors, Inc., a Florida corporation (the "Gemaire
Stock"), and (iii) 500 shares of stock of Heating & Cooling Supply, Inc., a
California corporation (the "Heating & Cooling Stock" and together with the
Comfort Supply Stock and the Gemaire Stock, collectively, the "Stock").
B. Rheem desires to transfer, convey, assign, deliver and set over unto
Watsco all of the Stock in exchange for that number of shares of common stock,
$.50 par value per share, of Watsco, whose value equals Twenty-Three Million and
No/100 Dollars ($23,000,000.00) (the "Watsco Stock"), as determined by the
average of the closing sales price on the New York Stock Exchange for a share of
common stock, $.50 par value per share, of Watsco for the ten (10) trading days
preceding the Closing Date (as hereinafter defined).
C. Watsco desires to issue, transfer, convey, assign, deliver and set
over unto Rheem the Watsco Stock in exchange for the Stock.
D. Upon the execution of this Agreement and the consummation of the
transactions contemplated hereby, Watsco will own all of the issued and
outstanding shares of common stock of Comfort Supply, Inc., Gemaire
Distributors, Inc. and Heating & Cooling Supply, Inc.
A G R E E M E N T
In consideration of the premises, the respective mutual agreements,
covenants, representations and warranties herein contained, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto intending to be bound legally, hereby agree as
follows:
1. EXCHANGE OF STOCK.
1.1 TRANSFER OF THE STOCK. At the Closing (as hereinafter defined),
Rheem shall transfer, convey, assign and set over unto Watsco all of the Stock
and deliver to Watsco certificates representing the Stock, together with
appropriate stock powers, in form and substance satisfactory to Watsco and its
legal counsel.
<PAGE>
1.2 ISSUANCE OF THE WATSCO STOCK. At the Closing, Watsco shall
instruct its transfer agent to issue, transfer, convey, assign and set over unto
Rheem all of the Watsco Stock and deliver to Rheem certificates representing
Watsco Stock, together with appropriate stock powers, if necessary, in form and
substance satisfactory to Rheem and its legal counsel.
1.3 NO FRACTIONAL SECURITIES. No certificates or scrip representing
fractional shares of Watsco Stock shall be issued upon the exchange of
certificates pursuant to this Section 1. In lieu of any such fractional
securities: (i) Rheem shall be issued one additional share of Watsco Stock in
the event that Rheem is entitled to receive, under the terms of this Agreement,
a fractional share of Watsco Stock which is equal to or greater than 50/100 of
one share and (ii) Rheem shall not be entitled to any further consideration,
whether in the form of stock or cash, in the event Rheem is entitled to receive,
under the terms of this Agreement, a fractional share of Watsco Stock which is
less than 50/100 of one share.
2. CLOSING.
2.1 The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place on February 29, 1996 (or, if the conditions set
forth in Sections 7 and 8 hereof have not been satisfied or waived by such date,
no later than three (3) business days after all such conditions have been
satisfied or waived), at the offices of Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A., 1221 Brickell Avenue, Miami, Florida 33131, at 10:00
a.m., or at such other place and time as the parties hereto may agree. The date
upon which the Closing occurs is hereinafter referred to as the "Closing Date".
2.2 DELIVERIES BY RHEEM. At or prior to the Closing, Rheem shall
deliver (or cause to be delivered) to Watsco:
(i) certificates representing all of the Stock, together with
appropriate stock powers; and
(ii) all other documents, instruments, agreements and all
certificates and other evidence as Watsco or its counsel may reasonably request
as to the satisfaction of the conditions to Watsco's obligations set forth
herein.
2.3 DELIVERIES BY WATSCO. At or prior to the Closing, Watsco shall
deliver (or cause to be delivered) to Rheem:
(i) certificates representing all of the Watsco Stock,
together with appropriate stock powers, if necessary; and
(ii) all other documents, instruments, agreements, certificates
and other evidence as Rheem or its counsel may reasonably request as to the
satisfaction of the conditions to Rheem's obligations set forth herein.
- 2 -
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF RHEEM. In order to induce Watsco
to enter into this Agreement, and to consummate the transactions contemplated
hereby, Rheem hereby represents and warrants to Watsco as follows:
3.1 STATUS OF RHEEM. Rheem is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Rheem has
all necessary corporate power and authority to own, manage, lease and hold its
properties and to execute, deliver and perform its obligations under this
Agreement and consummate the transactions contemplated hereby.
3.2 AUTHORITY; APPROVAL; ENFORCEABILITY. The execution, delivery and
performance by Rheem of this Agreement, and of each and every agreement,
document and instrument of conveyance contemplated hereby, and the consummation
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action. This Agreement is, and when
executed and delivered all such other agreements, documents and instruments
contemplated by this Agreement will be, valid, binding and enforceable against
Rheem in accordance with their respective terms, except to the extent that
enforcement thereof may be limited by applicable bankruptcy, reorganization,
insolvency or moratorium laws, or other laws or principles of equity affecting
the enforcement of creditors' rights. All persons who have executed this
Agreement on behalf of Rheem and who will execute any other agreement, document
or instrument contemplated by this Agreement on behalf of Rheem have been duly
authorized to do so by all necessary corporate action.
