As filed with the Securities and Exchange Commission on January 23, 1996
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
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 PROPOSED
TITLE OF EACH CLASS NUMBER OF SHARES MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.50 par value per share 1,610,000 shares $18.25 $29,382,500 $10,131.90
===========================================================================================================================
<FN>
(1) Includes 210,000 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.
</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 JANUARY 23, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
1,400,000 SHARES
WATSCO
COMMON STOCK
- --------------------------------------------------------------------------------
Of the 1,400,000 shares of common stock, par value $.50 per share (the "Common
Stock"), offered hereby, 1,000,000 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. See "Risk Factors -- Limited Voting Rights
of Common Shareholders; Control by Principal Shareholder."
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 January 19, 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 $18.375 and $18.375 per share, respectively.
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
===================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........... $ $ $ $
- -------------------------------------------------------------------------------------------------------------------
Total(3)............ $ $ $ $
===================================================================================================================
<FN>
(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 210,000 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.
PRUDENTIAL SECURITIES INCORPORATED
February , 1996
<PAGE>
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 independent
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 achieved internal sales growth
of 16% and 10% for 1994 and the nine months ended September 30, 1995,
respectively.
According to the Air Conditioning and Refrigeration Institute ("ARI"),
manufacturers' sales of residential central air conditioners in the United
States were approximately $4.3 billion in 1994 and have grown at an annual rate
of 5.5% 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 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").
Recently, the Company has accelerated its acquisition activity. 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>
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.
</TABLE>
<TABLE>
THE OFFERING
<S> <C>
Common Stock Offered by the:
Company.......................................... 1,000,000 shares
Selling Shareholders............................. 400,000 shares
Common Stock to be Outstanding after the Offering(1):
Common Stock..................................... 5,801,536 shares
Class B Common Stock............................. 1,480,681 shares
Total................................... 7,282,217 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
<FN>
- -----------------------------
(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"), and (ii) no
conversion of the Company's outstanding 10% Convertible Subordinated
Debentures due 1996 ("Convertible Debentures"), which are convertible
into 223,225 shares of Class B Common Stock.
</FN>
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------- --------------------------------------------
(UNAUDITED)
PRO FORMA,
PRO FORMA AS ADJUSTED
1992 1993 1994 1994(1) 1994 1995 1995(1)
----------- -------------- ----------- ----------- ------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.......... $194,633 $230,656 $283,731 $328,672 $213,884 $250,190 $286,424
Gross profit(2)......... 45,559 51,930 63,212 73,651 48,666 56,547 65,152
Operating income........ 9,930 11,390 15,043 17,108 12,630 15,527 17,337
Net income.............. 2,918 5,041(3) 5,762 7,159 4,923 6,033 7,277
Earnings per share:
Primary............... $.70 $.85(3) $.89 $.96 $.77 $.91 $.96
Fully diluted(4)...... .64 .82(3) .87 .94 .74 .87 .92
Supplemental earnings
per share:
Primary............... $.73(3)
Fully Diluted......... .71(3)
Weighted average
shares outstanding:
Primary............... 4,159 5,869 6,326 7,326 6,308 6,508 7,508
Fully diluted(4)...... 5,091 6,339 6,646 7,646 6,604 6,930 7,930
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------------
(UNAUDITED)
PRO FORMA,
AS
ACTUAL ADJUSTED(5)
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................... $ 44,985 $ 58,928
Total assets.............................................................................. 147,565 167,856
Long-term obligations..................................................................... 7,867 7,867
Minority interests........................................................................ 12,780 12,780
Shareholders' equity...................................................................... 52,604 69,504
<FN>
- -------------------------------------------------------
(1) Gives effect to the Three States acquisition and the issuance of 1,000,000
shares of Common Stock offered hereby by the Company as if they occurred as
of the beginning of the period shown. There can be no assurance that the
Three States acquisition will be consummated. See "Business - Three States
Acquisition."
(2) Total revenues less cost of sales and direct service expenses.
(3) 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. The supplemental earnings per share information
excluding this item is $.73 and $.71 for primary and fully diluted
earnings per share, respectively.
(4) Calculated assuming conversion of the Convertible Debentures.
(5) Gives effect to the Three States acquisition as if it occurred on September
30, 1995 and the sale of 1,000,000 shares of Common Stock offered hereby by
the Company at an assumed offering price of $18.375 per share (the last
reported sale price of the Common Stock on January 19, 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." Excluding the Three
States acquisition but giving effect to the offering as if it had occurred
on September 30, 1995, at that date the Company would have as adjusted
total assets of $150,956.
</FN>
</TABLE>
- 5 -
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk
factors, which can affect the Company's current position and future prospects,
in addition to the other information set forth in this Prospectus in connection
with an investment in the shares of Common Stock offered hereby.
DEPENDENCE ON KEY SUPPLIER. The Company's primary supplier for central
air conditioners is Rheem Manufacturing Company ("Rheem"). The Company's
distribution subsidiaries (other than Heating & Cooling Supply, Inc. ("Heating &
Cooling")) have distribution agreements with Rheem. Two of the distribution
agreements will expire in 1998, and the third can be terminated at any time
without cause by either party. Heating & Cooling's distribution agreement
expired in September 1995. Heating & Cooling continues to distribute Rheem
products, and the Company expects that Heating & Cooling will enter into a new
distribution agreement with Rheem on substantially similar economic terms. Under
the distribution agreements, certain of the distribution subsidiaries have
restrictions on the sale of other manufacturers' products. In 1994 and in 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. See "Business -- Relationship with Rheem
Manufacturing Company."
PUT/CALL AGREEMENTS WITH RHEEM MANUFACTURING COMPANY. Rheem owns an
equity interest in certain of the Company's distribution subsidiaries that
accounted for approximately 84% and 89% of the Company's revenues and operating
income (excluding unallocated corporate overhead), respectively, for the nine
months ended September 30, 1995. Rheem is a 20% shareholder of Gemaire
Distributors, Inc. ("Gemaire") and Comfort Supply, Inc. ("Comfort Supply") and a
50% shareholder of Heating & Cooling. Prior to January 1, 1996, shareholder
agreements between the Company and Rheem with respect to Gemaire, Heating &
Cooling and Comfort Supply provided that, annually (for Gemaire and Heating &
Cooling) and after December 31, 1996 (for Comfort Supply), for the 90-day period
(the "Election Period") immediately following the issuance of the Gemaire,
Heating & Cooling and Comfort Supply audited financial statements (which are
generally issued in March of each year), the Company can "put" its ownership
interest in any of Gemaire, Heating & Cooling and Comfort Supply to Rheem, and
Rheem can "call" the Company's ownership interest in any of Gemaire, Heating &
Cooling and Comfort Supply, at a price based on a valuation formula. On January
1, 1996, the Company and Rheem amended all three agreements delaying Rheem's
right to call Watsco's ownership interest in all three subsidiaries until the
Election Period in 1998. See Note 10 to the Company's Consolidated Financial
Statements.