3.3 NO CONFLICT; NO CONSENTS REQUIRED. Neither the execution and
delivery by Rheem of this Agreement nor the consummation by Rheem of the
transactions contemplated hereby, nor compliance by Rheem with any of the
provisions hereof, will (i) conflict with or result in a breach of any provision
of the certificate of incorporation, bylaws or any other organizational document
of Rheem; (ii) result in the creation of a lien, charge or encumbrance upon any
of Rheem's assets; (iii) breach, conflict with, constitute a default (with or
without the giving of notice or the lapse of time or both) with respect to, or
result in the cancellation, termination or acceleration of the performance of
any obligations or indebtedness under the terms and conditions of, any contract,
agreement, commitment, indenture, mortgage, note, bond, license or other
instrument or obligation to which Rheem is now a party or by which Rheem or its
properties or assets may be bound or affected; (iv) violate any law or any rule
or regulation of any administrative agency or governmental body, or any
judgment, order, writ, injunction or decree of any court, administrative agency
or governmental body to which Rheem or its assets are or may be subject; or (v)
except for the Hart-Scott-Rodino filing and the consent of Rheem's lenders,
require Rheem to obtain or make any waiver, consent, approval or authorization
of, or registration, declaration, notice or filing with, any private
non-governmental third party or any federal, state, local or other governmental
authority. No approval, authorization, consent or other order or action of, or
filing by Rheem with any court, administrative agency, governmental authority or
any other person is required for the execution and delivery by Rheem of this
Agreement or the consummation by Rheem of the transactions contemplated hereby.
- 3 -
<PAGE>
3.4 TITLE TO STOCK. Rheem owns all right, title and interest in and
to the Stock, free and clear of any security interests, charges, liens or other
encumbrances of any kind whatsoever, and the Stock represents all of Rheem's
right, title and interest in Comfort Supply, Inc., Gemaire Distributors, Inc.
and Heating & Cooling Supply, Inc. At the Closing, Rheem will transfer, convey,
assign and deliver, and Watsco will acquire, good, valid and marketable title to
the Stock, free and clear of all security interests, charges, liens or other
encumbrances of any kind whatsoever.
3.5 SECURITIES MATTERS.
3.5.1 Rheem is acquiring the Watsco Stock issuable in connection
with the transactions contemplated hereby for its own account and not with a
view to, or for sale in connection with, any "distribution," as such term is
used in Section 2(11) of the Securities Act of 1933, as amended (the "Securities
Act"), of any Watsco Stock in violation of the Securities Act.
3.5.2 Rheem is an "accredited investor," as that term is defined
in Rule 501(a) of Regulation D promulgated under the Securities Act.
3.5.3 Rheem understands that (i) the Watsco Stock issued in
connection with the transactions contemplated hereby will be restricted
securities within the meaning of Rule 144 of the Securities Act ("Rule 144");
(ii) such securities are not registered; (iii) such securities must be held
indefinitely and that no transfer of such securities may be made by Rheem unless
(A) the sale of such securities has been registered under the Securities Act and
any applicable state securities laws, or (B) an exemption from registration is
available under applicable state securities laws and the Securities Act,
including in accordance with the terms and conditions of Rule 144; and (iv) in
any event, the exemption from registration under Rule 144 will not be available
unless such securities have been beneficially owned for at least two years.
3.5.4 Rheem understands that the certificates representing the
Watsco Stock issued pursuant to this Agreement shall bear a legend substantially
as follows:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 or any applicable state law. They may
not be offered for sale, sold or transferred without (1) registration
under the Securities Act of 1933 and any applicable state law, or (2)
at holder's expense, an opinion (satisfactory to Rheem) of counsel
(satisfactory to Rheem) that registration is not required."
3.5.5 Rheem (i) has received and reviewed (x) Watsco's Annual
Report on Form 10-K for the year ended December 31, 1994, (y) Watsco's Quarterly
Report on Form 10-Q for the nine (9) months ended September 30, 1995 and (z) the
annual and other
- 4 -
<PAGE>
periodic reports, special reports and registration statements filed by Watsco
with the Securities and Exchange Commission and/or any other securities exchange
during the past two (2) years, and (ii) has been afforded, prior to execution of
this Agreement, the opportunity to ask questions of, and receive answers from
Watsco, and to obtain any additional information relating to the transactions
contemplated hereby, to the extent Watsco possesses such information or could
have acquired it without unreasonable effort or expense, and in general has had
access to all information Rheem has deemed material to its decision to approve
the transaction contemplated hereby.
3.6 FAMILIARITY WITH WATSCO. Rheem is familiar with and
knowledgeable with regard to the operations of Watsco and its assets, properties
and businesses.
3.7 ACCURACY OF INFORMATION. None of the representations or
warranties by Rheem in this Agreement or in any statement or certificate
furnished or to be furnished to Watsco pursuant to the terms of this Agreement
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact, necessary to make the statement contained
therein not misleading or necessary in order to provide Watsco with complete and
accurate information in respect of all of the properties, assets and affairs of
Rheem.
4. REPRESENTATIONS AND WARRANTIES OF WATSCO. In order to induce Rheem
to enter into this Agreement, and to consummate the transactions contemplated
hereby, Watsco hereby represents and warrants to Rheem as follows:
4.1 STATUS OF WATSCO. Watsco is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida.
Watsco has all requisite corporate power and authority to own, manage, lease and
hold its properties and to execute, deliver and perform its obligations under
this Agreement and consummate the transactions contemplated hereby.
4.2 AUTHORITY. The execution, delivery and performance by Watsco of
this Agreement, and of each and every agreement, document and instrument
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action.
This Agreement is, and when executed and delivered all such agreements,
documents and instruments contemplated by this Agreement will be, valid, binding
and enforceable against Watsco in accordance with their respective terms, except
to the extent that enforcement thereof may be limited by applicable bankruptcy,
reorganization, insolvency or moratorium laws, or other laws or principles of
equity affecting the enforcement of creditors' rights. All persons who have
executed this Agreement on behalf of Watsco and who will execute any other
agreement, document or instrument contemplated by this Agreement on behalf of
Watsco have been duly authorized to do so by all necessary corporate action.
4.3 NO CONFLICT. Neither the execution and delivery by Watsco of
this Agreement nor the consummation by Watsco of the transactions contemplated
hereby, nor
- 5 -
<PAGE>
compliance by Purchaser with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of the articles of incorporation,
bylaws or any other organizational document of Watsco, (ii) result in the
creation of a lien, charge or encumbrance upon any of Watsco's assets; (iii)
breach, conflict with, constitute a default (with or without the giving of
notice or the lapse of time or both) with respect to, or result in the
cancellation, termination or acceleration of the performance of any obligations
or indebtedness under the terms and conditions of, any contract, agreement,
commitment, indenture, mortgage, note, bond, license or other instrument or
obligation to which Watsco is now a party or by which Watsco or its properties
or assets may be bound or affected; (iv) violate any law or any rule or
regulation of any administrative agency or governmental body, or any judgment,
order, writ, injunction or decree of any court, administrative agency or
governmental body to which Watsco or its assets are or may be subject; or (v)
except for the Hart-Scott-Rodino filing and any necessary filing with the New
York Stock Exchange, require Watsco to obtain or make any waiver, consent,
approval or authorization of, or registration, declaration, notice or filing
with, any private non-governmental third party or any federal, state, local or
other governmental authority. No approval, authorization, consent or other order
or action of, or filing by Watsco with any court, administrative agency,
governmental authority or any other person is required for the execution and
delivery by Watsco of this Agreement or the consummation by Watsco of the
transactions contemplated hereby.
4.4 TITLE TO WATSCO STOCK. The Watsco Stock (i) has been duly
authorized and validly issued, (ii) is fully paid and non-assessable and (iii)
is free and clear of any security interests, charges, liens or encumbrances of
any kind whatsoever. At the Closing, Watsco will transfer and convey, and Rheem
will acquire, good, valid and marketable title to the Watsco Stock, free and
clear of all security interests, charges, liens and other encumbrances of any
kind whatsoever.
4.5 SECURITIES MATTERS.
4.5.1 Watsco is acquiring the Stock transferred in connection
with the transactions contemplated hereby for its own account and not with a
view to, or for sale in connection with, any "distribution," as such term is
used in Section 2(11) of the Securities Act of 1933, as amended (the "Securities
Act"), of any Stock in violation of the Securities Act.
4.5.2 Watsco is an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
4.5.3 Watsco understands that (i) the Stock issued in connection
with the transactions contemplated hereby are not registered, and (ii) such
securities must be held indefinitely and that no transfer of such securities may
be made by Watsco unless (A) the sale of such securities has been registered
under the Securities Act and any applicable state securities laws, or (B) an
exemption from registration is available under the Securities Act and applicable
state securities laws.
- 6 -
<PAGE>
4.5.4 Watsco understands that the certificates representing the
Stock issued pursuant to this Agreement shall bear a legend substantially as
follows:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 or any applicable state law. They may
not be offered for sale, sold or transferred without (1) registration
under the Securities Act of 1933 and any applicable state law, or (2)
at holder's expense, an opinion (satisfactory to Watsco) of counsel
(satisfactory to Watsco) that registration is not required."
4.5.5 Watsco has been afforded, prior to execution of this
Agreement, the opportunity to ask questions of, and receive answers from Rheem
and to obtain any additional information relating to the transactions
contemplated hereby, to the extent Rheem possesses such information or could
have acquired it without unreasonable effort or expense, and in general has had
access to all information Watsco has deemed material to its decision to approve
the transactions contemplated hereby.
4.6 FAMILIARITY WITH COMPANIES. Watsco is actively involved in the
operation of Comfort Supply, Inc., Gemaire Distributors, Inc. and Heating &
Cooling Supply, Inc. and is intimately familiar with and knowledgeable with
regard to the assets and businesses of Comfort Supply, Inc., Gemaire
Distributors, Inc. and Heating & Cooling Supply, Inc.
4.7 ACCURACY OF INFORMATION. None of the representations or
warranties by Watsco in this Agreement or in any statement or certificate
furnished or to be furnished to Rheem pursuant to the terms of this Agreement
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact, necessary to make the statement contained
therein not misleading or necessary in order to provide Rheem with complete and
accurate information in respect of all of the properties, assets and affairs of
Watsco.
4.8 TAX MATTERS.
4.8.1 Heating & Cooling Supply, Inc. has no plan or intention to
acquire or redeem the Series A Preferred Stock.
4.8.2 Neither Gemaire Distributors, Inc., Heating & Cooling
Supply, Inc., nor Comfort Supply, Inc., has any plans or intentions to issue
additional shares of its stock to the extent doing so would result in Watsco
losing control of Gemaire Distributors, Inc., Heating & Cooling Supply, Inc., or
Comfort Supply, Inc., within the meaning of Section 368(c) of the Internal
Revenue Code of 1986, as amended.