An exercise of the put/call options can result in the sale of Gemaire,
Heating & Cooling or Comfort Supply at a price below the value of such
subsidiary at the time of sale. There can be no assurance that the Company will
be able to satisfactorily reinvest proceeds from the sale of a subsidiary to
acquire attractive businesses or that such proceeds would be sufficient to
acquire businesses comparable to the one(s) sold. In addition, the sale of the
subsidiaries would significantly decrease the Company's revenues and net income
from the date of any such sale. See "Business -- Relationship with Rheem
Manufacturing Company."
LIMITED VOTING RIGHTS OF COMMON SHAREHOLDERS; CONTROL BY PRINCIPAL
SHAREHOLDER. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders and holders of Class B Common Stock
are entitled to ten votes per share. The holders of Common Stock are currently
entitled to vote as a separate class to elect 25% of the Company's Board of
Directors and the holders of the Class B Common Stock are currently entitled to
vote as a separate class to elect the remaining 75% of the directors. Upon
completion of this offering, Albert H. Nahmad, the Company's Chairman and
President, and a limited partnership controlled by him, collectively will retain
beneficial ownership of approximately 6.9% of the Common Stock and 60.4% of the
Class B Common Stock and will have approximately 35.1% 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.
- 6 -
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares
of Common Stock offered by the Company hereby, assuming an offering price of
$18.375 per share (the last reported sale price of the Common Stock on January
19, 1996) and after deducting estimated underwriting discounts and commissions
and offering expenses payable by the Company, are anticipated to be
approximately $16.9 million ($20.5 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 $2.9
million ($16.9 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 $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
basis giving effect to (i) the issuance and sale of the 1,000,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of
$18.25 per share (the last reported sale price of the Common Stock on January
17, 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 and (ii) the Three States acquisition. 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
-------------------------------------------
(UNAUDITED)
PRO FORMA,
ACTUAL AS ADJUSTED
----------------- ------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Current portion of long-term obligations.................................... $ 744 $ 744
Borrowings under revolving credit agreements(1)............................. 49,433 49,433
----------------- ------------------
50,177 50,177
----------------- ------------------
Long-term obligations:
Bank and other debt.................................................... 4,026 4,026
12% Subordinated Note due 1998......................................... 2,500 2,500
10% Convertible Subordinated Debentures due 1996....................... 1,341 1,341
----------------- ------------------
Total long-term obligations................................... 7,867 7,867
----------------- ------------------
Shareholders' equity:
Common Stock, $.50 par value, 40,000,000 shares authorized; 4,783,129
issued and outstanding; 5,783,129 issued and outstanding, as
adjusted(2)........................................................ 2,392 2,892
Class B Common Stock, $.50 par value, 4,000,000 shares authorized;
1,485,171 issued and outstanding(2)................................ 742 742
Paid-in capital............................................................. 19,205 35,605
Retained earnings........................................................... 30,265 30,265
----------------- ------------------
Total shareholders' equity.................................... 52,604 69,504
----------------- ------------------
Total capitalization...................................... $110,648 $127,548
================= ==================
<FN>
- --------------------
(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) 223,225 shares of
Class B Common Stock issuable upon conversion of the Company's
Convertible Debentures.
</FN>
</TABLE>
- 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 January 19, 1996)................ 18 3/4 17 3/4 18 7/8 17 3/8
</TABLE>
On January 19, 1996, the last reported sale prices for the Common Stock and
the Class B Common Stock on the New York Stock Exchange and the American Stock
Exchange were $18 3/8 and $18 3/8 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 give effect to: (i) the potential Three States acquisition, using
the purchase method of accounting, and (ii) the issuance and sale of the Common
Stock offered hereby, 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 the
Three States acquisition 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 AS ADJUSTED
1990 1991 1992 1993 1994 1994(1) 1994 1995 1995(1)
-------- --------- --------- --------- --------- --------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues..... $117,749 $169,318 $194,633 $230,656 $283,731 $328,672 $213,884 $250,190 $286,424
Gross profit(2).... 30,470 40,906 45,559 51,930 63,212 73,651 48,666 56,547 65,152
Operating income... 7,006 8,576 9,930 11,390 15,043 17,108 12,630 15,527 17,337
Interest expense... (2,896) (4,059) (3,197) (2,756) (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) (5,531) (4,065) (4,867) (5,676)
Minority
interests(3)...... (728) (1,010) (1,470) (1,287) (1,636) (1,636) (1,446) (1,744) (1,744)
Net income......... 1,975 1,990 2,918 5,041(4) 5,762 7,159 4,923 6,033 7,277
Earnings per share:
Primary.......... $.61 $.50 $.70 $.85(4) $.89 $.96 $.77 $.91 $.96
Fully diluted(5). .56 .48 .64 .82(4) .87 .94 .74 .87 .92
Weighted average
shares outstanding:
Primary.......... 3,190 3,987 4,159 5,869 6,326 7,326 6,308 6,508 7,508
Fully diluted(5). 4,141 4,929 5,091 6,339 6,646 7,646 6,604 6,930 7,930
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
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30, 1995
------------------------------------------------------------------------ ------------------------------
(UNAUDITED)
PRO FORMA,
1990 1991 1992 1993 1994 ACTUAL AS ADJUSTED(6)
----------- ------------ ------------ ------------ ------------ ------------ ---------------
<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 $58,928
Total assets.......... 82,322 81,767 81,138 109,685 119,664 147,565 167,856
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 12,780
Shareholders' equity.. 18,935 20,832 25,272 41,754 46,816 52,604 69,504
<FN>
- -------------------------------------------------------
(1) Gives effect to the Three States acquisition and the issuance of 1,000,000
shares of Common Stock offered hereby by the Company as if they occurred as
of the beginning of the period shown. There can be no assurance that the
Three States acquisition will be consummated. See "Business - Three States
Acquisition."
(2) Total revenues less cost of sales and direct service expenses.
(3) 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.
(4) 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.
(5) Calculated assuming conversion of the Convertible Debentures.
(6) Gives effect to the Three States acquisition as if it occurred on September
30, 1995 and the sale of 1,000,000 shares of Common Stock offered hereby by
the Company at an assumed offering price of $18.375 per share (the last
reported sale price of the Common Stock on January 19, 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." Excluding the Three
States acquisition but giving effect to the offering as if it had occurred
on September 30, 1995, at that date the Company would have as adjusted
total assets of $150,956.
</FN>
</TABLE>
- 10 -
<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, a distributor of residential central air conditioners
in Florida, for an aggregate of approximately $17.1 million. In October 1990,
the Company acquired 50% and Rheem acquired 50% of the capital stock of Heating
& Cooling, a distributor of residential central air conditioners in southern
California, Arizona and Nevada, for an aggregate of approximately $31.5 million.
In April 1993, the Company acquired 80% and Rheem acquired 20% of the capital
stock of Comfort Supply, a distributor of residential central air conditioners
in Texas, for an aggregate 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.
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%
=========== ========== ========== =========
<FN>
- --------------------
(1) Excludes non-recurring income from the receipt of insurance proceeds.
</FN>
</TABLE>
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
- 11 -
<PAGE>
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. In 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 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.
- 12 -
<PAGE>
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 $70.0
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 price, the Company has received indications from its lenders that
it will be able to obtain financing for the acquisition.