4.8.3 Watsco has no plan or intention to liquidate or merge
Gemaire Distributors, Inc., Heating & Cooling Supply, Inc., or Comfort Supply,
Inc. into another corporation; to cause Gemaire Distributors, Inc., Heating &
Cooling Supply, Inc., or Comfort
- 7 -
<PAGE>
Supply, Inc., to sell or otherwise dispose of any of its assets, except for
dispositions in the ordinary course of business; or to sell or otherwise dispose
of any of the stock of Gemaire Distributors, Inc., Heating & Cooling Supply,
Inc., or Comfort Supply, Inc., except for transfers described in Section
368(a)(2)(C) of the Internal Revenue Code of 1986, as amended.
4.8.4 It is the present plan and intention of Watsco either to
(i) continue the respective historic businesses of Gemaire Distributors, Inc.,
Heating & Cooling Supply, Inc., and Comfort Supply, Inc., or (ii) use a
significant portion of their respective historic business assets in a business.
5. COVENANTS AND AGREEMENTS. Watsco and Rheem hereby covenant and agree
as follows:
5.1 TERMINATION OF EXISTING AGREEMENTS. Upon consummation of the
Closing, each of the Subscription and Shareholders' Agreements between Watsco
and Rheem in respect of Comfort Supply, Inc., Gemaire Distributors, Inc. and
Heating & Cooling Supply, Inc., each of which is attached hereto as Exhibit "A"
(collectively, the "Subscription and Shareholders' Agreements") , shall
terminate and be of no further force and effect except as otherwise provided in
Sections 5.2 and 5.3 of this Agreement.
5.2 PUT AND CALL.
5.2.1 Watsco and Rheem hereby agree that the "put" and "call"
provisions contained in Section 3 of each of the Subscription and Shareholders'
Agreements shall continue to be valid, binding and enforceable obligations of
each of Watsco and Rheem and, except as provided below, no such "put" or "call"
shall be exercisable prior to the tenth (10th) anniversary of the date of this
Agreement, if not terminated sooner:
(a) Notwithstanding anything to the contrary contained
in this Agreement, unless otherwise mutually agreed by
Watsco and Rheem, Rheem shall have the right to exercise a
"call" during the next succeeding Election Period (as
defined in the Subscription and Shareholders Agreements)
with respect to the corporation in question in the event
of:
(i) The appointment of a trustee, receiver or other
custodian for all or any substantial portion of
the property of Gemaire Distributors, Inc.,
Heating & Cooling Supply, Inc., Comfort Supply,
Inc., and/or Watsco; or
(ii) A judicial finding that Gemaire Distributors,
Inc., Heating & Cooling Supply, Inc.,
- 8 -
<PAGE>
Comfort Supply, Inc. and/or Watsco is insolvent
or bankrupt; or
(iii) An assignment by Gemaire Distributors, Inc.,
Heating & Cooling Supply, Inc., Comfort Supply,
Inc. and/or Watsco for the benefit of creditors;
or
(iv) An irreconcilable violation of any Distributor
Agreement (Distributor Agreement is defined
hereinafter in Section 5.10) with Rheem by
Comfort Supply, Inc., Gemaire Distributors, Inc.
and/or Heating & Cooling Supply, Inc.; or
(v) Watsco takes any of the following actions with
respect to Comfort Supply, Inc., Gemaire
Distributors, Inc., or Heating & Cooling Supply,
Inc., without the express prior written consent
of Rheem:
(I) Any change in the number of members of the
Board of Directors of Comfort Supply,
Inc., Gemaire Distributors, Inc., and/or
Heating & Cooling Supply, Inc., from that
existing on the date of this Agreement;
(II) Any violation of Section 1.4 of the
Subscription and Shareholders' Agreements,
which sections shall continue to be valid,
binding and enforceable obligations of
each of Watsco and Rheem (except that in
the case of Section 1.4 of the
Subscription and Shareholders' Agreement
for Heating & Cooling Supply, Inc., Watsco
shall have the right to appoint the
successor to O.M. Butler).
(III) The adoption, amendment or repeal of the
Bylaws of Comfort Supply,
- 9 -
<PAGE>
Inc., Gemaire Distributors, Inc., and/or
Heating & Cooling Supply, Inc., in
existence on the date of this Agreement;
(IV) The dissolution, liquidation or winding up
of Comfort Supply, Inc., Gemaire
Distributors, Inc., Heating & Cooling
Supply, Inc. and/or Watsco;
(V) Any amendment to the Articles of
Incorporation of Comfort Supply, Inc.,
Gemaire Distributors, Inc., and/or Heating
& Cooling Supply, Inc.;
(VI) Any change in the business materially away
from distributing heating, ventilating,
air conditioning and cooling and
refrigeration equipment, parts and
supplies by Gemaire Distributors, Inc.,
Heating & Cooling Supply, Inc. and/or
Comfort Supply, Inc.; or
(VII) Voluntary submission to receivership,
bankruptcy or any similar status,
insolvency, or partial or complete
dissolution or liquidation or assignment
for the benefit of creditors by Gemaire
Distributors, Inc., Heating & Cooling
Supply, Inc., and/or Comfort Supply, Inc.
(b) Notwithstanding anything to the contrary contained in
this Agreement, unless otherwise mutually agreed by Watsco
and Rheem, Rheem shall have the right to exercise the
"call" with respect to Heating & Cooling Supply, Inc.
during the next succeeding Election Period (as defined in
the Subscription and Shareholders' Agreements) in the
event that Watsco takes any of the following actions with
respect to Heating & Cooling Supply, Inc. without the
express prior written consent of Rheem:
- 10 -
<PAGE>
(i) Any assignment, transfer, sale, lease or
disposition of the business or assets of Heating
& Cooling Supply, Inc., whether now owned or
hereafter acquired, other than in the ordinary
course of business; or
(ii) Any sale, amalgamation, merger, reorganization,
spin off, split up or consolidation, affiliation
with, participation in ownership of or joint
venture which is precluded under Section
5.2.1(a)(v)(VI); or
(iii) Any investment by Heating & Cooling Supply, Inc.
outside the ordinary course of business;
(iv) Voluntary submission to receivership, bankruptcy
or any similar status, insolvency, or partial or
complete dissolution or liquidation or
assignment for the benefit of creditors by
Heating & Cooling Supply, Inc.;
(v) Any liens, charges or encumbrances upon any of
its assets or property whether now owned or
hereafter acquired, other than as required under
credit or loan agreements or with vendors other
than in the ordinary course of business by
Heating & Cooling Supply, Inc.; or
(vi) Any third party debt unrelated to working
capital needs of Heating & Cooling Supply, Inc.
and such debt shall reduce the purchase price
under Section 3.3.1 (of the appropriate
Subscription and Shareholders' Agreement) and
which adjustment for the purchase price will be
agreed upon prior to the incurrence of the debt.
Watsco and Rheem hereby agree that paragraphs (i), (iii),
(iv) and (v) only apply to Heating & Cooling Supply, Inc.
until the satisfaction of and payment of, when
appropriate:
- 11 -
<PAGE>
(x) the preferred shares issued by Heating & Cooling
Supply Inc., plus accrued dividends thereon; and
(y) the Note owed by Heating & Cooling Supply, Inc.
to Rheem plus any accrued interest thereon.
(c) Notwithstanding anything to the contrary contained in
this Agreement, unless otherwise mutually agreed by Watsco
and Rheem, Watsco shall have the right to exercise a "put"
during the next succeeding Election Period (as defined in
the Subscription and Shareholders' Agreements) in the
event of:
(i) The appointment of a trustee, receiver or other
custodian for all or any substantial portion of
the property of Rheem; or
(ii) A judicial finding that Rheem is insolvent or
bankrupt; or
(iii) An assignment by Rheem for the benefit of
creditors; or
(iv) The dissolution or liquidation of Rheem; or
(v) Rheem impedes the long-term competitiveness of
Comfort Supply, Inc., Gemaire Distributors,
Inc., or Heating & Cooling Supply, Inc., in
terms of quality, price, or delivery; or
(vi) The voluntary submission to receivership,
bankruptcy or any similar status, insolvency or
partial or complete dissolution or liquidation
or assignment for the benefit of creditors by
Rheem.
(d) In the event of an irreconcilable dispute over whether
Rheem impedes the long-term competitiveness of Comfort
Supply, Inc., Gemaire Distributors, Inc., or Heating &
Cooling Supply, Inc., in terms of quality, price or
delivery or where there is an irreconcilable violation of
the Distribution Agreements, the parties agree to be bound
to the dispute resolution procedures provided in Section
5.11.3 herein.
- 12 -
<PAGE>
5.2.2 The "put" and "call" provided for in Section 3 of each of
the Subscription and Shareholders' Agreements and this Section 5.2 shall
terminate on the tenth (10th) anniversary of the date of this Agreement, if not
terminated sooner.
5.2.3 REFINANCING. Watsco and Rheem hereby agree that the "put"
and "call" formulae shall be modified at such time as Watsco replaces any
existing bank debt at the operating or subsidiary level with intercompany debt.
5.3 INVENTORY PURCHASE. Watsco and Rheem hereby agree that Section
3.7 of the Subscription and Shareholders' Agreements for Heating & Cooling
Supply, Inc. and Comfort Supply, Inc. shall continue to be valid, binding and
enforceable obligations of each of Watsco and Rheem.
5.4 FINANCIAL INFORMATION AND ASSURANCE.
5.4.1 During the term of this Agreement, Watsco shall provide
Rheem with a copy of (i) its annual financial statements, together with the
auditor's report, upon completion thereof, but in no event later than March 30
and (ii) the annual and other periodic reports, special reports and registration
statements to be filed by Watsco with the Securities and Exchange Commission
and/or any other securities exchange at the same time that it files such reports
and registration statements with the governmental authorities and/or securities
exchanges, unless prohibited by law.
5.4.2 Rheem shall notify Watsco at any time during the term of
this Agreement that Rheem determines in good faith, or otherwise becomes aware
that (a) it is financially incapable, of fulfilling its "put" and "call"
obligations under Section 3 of each of the Subscription and Shareholders'
Agreements and Section 5.2 of this Agreement or (b) an Event of Default as
defined in the Credit Agreement to which it is a party has occurred and is
continuing. Upon receipt of any such notice or if Rheem fails to provide Watsco
with the information specified in the first sentence of this Section 5.4.2,
Watsco shall have the right to terminate the "put" and "call" provisions
contained in Section 3 of each of the Subscription and Shareholders' Agreements
and Section 5.2 of this Agreement.