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.
- 13 -
<PAGE>
BUSINESS
GENERAL
The Company is the largest independent 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 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..................................... $ 9,873 $11,456 $14,656 $12,038 $15,233
Manufacturing.................................... 2,280 1,133 1,745 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
According to the ARI, manufacturers' sales of residential central air
conditioners in the United States were approximately $4.3 billion in 1994 and
have grown at an annual rate of 5.5% since 1990. Residential central air
conditioners are manufactured primarily by seven major companies that account
for a substantial majority
- 14 -
<PAGE>
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.
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.
Recently, the Company has accelerated its acquisition activity. The
following is a description of the Company's acquisitions completed in 1995.
- 15 -
<PAGE>
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.
H.B. ADAMS, INC. In March 1995, the Company acquired certain assets
of H.B. Adams. 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, 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 products include
- 16 -
<PAGE>
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.
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 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.
- --------------------
* 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.
- 17 -
<PAGE>
RELATIONSHIP WITH RHEEM MANUFACTURING COMPANY
Rheem is the second largest manufacturer of residential central air
conditioning equipment in the United States with a reputation for a high
quality, competitively-priced product line. The Company is the leading
distributor of Rheem products and is an authorized distributor of Rheem products
in the State of Florida, the eastern half of Texas, southern and central
California, the western half of North Carolina, the Phoenix and Tucson, Arizona
metropolitan areas, the Las Vegas, Nevada metropolitan area, the Shreveport and
Monroe, Louisiana metropolitan areas, the Fort Smith and Jonesboro, Arkansas
metropolitan areas, the Mobile, Alabama metropolitan area, the County of
Decatur, Georgia, and substantially all of the countries of South America,
Central America and the Caribbean (excluding principally Brazil, Chile, Peru,
Mexico, and Puerto Rico). Additionally, the Company is authorized to distribute
the Weatherking brand of air conditioners, also manufactured by Rheem, in
substantially all of South America, Central America and the Caribbean. Pursuant
to the Company's distribution agreements with Rheem, Rheem is obligated to offer
the Company all of the same programs, prices, terms and conditions offered to
competing distributors of Rheem brand products in the same territories.
Management believes that the Company maintains a unique and mutually
beneficial relationship with Rheem, which owns 20% of Gemaire and Comfort Supply
and 50% of Heating & Cooling. The Company has the option to increase its
ownership in Heating & Cooling to 50.25%. Pursuant to shareholder agreements
with the Company, Rheem has the right to designate directors to two of the five
seats on Gemaire's Board of Directors and three of the seven seats on Heating &
Cooling's and Comfort Supply's Boards of Directors, as well as the right to
approve fundamental corporate changes with respect to the business and corporate
structures of Gemaire, Heating & Cooling and Comfort Supply. See "Business --
Distribution Operations."
The Company's distribution subsidiaries (other than Heating & Cooling)
have distribution agreements with Rheem. Two of the distribution agreements will
expire in 1998, and the third can be terminated at any time without cause by
either party. Heating & Cooling's distribution agreement expired in September
1995. Heating & Cooling continues to distribute Rheem products, and the Company
expects that Heating & Cooling will enter into a new distribution agreement with
Rheem on substantially similar economic terms. Under Gemaire's distribution
agreement, Gemaire's sales of competitive products from other manufacturers in
any 12-month period must be less than 5% of its sales of Rheem products. Under
Comfort Supply's distribution agreement, Comfort Supply is permitted to continue
to sell, without restriction, competitive products substantially similar to
those carried by Comfort Supply at the time it entered into its distribution
agreement (the "Permitted Competitive Products"). Comfort Supply may also sell
competitive products ("Other Products"), in addition to the Permitted
Competitive Products, in any 12-month period as long as such sales of Other
Products are less than 10% of the sum of (i) its sales of Rheem products plus
(ii) its sales of Permitted Competitive Products.
The shareholder agreement, as amended, between the Company and Rheem
with respect to Gemaire provides, among other things, that annually during any
Election Period after the year ended December 31, 1992, the Company can "put"
its ownership interest in Gemaire to Rheem, and, that annually during any
Election Period after the year ended December 31, 1997, Rheem can "call" the
Company's ownership interest in Gemaire, at a price based on a valuation formula
(the "Gemaire Put/Call"). The Gemaire Put/Call purchase price is 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 purchase 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 of the Gemaire Put/Call,
plus (b) goodwill arising out of the acquisition of Gemaire. See "Risk Factors
- -- Put/Call Agreements with Rheem Manufacturing Company" and Note 10 to the
Company's Consolidated Financial Statements.
The shareholder agreement, as amended, between the Company and Rheem
with respect to Heating & Cooling provides, among other things, that annually
during any Election Period after the year ended December
- 18 -
<PAGE>
31, 1992, the Company can "put" its stock in Heating & Cooling to Rheem and,
that annually during any Election Period after the year ended December 31, 1997,
Rheem can "call" the Company's stock in Heating & Cooling pursuant to a
valuation formula (the "H&C Put/Call"). The H&C Put/Call purchase price is the
Company's ownership percentage multiplied by the greater of (i) an amount (the
"H&C EBIT Valuation") equal to (a) six times Heating & Cooling's highest annual
EBIT during the four full fiscal years immediately preceding the date of the
exercise of the H&C Put/Call (the "H&C Exercise Date") less (b) the sum of (1)
the amount of Heating & Cooling's long-term interest-bearing bank debt,
inclusive of current portion, as of the date of the balance sheet for the fiscal
year immediately preceding the H&C Exercise Date (the "Debt"), less (2) the
amount of such Debt then guaranteed by Watsco and less (3) the product of (A)
Heating & Cooling's working capital (determined in accordance with generally
accepted accounting principles) and (B) the quotient obtained by dividing
Heating & Cooling's Debt by the sum of its Debt and stockholders' equity
(determined in accordance with generally accepted accounting principles), less
(c) a working capital adjustment, as defined below; or (ii) the amount equal to
(a) Heating & Cooling's tangible net book value as of the closing of the H&C
Put/Call, plus (b) the goodwill arising out of the acquisition of Heating &
Cooling by the Company, plus (c) $5,000,000. The working capital adjustment
referred to above is the amount, if any, by which (i) certain components of
working capital of Heating & Cooling (accounts receivable and inventory less
accounts payable and accrued expenses) at the end of the year used to calculate
the H&C EBIT Valuation are greater than the net total of (ii) those same
components of working capital as of the date of the balance sheet for the fiscal
year immediately preceding the H&C Exercise Date, except that such adjustment
may not exceed $6,000,000. See "Risk Factors -- Put/Call Agreements with Rheem
Manufacturing Company" and Note 10 to the Company's Consolidated Financial
Statements.
The shareholder agreement, as amended, between the Company and Rheem
with respect to Comfort Supply provides, among other things, that annually
during any Election Period after the year ended December 31, 1996, the Company
can "put" its stock in Comfort Supply to Rheem and, that annually during any
Election Period after the year ended December 31, 1997, Rheem can "call" the
Company's stock in Comfort Supply pursuant to a valuation formula (the "Comfort
Supply Put/Call"). The Comfort Supply Put/Call purchase price is 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 preceding the date the purchase price is
being calculated or (ii) an amount equal to (a) Comfort Supply's tangible net
book value as of the closing of the Comfort Supply Put/Call, plus (b) any
remaining goodwill arising out of the acquisition of Comfort Supply, plus (c)
$2,000,000. See "Risk Factors -- Put/Call Agreements with Rheem Manufacturing
Company" and Note 10 to the Company's Consolidated Financial Statements.
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,
- 19 -
<PAGE>
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
independent distributors and those major air conditioner manufacturers who
distribute a significant portion of their products through factory-owned
distribution organizations. Many of the factory-owned 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.
- 20 -
<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
<FN>
- ---------------------
(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.
</FN>
</TABLE>
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 director of American Bankers
Insurance Group.
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 The Wickes Corporation, a diversified New York Stock Exchange
company. From 1961 to 1978, Mr. Coape-Arnold served as Vice President and Group
Executive of W.R. Grace & Co., a diversified New York Stock Exchange company.
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.
- 21 -
<PAGE>
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.
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.
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.
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.
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.
- 22 -
<PAGE>
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, and as adjusted to reflect the sale of the Common Stock
offered hereby.
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK
------------------------------------------------------------ --------------------
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BENEFICIAL
PRIOR TO OFFERING AFTER OFFERING OWNERSHIP
-------------------- -------------------- --------------------
NUMBER OF % OF NUMBER OF NUMBER OF % OF NUMBER OF % OF
SHARES CLASS SHARES OFFERED SHARES CLASS SHARES CLASS
---------- ------- -------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Alna Capital Associates(1) 162,510 3.4% 25,720 136,790 2.4% 677,345 41.2%
505 Park Avenue
New York, NY 10022
Albert H. Nahmad(2) 469,685 9.2 50,000 419,685 6.9 1,183,559 60.4
2665 S. Bayshore Drive
Suite 901
Miami, FL 33133
Oliver M. Butler and 286,405 6.0 286,405 -- -- -- --
Marjorie E. Butler
Declaration of Trust(3)
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 51,416 3.4
2665 S. Bayshore Drive
Suite 901
Miami, FL 33133
<FN>
- --------------------------------------
(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, 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.
- 23 -
<PAGE>
(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."
</FN>
</TABLE>
- 24 -
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated is acting as the representative (the "Representative"),
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.....................
---------
Total......................................... 1,400,000
=========
</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 the Representative, 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 Representative.
The Company has granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to 210,000 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 1,400,000 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, without the prior
written consent of the Representative on behalf of the Underwriters for a period
of 120 days after the date of this Prospectus, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell
- 25 -
<PAGE>
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 or exercisable for, shares of Common Stock or Class B Common Stock,
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.
James S. Grien, a director of the Company, is a Managing Director in
the Investment Banking Group of Prudential Securities Incorporated, the
Representative.
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
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.
- 26 -
<PAGE>
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.
- 27 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
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-21
Balance Sheets as of December 31, 1994 and
September 30, 1995 (unaudited)..................................... F-22
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-23
Statements of Cash Flows for the Year Ended December 31, 1994 and for
the Nine Months Ended September 30, 1994 and 1995 (unaudited)...... F-24
Notes to Financial Statements........................................... F-25
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1995..... F-31
Unaudited Pro Forma Combined Statements of Income for the Year Ended
December 31, 1994 and for the Nine Months Ended
September 30, 1995................................................. F-32
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-34
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 January 18, 1996).
F-2
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<C> <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)
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.
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.
F-8
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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> <S> <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 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>
F-9
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-10
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-11
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
YEAR 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
======= ======= =======
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>
<TABLE>
<CAPTION>
YEAR 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>
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
------- -------
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,
--------------------
1993 1994
------- -------
<S> <C> <C>
$ 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.
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.
F-13
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized information for the above plans is as follows:
<TABLE>
<CAPTION>
YEAR 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.
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
F-14
<PAGE>
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.
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>
YEAR 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.
F-15
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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>
F-16
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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. 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.
F-17
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
CLIMATE PERSONNEL
CONTROL SERVICES OTHER CONSOLIDATED
--------- ---------- ------- ------------
<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
======== ========= === =========
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-18
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
<FN>
(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.
</FN>
</TABLE>
F-19
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 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 plans to file a secondary offering with
the Securities and Exchange Commission to sell 1,400,000 shares of Common Stock
during February 1996. Such shares will consist of 1,000,000 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.
F-20
<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-21
<PAGE>
<TABLE>
<CAPTION>
THREE STATES SUPPLY COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
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-22
<PAGE>
<TABLE>
<CAPTION>
THREE STATES SUPPLY COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED 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-23
<PAGE>
<TABLE>
<CAPTION>
THREE STATES SUPPLY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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-24
<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.
F-25
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-26
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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%
====
F-27
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 year 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.
F-28
<PAGE>
THREE STATES SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE (7) - SUBSEQUENT EVENT
In January 1996, 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-29
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial information gives
effect to the Company's proposed acquisition of the assets and certain
liabilities of Three States Supply Company, Inc. ("Three States"), 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 pro forma information is based on the
historical financial statements of the Company and Three States. This proposed
acquisition is 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 Three States acquisition, the issuance and sale by the
Company of 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 Three States acquisition, the issuance and
sale by the Company of 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 Three States acquisition, the
issuance and sale by the Company of 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 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-30
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
(IN THOUSANDS)
PRO FORMA
ADJUSTMENTS
-------------- PRO FORMA
COMPANY THREE STATES DR (CR) COMBINED
------------- ------------ -------------- ------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 3,190 $ 1,531 $16,900 (1) $ 5,325
(16,296)(2)
Marketable securities........................................... 1,281 -- 1,281
Accounts receivable, net........................................ 47,413 6,596 54,009
Inventories.....................................................
61,654 6,039 2,486 (2) 70,179
Prepaid expenses and other current assets....................... 5,123 253 (175)(2) 5,201
--------- -------- ------- ---------
Total current assets................................................. 118,661 14,419 2,915 135,995
Property, plant and equipment, net................................... 10,537 2,857 13,394
Intangible assets, net............................................... 14,353 -- 100 (2) 14,453
Other assets......................................................... 4,014 -- 4,014
--------- -------- ------- ---------
$147,565 $17,276 $3,015 $167,856
========= ======== ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations........................ $ 744 $ -- $ 744
Borrowings under revolving credit agreement..................... 49,433 -- 49,433
Accounts payable and accrued liabilities........................ 23,499 3,391 26,890
--------- -------- ------- ---------
Total current liabilities............................................ 73,676 3,391 77,067
--------- -------- ------- ---------
Long-term Obligations:
Due to parent company........................................... -- 4,220 $4,220 (2) --
Bank and other debt............................................. 4,026 -- 4,026
Subordinated note............................................... 2,500 -- 2,500
Convertible subordinated debentures............................. 1,341 -- 1,341
--------- -------- ------- ---------
7,867 4,220 4,220 7,867
--------- -------- ------- ---------
Deferred income taxes................................................ 638 171 171 (2) 638
Minority interests................................................... 12,780 -- 12,780
Shareholders' equity:
Common Stock.................................................... 2,392 10 (500)(1) 2,892
10 (2)
Class B Common Stock............................................ 742 -- 742
Paid-in capital................................................. 19,205 -- (16,400)(1) 35,605
Retained earnings............................................... 30,265 9,484 9,484 (2) 30,265
--------- -------- ------- ---------
Total shareholders' equity........................................... 52,604 9,494 (7,406) 69,504
--------- -------- ------- ---------
$147,565 $17,276 $(3,015) $167,856
========= ======== ======= =========
</TABLE>
The accompanying notes to unaudited pro forma combined financial
statements are an integral part of this statement.