5.5 WATSCO AND RHEEM OPTIONS.
5.5.1 WATSCO OPTION. In the event that Watsco has the right to
accelerate a "put" pursuant to Section 5.2 of this Agreement, Watsco may elect
either to (i) exercise its right to accelerate such "put" or (ii) terminate the
"put" and "call" provisions contained in Section 3 of each of the Subscription
and Shareholders' Agreements and Section 5.1 of this Agreement.
5.5.2 RHEEM OPTION. In the event that Rheem has the right to
accelerate a "call" pursuant to Section 5.2 of this Agreement, Rheem may elect
either to (i) exercise its right to accelerate such "call" or (ii) terminate the
put and "call" provisions
- 13 -
<PAGE>
contained in Section 3 of each of the Subscription and Shareholders' Agreements
and Section 5.1 of this Agreement.
5.6 WATSCO BOARD OF DIRECTORS. Watsco agrees that, after the Closing
Date and until such time as Rheem owns less than ten percent (10%) of the issued
and outstanding shares of common stock of Watsco, the chief executive officer of
Rheem shall be listed in Watsco's proxy as a nominee to Watsco's Board of
Directors.
5.7 ENSURE CONDITIONS MET; HART-SCOTT-RODINO FILINGS. Each of Watsco
and Rheem shall use all reasonable efforts to cause the conditions to Watsco's
and Rheem's obligations at Closing to be satisfied on or before the Closing
Date, and specifically to use all reasonable efforts to (i) take, or cause to be
taken, all actions necessary to comply promptly with all legal requirements
which may be imposed on such party with respect to the transactions contemplated
by this Agreement and to consummate the transactions contemplated by this
Agreement, and (ii) to obtain (and to cooperate with the other party to obtain)
any consent, authorization, order or approval of, or any exemption by, any
governmental entity and/or any private third party which is required to be
obtained or made by such party in connection with the transactions contemplated
by this Agreement (including, without limitation, the consent of Rheem's
lenders). The parties hereto specifically agree to promptly prepare and file
their respective Notification and Report Forms under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act"), in accordance with
applicable law, if such filings are required under applicable law with respect
to this Agreement and the transactions contemplated hereby. Each party hereto
shall furnish to the other party such information and assistance as such other
party may reasonably request in connection with the preparation of any such HSR
filings or submissions and provide the others with copies of all correspondence,
filings or communications (or memoranda setting forth the substance thereof)
between such party or any of its representatives, on the one hand, and any
governmental agency or authority or members of their respective staffs, on the
other hand, with respect to this Agreement and the transactions contemplated
hereby.
5.8 WATSCO FILINGS. Watsco has heretofore delivered to Rheem copies
of (i) Watsco's Annual Reports on Form 10-K for the fiscal years ended December
31, 1994 and December 31, 1993, (ii) Watsco's Quarterly Report on Form 10-Q for
the nine (9) months ended September 30, 1995 and (iii) the annual and other
periodic reports, special reports and registration statements filed by Watsco
with the Securities and Exchange Commission and/or any other securities exchange
during the past two (2) years. As of their respective dates, such reports
complied in all material respects with all applicable requirements of the
Securities Act or the Securities Exchange Act of 1934, as applicable, and did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Watsco included in such reports have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto and, as to unaudited statements, except for the
- 14 -
<PAGE>
absence of notes thereto), and present fairly in all material respects the
financial position of Watsco as of the dates thereof and the results of Watsco's
operations for the periods then ended (subject, in the case of unaudited interim
financial statements, to year-end adjustments, all of which adjustments will
consist of normal recurring accruals consistent with past practice).
5.9 SUPPLEMENTARY ACTION. If at any time after the Closing Date, any
further assignments or assurances in law or any other things are necessary or
desirable to carry out the provisions of this Agreement, the officers and
directors of Watsco and Rheem are hereby authorized and empowered, in the name
of and on behalf of Watsco or Rheem, as the case may be, to execute and deliver
any and all things necessary or proper to vest or to perfect or confirm title to
the Stock and/or the Watsco Stock in Watsco and Rheem, respectively, and
otherwise to carry out the purposes and provisions of this Agreement.
5.10 EXTENSION OF DISTRIBUTOR AGREEMENTS. Subject to Section 5.11.1
of this Agreement, each of the existing Rheem Manufacturing Distributor
Agreements with Comfort Supply, Inc., Gemaire Distributors, Inc. and Heating &
Cooling Supply, Inc., copies of which are attached hereto as Exhibit "B" (each a
"Distributor Agreement" and collectively, the "Distributor Agreements") shall be
extended for an initial term of ten (10) years which shall expire on the tenth
(10th) anniversary of the date of this Agreement. Thereafter, subject to Section
5.11.1 hereof, the Distributor Agreements shall be "evergreened" since they will
be renewed automatically after the initial term for additional successive terms
of one (1) year each.
5.11 MODIFICATION OF DISTRIBUTOR AGREEMENTS. Upon the termination of
the "put" and "call" obligations contained in Section 3 of each of the
Subscription and Shareholders' Agreements and Section 5.2 of this Agreement,
Watsco and Rheem hereby agree to modify, in writing, the Distributor Agreements,
as follows:
5.11.1 Watsco and Rheem hereby agree that the Distributor
Agreements shall terminate in the event that Rheem impedes the long-term
competitiveness of Comfort Supply, Inc., Gemaire Distributors, Inc. or Heating &
Cooling Supply, Inc., in terms of quality, price or delivery.