F-31
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA
COMPANY THREE STATES ADJUSTMENTS COMBINED
--------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues ........................................................ $ 283,731 $ 44,941 $ 328,672
Cost of sales and direct service expenses ....................... 220,519 34,896 $ (394)(3) 255,021
--------- --------- --------- ---------
Gross profit ............................................... 63,212 10,045 394 73,651
Selling, general and administrative expenses .................... 48,169 8,374 56,543
--------- --------- --------- ---------
Operating income ........................................... 15,043 1,671 394 17,108
Other income..................................................... 140 208 25(4) 373
Interest expense ................................................ 3,155 -- 3,155
--------- --------- --------- ---------
Income before income taxes and minority interests .......... 12,028 1,879 419 14,326
Income taxes .................................................... 4,630 738 163(5) 5,531
Minority interests .............................................. 1,636 -- 1,636
--------- --------- --------- ---------
Net income ................................................. $ 5,762 $ 1,141 $ 256 $ 7,159
========= ========= ========= =========
Earnings per share:
Primary .................................................... $ .89 $ .96
========= =========
Fully diluted .............................................. $ .87 $ .94
========= =========
Weighted average shares outstanding:
Primary .................................................... 6,326 7,326
========= =========
Fully diluted .............................................. 6,646 7,646
========= =========
</TABLE>
The accompanying notes to unaudited pro forma combined financial
statements are an integral part of this statement.
F-32
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA
COMPANY THREE STATES ADJUSTMENTS COMBINED
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 250,190 $ 36,234 286,424
Cost of sales and direct service expenses ...................... 193,643 27,735 $ (106)(3) 221,272
--------- --------- --------- ---------
Gross profit .............................................. 56,547 8,499 106 65,152
Selling, general and administrative expenses ................... 41,020 6,795 47,815
--------- --------- --------- ---------
Operating income .......................................... 15,527 1,704 106 17,337
Other income ................................................... 181 225 18(4) 424
Interest expense ............................................... 3,064 -- 3,064
--------- --------- --------- ---------
Income before income taxes and minority interests ......... 12,644 1,929 124 14,697
Income taxes ................................................... 4,867 761 48(5) 5,676
Minority interests ............................................. 1,744 -- 1,744
--------- --------- --------- ---------
Net income ................................................ $ 6,033 $ 1,168 $ 76 $ 7,277
========= ========= ========= =========
Earnings per share:
Primary..................................................... $.91 $ .96
========= =========
Fully diluted............................................... $.87 $ .92
========= =========
Weighted average shares outstanding:
Primary..................................................... 6,508 7,508
========= =========
Fully diluted............................................... 6,930 7,930
========= =========
</TABLE>
The accompanying notes to unaudited pro forma combined financial statements
are an integral part of this statement.
F-33
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) Represents the net proceeds from the issuance of 1,000,000 shares of
the Company's Common Stock at an assumed offering price of $18.375 per
share are determined as follows:
Gross proceeds on 1,000,000 shares..................... $18,375
Payment of estimated underwriters discount and
offering expenses................................. 1,475
-------
Net proceeds from Common Stock......................... $16,900
=======
(2) 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
=======
(3) 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.
(4) Represents interest income generated on the remaining net proceeds of
the offering not used for the acquisition of Three States.
(5) Represents pro forma income taxes at the Company's blended statutory
tax rate of 39%.
F-34
<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
The Offering................................................................. 4
Summary Financial Information................................................ 5
Risk Factors................................................................. 6
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............................................................ 11
Business..................................................................... 14
Management................................................................... 21
Selling Shareholders......................................................... 23
Underwriting................................................................. 25
Legal Matters................................................................ 26
Experts...................................................................... 26
Available Information........................................................ 26
Incorporation of Certain Documents
by Reference............................................................. 27
Index to Consolidated Financial Statements.................................. F-1
1,400,000 SHARES
WATSCO
COMMON STOCK
----------
PROSPECTUS
----------
PRUDENTIAL SECURITIES 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...................... $7,615 $2,517
NASD filing fee.......................................................... 2,584 855
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............................................................ 59,066
-------------------- --------------------
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.
<PAGE>
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------
1.1 Proposed form of Underwriting Agreement*
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.*
10.27 Revolving Credit Agreement dated October 26, 1995 by and between
CAC Acquisition, Inc. and NationsBank of Florida, N.A.*
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.*
23.1 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A. (included in its opinion filed as Exhibit 5.1).*
23.2 Consent of Arthur Andersen LLP*
23.3 Consent of Rhea & Ivy, P.L.C.*
- -------------------------
* Filed herewith.
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 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.
<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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Miami, State of Florida, on January 19, 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
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALBERT H. NAHMAD Chairman of the Board January 22, 1996
- ---------------------------- (principal executive officer)
Albert H. Nahmad
/s/ RONALD P. NEWMAN Chief Financial Officer, Secretary and January 22, 1996
- ---------------------------- Treasurer
Ronald P. Newman (principal financial and accounting
officer)
/s/ D. A. COAPE-ARNOLD Director January 22, 1996
- ----------------------------
D. A. Coape-Arnold
/s/ DAVID B. FLEEMAN Director January 22, 1996
- ----------------------------
David B. Fleeman
/s/ JAMES S. GRIEN Director January 22, 1996
- ----------------------------
James S. Grien
/s/ PAUL F. MANLEY Director January 22, 1996
- ----------------------------
Paul F. Manley
/s/ BOB L. MOSS Director January 22, 1996
- ----------------------------
Bob L. Moss
/s/ ROBERTO MOTTA Director January 22, 1996
- ----------------------------
Roberto Motta
/s/ ALAN H. POTAMKIN Director January 22, 1996
- ----------------------------
Alan H. Potamkin
</TABLE>
WATSCO, INC.
1,400,000 Shares*
Common Stock
UNDERWRITING AGREEMENT
____________, 1996
PRUDENTIAL SECURITIES INCORPORATED
As Representative of the several Underwriters
One New York Plaza
New York, New York 10292
Dear Sirs:
Each of Watsco, Inc., a Florida corporation (the "Company"), and the
shareholders of the Company named in Schedule 2 hereto (the "Selling
Securityholders") hereby confirms its agreement with the several underwriters
named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly
authorized to act as representative (in such capacity, the "Representative"), as
set forth below. If you are the only Underwriter, all references herein to the
Representative shall be deemed to be to the Underwriter.
1. SECURITIES. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell to the several Underwriters an aggregate
of 1,000,000 shares (the "Company Firm Securities") of the Company's Common
Stock, par value $0.50 per share (the "Common Stock"). The Company also proposes
to issue and sell to the several Underwriters not more than 210,000 additional
shares of Common Stock if requested by the Representative as provided in Section
3 of this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities". Subject to the terms and conditions herein contained, the Selling
Securityholders propose to sell to the several Underwriters an aggregate of
400,000 shares of Common Stock (the "Selling Securityholder Firm Securities" and
together with the Company Firm Securities, the "Firm Securities"). The Firm
Securities and any Option Securities are collectively referred to herein as the
"Securities".
- ------------------
* Plus an option to purchase from Watsco, Inc. up to 210,000 additional
shares to cover over-allotments.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) The Company and each Selling Securityholder identified in
Schedule 2 hereto as a Group 1 Selling Securityholder (collectively,
the "Group 1 Selling Securityholders"), to the best of such Group 1
Selling Securityholder's knowledge, jointly and severally, represent
and warrant to, and agree with, each of the several Underwriters that:
(i) The Company meets the requirements for use of Form S-3 under
the Securities Act of 1933, as amended (the "Act"). A
registration statement on such form (File No. 33-________)
with respect to the Securities, including a prospectus subject
to completion, has been filed by the Company with the
Securities and Exchange Commission (the "Commission") under
the Act, and one or more amendments to such registration
statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either
(A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective
under the Act either (1) if the Company relies on Rule 434
under the Act, a Term Sheet (as hereinafter defined) relating
to the Securities, that shall identify the Preliminary
Prospectus (as hereinafter defined) that it supplements, and,
if required to be filed pursuant to Rules 434(c)(2) and
424(b), an Integrated Prospectus (as hereinafter defined), in
either case, containing such information as is required or
permitted by Rules 434, 430A and 424(b) under the Act or (2)
if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment shall
have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the
Act or permitted by Rule 424(b) under the Act, and in the case
of either clause (A)(1) or (A)(2) of this sentence as have
been provided to and approved by the Representative prior to
the execution of this Agreement, or (B) if such registration
statement, as it may have been amended, has not been declared
by the Commission to be effective under the Act, an amendment
to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to
and approved by the Representative prior to the execution of
this Agreement. The Company may also file a related
registration statement
- 2 -
<PAGE>
with the Commission pursuant to Rule 462(b) under the Act for
the purpose of registering certain additional Securities,
which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original
Registration Statement" means the registration statement
initially filed relating to the Securities, as amended at the
time when it was or is declared effective, including (A) all
financial schedules and exhibits thereto, (B) all documents
incorporated by reference therein filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and (C)
any information omitted therefrom pursuant to Rule 430A under
the Act and included in the Prospectus (as hereinafter
defined) or, if required to be filed pursuant to Rules
434(c)(2) and 424(b), in the Integrated Prospectus; the term
"Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b)
under the Act (including the Original Registration Statement
and any Preliminary Prospectus or Prospectus incorporated
therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus"
means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it
was or is declared effective), including all documents
incorporated by referenced therein filed under the Exchange
Act; the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first
filed pursuant to Rule 424(b)(7) under the Act,
together with the Preliminary Prospectus identified
therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act,
the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act
and if no prospectus is required to be
- 3 -
<PAGE>
filed pursuant to Rule 424(b) under the Act, the
prospectus included in the Registration Statement,
including, in the case of the immediately foregoing clause
(A), (B) or (C) of this sentence, all documents incorporated
by referenced therein filed under the Exchange Act. The term
"Integrated Prospectus" means a prospectus first filed with
the Commission pursuant to Rules 434(c)(2) and 424(b) under
the Act; and the term "Term Sheet" means any abbreviated Term
Sheet that satisfies the requirements of Rule 434 under the
Act. Any reference in this Agreement to an "amendment or
supplement" to any Preliminary Prospectus, the Prospectus or
any Integrated Prospectus or an "amendment" to any
registration statement (including the Registration Statement)
shall be deemed to include any document incorporated by
reference therein that is filed with the Commission under the
Exchange Act after the date of such Preliminary Prospectus,
Prospectus, any Integrated Prospectus, or registration
statement, as the case may be; any reference herein to the
"date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet. For purposes of the preceding
sentence, any reference to the "effective date" of an
amendment to a registration statement shall, if such amendment
is effected by means of the filing with the Commission under
the Exchange Act of a document incorporated by reference in
such registration statement, be deemed to refer to the date on
which such document was filed with the Commission.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any
Preliminary Prospectus and any amendment or supplement thereto
was filed with the Commission, it (A) contained all statements
required to be stated therein in accordance with, and complied
in all material respects with the requirements of, the Act,
the Exchange Act and the respective rules and regulations of
the Commission thereunder, and (B) did not include any untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment
thereto was or is declared effective, it (A) contained or will
contain all statements required to be stated therein in
accordance with, and complied or will comply
- 4 -
<PAGE>
in all material respects with the requirements of the Act, the
Exchange Act and the respective rules and regulations of the
Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not
misleading. When the Prospectus or any Term Sheet that is a
part thereof or any Integrated Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or part thereof
or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the
Prospectus was or is declared effective), on the date when the
Prospectus is otherwise amended or supplemented and on the
Firm Closing Date and any Option Closing Date (both as
hereinafter defined), each of the Prospectus and, if required
to be filed pursuant to Rules 434(c)(2) and 424(b) under the
Act, the Integrated Prospectus as amended or supplemented at
any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements
of the Act, the Exchange Act and the respective rules and
regulations of the Commission thereunder and (B) did not or
will not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions
of this paragraph (ii) do not apply to statements or omissions
made in any Preliminary Prospectus or any amendment or
supplement thereto, the Registration Statement or any
amendment thereto, the Prospectus or, if required to be filed
pursuant to Rules 434(c)(2) and 424(b) under the Act, the
Integrated Prospectus or any amendment or supplement thereto
in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the
Representative specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared
effective (i) the Company has filed a Rule 462(b) Registration
Statement in compliance with and that is effective upon filing
pursuant to Rule 462(b) and has received confirmation of its
receipt and (ii) the Company has given irrevocable
instructions for transmission of the applicable filing fee in
connection with
- 5 -
<PAGE>
the filing of the Rule 462(b) Registration Statement, in
compliance with Rule 111 promulgated under the Act or the
Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation and are duly qualified to transact business as
foreign corporations and are in good standing under the laws
of all other jurisdictions where the ownership or leasing of
their respective properties or the conduct of their respective
businesses requires such qualification, except where the
failure to be so qualified does not amount to a material
liability or disability to the Company and its subsidiaries,
taken as a whole.
(v) The Company and each of its subsidiaries have full power
(corporate or other) to own or lease their respective
properties and conduct their respective businesses as
described in the Registration Statement, each of the
Prospectus and any Integrated Prospectus or, if the Prospectus
and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus; and the Company has
full power (corporate or other) to enter into this Agreement
and to carry out all the terms and provisions hereof to be
carried out by it.