5.11.2 Watsco and Rheem hereby agree that the Distributor
Agreements shall provide that "specific performance" shall be an available and
permitted remedy in the event of any irreconcilable violation of the Distributor
Agreements.
5.11.3 Watsco and Rheem hereby agree that the Distributor
Agreements shall provide that the following dispute resolution procedures shall
govern, in the order of priority set forth below, in the event there is an
irreconcilable dispute between Watsco and Rheem with respect to any of the
Distributor Agreements:
(a) The chief executive officers of Watsco and Rheem shall
attempt, in good faith, to resolve the dispute during the ten (10) day period
following the date on which such dispute becomes irreconcilable.
- 15 -
<PAGE>
(b) In the event that the chief executive officers of Watsco
and Rheem are unable to resolve the dispute within such ten (10) day period, the
dispute shall be submitted to an independent third party mediator to be agreed
upon by the chief executive officers of Watsco and Rheem (or the managing
partner of the Washington, D.C. offices of Price Waterhouse or another "big six"
accounting firm that is not used by or associated with either Rheem or Watsco in
the event that the chief executive officers of Watsco and Rheem are unable to
agree upon an independent third party mediator).
(c) In the event that Watsco or Rheem fails to implement the
decision made by the mediator in respect of the dispute within ten (10) days of
such decision, the other party shall have the right to a confession of judgment
to implement the decision of the mediator. Each of Watsco and Rheem hereby agree
to take any and all actions, and to cooperate with the other in any reasonably
requested manner, necessary to obtain any such confession of judgment.
5.12 TAX TREATMENT. Each of Watsco and Rheem intends for the
transaction contemplated by this Agreement to qualify as a tax-free
reorganization for federal income tax purposes and agrees to retain their own
independent legal counsel to advise them on the tax consequences of the
transaction contemplated by this Agreement. Each of Watsco and Rheem further
agrees to cooperate with the other to ensure, to the maximum extent possible,
that the transaction contemplated by this Agreement will qualify as a tax-free
reorganization for federal income tax purposes.
5.13 REGISTRATION RIGHTS. Rheem shall be entitled to registration
rights with respect to the Watsco Stock on the first to occur of (i) the second
(2nd) anniversary of the Closing Date or (ii) an event described in Section 5.5
has occurred.
6. INDEMNIFICATION BY WATSCO.
6.1 INDEMNIFICATION BY WATSCO. Watsco agrees to indemnify and hold
Rheem harmless from, against and in respect of the full amount of any and all
liabilities, damages, claims, deficiencies, assessments, losses, taxes,
penalties, interest, costs and expenses, including without limitation,
reasonable fees and disbursements of trial and appellate counsel arising from,
in connection with, or incident to any breach or violation of any of the
representations, warranties, covenants or agreements of Watsco contained in this
Agreement.
6.2 INDEMNIFICATION BY RHEEM. Rheem agrees to indemnify and hold
Watsco harmless from, against and in respect of the full amount of any and all
liabilities, damages, claims, deficiencies, assessments, losses, taxes,
penalties, interest, costs and expenses, including without limitation,
reasonable fees and disbursements of trial and appellate counsel arising from,
in connection with, or incident to any breach or violation of any of the
representations, warranties, covenants or agreements of Rheem contained in this
Agreement.
- 16 -
<PAGE>
6.3 CLAIMS FOR INDEMNIFICATION. A claim for indemnification pursuant
to Section 6.1 or Section 6.2 of this Agreement may be made by any indemnified
party at any time by the giving of written notice thereof to the indemnifying
party. The notice shall set forth in reasonable detail the basis upon which the
claim for indemnification is made.
6.4 DEFENSE OF CLAIMS. If any person or entity not a party to this
Agreement shall make any demand or claim, or file or threaten to file any
lawsuit, which demand, claim or lawsuit may result in any liability, damage or
loss to any indemnified party or that may cause liability to any indemnified
party as the result of, arising from, in connection with or incident to any
breach or violation of any representations, warranties, covenants, or agreements
contained in this Agreement, then in that event, after notice by the indemnified
party to the indemnifying party of the demand, claim or lawsuit, the
indemnifying party shall have the option, at its cost and expense, to retain
counsel to defend any demand, claim or lawsuit. Thereafter, the indemnified
party shall be permitted to participate in any defense at its own expense. If
the indemnifying party shall fail to respond within ten (10) days after receipt
of the written notice of any demand, claim or lawsuit, the indemnified party
shall retain counsel and conduct the defenses of the demand, claim or lawsuit as
it may in its discretion deem proper, at the cost and expense of the
indemnifying party. The indemnities from the indemnifying party to the
indemnified party shall include any liability, damage or losses the indemnified
party may suffer as the result of the demand, claim or lawsuit.
7. CONDITIONS TO RHEEM'S OBLIGATION TO CLOSE. Rheem's obligation to
consummate the transactions contemplated by this Agreement shall be subject to
each of the following:
7.1 The expiration or termination, at or prior to the Closing, of
the applicable Hart-Scott-Rodino waiting period.