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and, except as otherwise set
forth in each of the Prospectus and any Integrated Prospectus
or, if the Prospectus and any required Integrated Prospectus
are not in existence, the most recent Preliminary Prospectus,
are owned beneficially by the Company free and clear of any
security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in each of the Prospectus and any
Integrated Prospectus or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus. All of the issued shares of capital
stock of the Company, including the Securities to be sold by
the Selling Securityholders hereunder, have been duly
authorized and validly issued and are fully paid and
nonassessable. The Company Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing
Date or the related
- 6 -
<PAGE>
Option Closing Date (as the case may be), after payment
therefor in accordance herewith, will be validly issued, fully
paid and nonassessable. No holders of outstanding shares of
capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the
Securities, and no holder of securities of the Company has any
right which has not been fully exercised or waived to require
the Company to register the offer or sale of any securities
owned by such holder under the Act in the public offering
contemplated by this Agreement.
(viii) The capital stock of the Company conforms to the description
thereof contained in each of the Prospectus and any Integrated
Prospectus or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus.
(ix) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the
Registration Statement, each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus) fairly present the financial position
of the Company and its consolidated subsidiaries and the
results of changes in operation and financial condition as of
the dates and periods therein specified. Such financial
statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted
therein). The unaudited pro forma financial data, together
with the related notes thereto, included in the Registration
Statement and the Prospectus and any Integrated Prospectus
(or, if the Prospectus and any required Integrated Prospectus
are not in existence, the most recent Preliminary Prospectus)
include all adjustments necessary to present fairly the pro
forma financial data at the dates and for the periods
indicated, and all assumptions used in preparing such pro
forma financial data are reasonable. The selected financial
data set forth under the caption "Selected Financial Data"
in the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in
existence, the most recent Preliminary Prospectus and in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 fairly present, on the basis stated in the
each of the Prospectus and
- 7 -
<PAGE>
any Integrated Prospectus (or such Preliminary Prospectus) and
such Annual Report, the information included therein.
(x) Arthur Andersen LLP and Rhea & Ivy, PLC, who have certified
certain financial statements of the Company and its
consolidated subsidiaries and Three States Supply Company,
Inc. ("Three States") and its consolidated subsidiaries,
respectively, and delivered their respective reports with
respect to the audited consolidated financial statements and
schedules included in the Registration Statement, each of the
Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in
existence, the most recent Preliminary Prospectus) for each of
the Company and its consolidated subsidiaries and Three States
and its consolidated subsidiaries, are independent public
accountants with respect to such entities as required by the
Act, the Exchange Act and the related published rules and
regulations thereunder.
(xi) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly
executed and delivered by the Company.
(xii) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the
property of the Company or any of its subsidiaries is subject
that are required to be described in the Registration
Statement, the Prospectus or any Integrated Prospectus and are
not described therein (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus), and no such proceedings have been
threatened against the Company or any of its subsidiaries or
with respect to any of their respective properties; and no
contract or other document is required to be described in the
Registration Statement, the Prospectus or any Integrated
Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein (or, if the Prospectus
and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus) or filed as required.
(xiii) The issuance, offering and sale of the Firm Securities and
the Option Securities to the Underwriters by the Company
pursuant to this Agreement, the compliance by the Company with
the other provisions of this Agreement and the consummation of
the other transactions herein contemplated do not (A) require
- 8 -
<PAGE>
the consent, approval, authorization, registration or
qualification of or with any governmental authority, except
such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is
not effective under the Act as of the time of execution
hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (B) conflict
with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any material
indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the
charter documents or by-laws of the Company or any of its
subsidiaries, or any statute or any judgment, decree, order,
rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any
of its subsidiaries, except for such judgments, decrees,
orders, rules or regulations of any local court or local
governmental authority or any local arbitrator applicable to
the Company or any of its subsidiaries, the violation, breach
or default of which would not have a material adverse effect
on the Company and its subsidiaries as a whole.
(xiv) The Company has not, directly or indirectly, (A) taken any
action designed to cause or to result in, or that has
constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale
of the Securities or (B) since the filing of the Registration
Statement (1) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Common Stock
(including the Securities), the Class B Common Stock, par
value $0.50 per share, of the Company (the "Class B Common
Stock"), any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock or Class B Common
Stock or (2) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Securities
by the Selling Securityholders under this Agreement).
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement, the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
- 9 -
<PAGE>
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus), (A) the Company and its subsidiaries
have not incurred any liability or obligation, direct or
contingent, nor entered into any transaction not in the
ordinary course of business, which would have a material
adverse effect on the Company and its subsidiaries as a whole;
(B) the Company has not purchased any of its outstanding
capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and
(C) there has not been any change in the capital stock,
short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in
or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus), which would have a material adverse effect on the
Company and its subsidiaries as a whole.
(xvi) The Company and each of its subsidiaries have good and
indefeasible title in fee simple to all items of real property
and indefeasible title to all personal property owned by each
of them, in each case free and clear of any security
interests, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect
the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company or
such subsidiary, and any real property and buildings held
under lease by the Company or any such subsidiary are held
under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the
use made or proposed to be made of such property and buildings
by the Company or such subsidiary, in each case except as
described in or contemplated by each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(xvii) No labor disruption with the employees of the Company or any
of its subsidiaries exists or is overtly threatened that could
result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries
taken as a whole, except as described in or contemplated by
each of the Prospectus and any Integrated Prospectus (or, if
the Prospectus
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<PAGE>
and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus).
(xviii) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in
the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their respective properties is
bound, which would have material adverse effect on the Company
and its subsidiaries as a whole.
(xix) The Company and each of its subsidiaries own or possess, or
can acquire on reasonable terms, all material patents, patent
applications, trademarks, service marks, trade names,
licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with
their respective businesses, and neither the Company nor any
such subsidiary has received any notice of or conflict with
asserted rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, except as
described in or contemplated by each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(xx) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and
customary in the businesses in which they are engaged; neither
the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely
affect the Company and its subsidiaries as a whole, except as
described in or contemplated by each of the Prospectus and any
Integrated
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<PAGE>
Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus).
(xxi) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the
Company, from making any other distribution on such
subsidiary's capital stock, from repaying to the Company any
loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to
the Company or any other subsidiary of the Company, except as
described in or contemplated by each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(xxii) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct
their respective businesses, and neither the Company nor any
such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling
or finding, would result in a material adverse change in the
Company and its subsidiaries as a whole, except as described
or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus).
(xxiii) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so
to file would not have a material adverse effect on the
Company and its subsidiaries as a whole) and has paid all
taxes required to be paid by it and any other assessment, fine
or penalty levied against it, to the extent that any of the
foregoing is due and payable, except to the extent that any
such assessment, fine or penalty would not have a material
adverse effect on the Company and its subsidiaries as a whole
or as described in or contemplated by each of the Prospectus
and any Integrated Prospectus (or, if the Prospectus and any
required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus).