7.2 The receipt of the consents of the Lenders.
7.3 The recapitalization of Heating & Cooling Supply, Inc., pursuant
to Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended, such
that after the recapitalization, the authorized capital stock of Heating &
Cooling Supply, Inc. shall be (i) 10,000 shares of Common Stock which shall be
entitled to vote on a one vote per share basis, 5,000 shares of which shall be
issued to Watsco and 5,000 shares of which shall be issued to Rheem and (ii)
2,000 shares of Series A Preferred Stock which shall be entitled to vote on a
one vote per share basis, all of which shall be issued to Rheem.
7.4 Heating & Cooling Supply, Inc., shall have permanently amended
its charter and the Certificate of Determination of Preferences, Series A to
reflect that each share of Series A Preferred Stock shall be entitled to vote on
a one vote per share basis.
8. CONDITIONS TO WATSCO'S OBLIGATION TO CLOSE. Watsco's obligation to
consummate the transactions contemplated by this Agreement shall be subject to
the expiration or termination, at or prior to Closing, of the applicable
Hart-Scott-Rodino waiting period.
- 17 -
<PAGE>
9. MISCELLANEOUS.
9.1 GOVERNING LAW; JURISDICTION; VENUE. This Agreement shall be
governed by and construed in accordance with the laws of the State of Florida.
The parties hereto agree that any action brought by Rheem in connection with the
transactions contemplated herein shall be brought in the Federal and Florida
state courts located in Dade County, Florida. The parties hereto agree that any
action brought by Watsco in connection with the transactions contemplated herein
shall be brought in the Federal and New York state courts located in New York
County, New York. Each of the parties hereto expressly consents to the
jurisdiction of the foregoing courts and waives any objection that such courts
constitute an inconvenient forum.
9.2 NO ASSIGNMENT. Except as set forth herein, no party hereto shall
assign its rights, or delegate its obligations, under this Agreement unless and
until any such assignment or delegation shall first be consented to in a written
instrument executed by the other parties hereto.
9.3 NOTICES. Any notices, requests, demands and other communications
required or permitted to be given hereunder shall be given in writing and shall
be deemed to have been duly given when delivered by hand or when deposited in
the United States mail, by registered or certified mail, postage prepaid, return
receipt requested, or by delivery to Federal Express priority service or another
reputable overnight courier service, addressed as follows:
If to Watsco: Watsco, Inc.
2665 South Bayshore Drive, Suite 901
Coconut Grove, Florida 33133
Attention: Ronald Newman
with a copy to: Greenberg, Traurig, Hoffman, Lipoff &
Quentel, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention: Martin Kalb, Esq.
If to Rheem: Rheem Manufacturing Company
405 Lexington Avenue, 22nd Floor
New York, New York 10174-0307
Attention: Gary L. Tapella
with a copy to: Rheem Manufacturing Company
405 Lexington Avenue, 22nd Floor
New York, New York 10174-0307
Attention: Vincent J. Debo, Esq.
- 18 -
<PAGE>
or to such other addresses as the parties hereto from time to time may give
written notice of, in accordance with this section, to the other parties.
9.4 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior agreements,
understandings, negotiations and discussions, both written and oral, between the
parties hereto with respect to the subject matter hereof.
9.5 AMENDMENT. This Agreement may not be amended or modified in any
way except by a written instrument executed by the parties hereto.
9.6 BENEFITS; BINDING EFFECT. This Agreement shall be for the
benefit of and binding upon the parties hereto, their respective heirs, personal
representatives, successors and assigns.
9.7 NO WAIVER. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar), nor shall any such waiver constitute a continuing
waiver unless otherwise expressly so provided.
9.8 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person,
firm, corporation, partnership, association or other entity, other than the
parties hereto and their respective heirs, personal representatives, legal
representatives and assigns, any rights or remedies under or by reason of this
Agreement.
9.9 SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law, and, in the event that any one or more of the words, phrases, sentences,
clauses, sections or subsections contained in this Agreement shall be declared
invalid, this Agreement shall be construed as if such invalid section or
sections, or subsection or subsections had not been inserted.
9.10 PRONOUNS AND PLURALS. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular forms of nouns, pronouns and words
shall include the plural and vice versa.
9.11 SECTION HEADINGS. The section and other headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of any provisions of this Agreement.
9.12 ATTORNEYS' FEES. If either party shall retain or engage an
attorney or attorneys to collect or enforce or protect its interest with respect
to this Agreement, the prevailing party shall be entitled to receive from the
other party payment of all costs and
- 19 -
<PAGE>
expenses of collection, enforcement, or protection, including reasonable
attorneys' fees, whether or not suit is brought and through all appeals.
9.13 COUNTERPARTS. This Agreement may be executed in multiple
counterparts and all such counter parts shall collectively constitute an
original Agreement, which may be evidenced by any one counterpart.
IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first above written.
WATSCO, INC., a Florida corporation
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
RHEEM MANUFACTURING
COMPANY, a Delaware corporation
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
- 20 -
<PAGE>
EXHIBIT "A"
SUBSCRIPTION AND SHAREHOLDERS' AGREEMENTS
A-1
<PAGE>
EXHIBIT "B"
RHEEM MANUFACTURING COMPANY DISTRIBUTOR AGREEMENTS
B-1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
February 6, 1996.
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 of
Watsco, Inc. of our report on our audit of the financial statements of Three
States Supply Company, Inc. We also consent to the reference to our firm under
the caption "Experts."
RHEA & IVY, P.L.C.
Memphis, Tennessee,
February 6, 1996.