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<PAGE>
(xxiv) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating
to occupational safety and health or to the storage, handling
or transportation of hazardous or toxic material and the
Company and its subsidiaries have received all permits,
licenses or other approvals required of them under applicable
federal and state occupational safety and health and
environmental laws and regulations to conduct their respective
businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permit,
license or approval, except any such violation of law or
regulation, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals which would
not, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries as a whole, except
as described in or contemplated by each of the Prospectus and
any Integrated Prospectus (or, if the Prospectus and any
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(xxv) Each certificate signed by any officer of the Company and
delivered to the Representative or counsel for the
Underwriters shall be deemed to be a representation and
warranty by the Company to each Underwriter as to the matters
covered thereby.
(xxvi) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries,
neither the Company nor any such subsidiary owns any shares of
stock or any other equity securities of any corporation or has
any equity interest in any firm, partnership, association or
other entity, except as described in or contemplated by each
of the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus).
(xxvii) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida) to
the extent such provisions are applicable to the Company.
(xxviii) The Company has not distributed and, prior to the later of
(A) the Firm Closing Date and (B) the completion of the
distribution of the Securities, will not distribute any
offering
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<PAGE>
material in connection with the offering and sale of the
Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus
or any Integrated Prospectus or any supplement or amendment
thereto, or any materials, if any permitted by the Act.
(xxix) Except as disclosed in each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not existence, the most recent
Preliminary Prospectus), there are no outstanding (A)
securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital
stock of the Company or any such subsidiary, (B) warrants,
rights or options to subscribe for or purchase from the
Company or any such subsidiary any such capital stock or any
such convertible or exchangeable securities or obligations, or
(C) obligations of the Company or any such subsidiary to issue
any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants,
rights or options.
(b) The Group 2 Selling Securityholder represents and warrants
to, and agrees with, each of the several Underwriters that, to the
extent that any statements or omissions are made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, any Integrated
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by the
Group 2 Selling Securityholder specifically for use therein, such
information in the Preliminary Prospectus, the Registration Statement,
the Prospectus, any Integrated Prospectus and any amendments or
supplements thereto, when they become effective or are filed with the
Commission, as the case may be, did and will conform in all material
respects to the requirements of the Act, the Exchange Act and the
respective rules and regulations of the Commission thereunder and will
not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which
they are made, not misleading. The Group 2 Selling Securityholder has
reviewed the Prospectus and any Integrated Prospectus or if the
Prospectus and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus, and the Registration Statement,
and the information regarding the Group 2 Selling Securityholder set
forth therein under the caption "Selling Shareholders" is complete and
accurate.
(c) Each Selling Securityholder represents and warrants to,
and agrees with, each of the several Underwriters that:
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<PAGE>
(i) Such Selling Securityholder has full power to enter into this
Agreement and to sell, assign, transfer and deliver to the
Underwriters the Securities to be sold by such Selling
Securityholder hereunder in accordance with the terms of this
Agreement; and this Agreement has been duly executed and
delivered by such Selling Securityholder.
(ii) Such Selling Securityholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such
Selling Securityholder, the "Power-of-Attorney" and the
"Custody Agreement", respectively), each in the form
heretofore delivered to the Representative, appointing Albert
H. Nahmad and Ronald P. Newman as such Selling
Securityholder's attorney-in-fact (the "Attorney-in-Fact")
with authority to execute, deliver and perform this Agreement
on behalf of such Selling Securityholder and appointing First
Union Bank, as custodian thereunder (the "Custodian").
Certificates in negotiable form, endorsed in blank or
accompanied by blank stock powers duly executed, with
signatures appropriately guaranteed, representing the
Securities to be sold by such Selling Securityholder hereunder
have been deposited with the Custodian pursuant to the Custody
Agreement for the purpose of delivery pursuant to this
Agreement. Such Selling Securityholder has full power to enter
into the Custody Agreement and the Power-of-Attorney and to
perform its obligations under the Custody Agreement. The
Custody Agreement and the Power-of-Attorney have been duly
executed and delivered by such Selling Securityholder and,
assuming due authorization, execution and delivery by the
Custodian, are the legal, valid, binding and enforceable
instruments of such Selling Securityholder. Such Selling
Securityholder agrees that each of the Securities represented
by the certificates on deposit with the Custodian is subject
to the interests of the Underwriters hereunder, that the
arrangements made for such custody, the appointment of the
Attorney-in-Fact and the right, power and authority of the
Attorney-in-Fact to execute and deliver this Agreement, to
agree on the price at which the Securities (including such
Selling Securityholder's Securities) are to be sold to the
Underwriters, and to carry out the terms of this Agreement,
are to that extent irrevocable and that the obligations of
such Selling Securityholder hereunder shall not be terminated,
except as provided in this Agreement or the Custody Agreement,
by any act of such Selling Securityholder, by operation of law
or otherwise, whether in the case of any
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<PAGE>
individual Selling Securityholder by the death or incapacity
of such Selling Securityholder, in the case of a trust or
estate by the death of the trustee or trustees or the executor
or executors or the termination of such trust or estate, or in
the case of a corporate or partnership Selling Securityholder
by its liquidation or dissolution or by the occurrence of any
other event. If any individual Selling Securityholder, trustee
or executor should die or become incapacitated or any such
trust should be terminated, or if any corporate or partnership
Selling Securityholder shall liquidate or dissolve, or if any
other event should occur, before the delivery of such
Securities hereunder, the certificates for such Securities
deposited with the Custodian shall be delivered by the
Custodian in accordance with the respective terms and
conditions of this Agreement as if such death, incapacity,
termination, liquidation or dissolution or other event had not
occurred, regardless of whether or not the Custodian or the
Attorney-in-Fact shall have received notice thereof.
(iii) Such Selling Securityholder is the lawful owner of the
Securities to be sold by such Selling Securityholder hereunder
and upon sale and delivery of, and payment for, such
Securities, as provided herein, such Selling Securityholder
will convey good and valid title to such Securities, free and
clear of any security interests, liens, encumbrances,
equities, claims or other defects.
(iv) Such Selling Securityholder has not, directly or indirectly,
(A) taken any action designed to cause or result in, or that
has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale
of the Common Stock.
(v) Such Selling Securityholder has not, since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of, the
Common Stock (including the Securities), or the Class B Common
Stock, or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock or the Class B Common
Stock or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Securities
by the Selling Securityholders under this Agreement).
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<PAGE>
(vi) The Selling Securityholder is not aware of any adverse
information concerning the Company that is not set forth in
the Registration Statement, each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(vii) The sale of the Securities to the Underwriters by such
Selling Securityholder pursuant to this Agreement, the
compliance by such Selling Securityholder with the other
provisions of this Agreement, the Custody Agreement and the
consummation of the other transactions herein contemplated do
not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the
registration statement filed with respect to the Securities
(as amended) is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be
obtained as provided in this Agreement) under the Act and the
Exchange Act or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which such Selling
Securityholder is a party or by which such Selling
Securityholder or any of such Selling Securityholder's
properties are bound, or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to such Selling
Securityholder which would constitute a material judgment,
decree, order, rule or regulation or which would prevent the
consummation of any transaction contemplated hereby.
(viii) The Selling Stockholders have not distributed and, prior to
the later of (A) the Firm Closing Date and (B) the completion
of the distribution of the shares, will not distribute any
offering material in connection with the offering and sale of
the shares other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus
or any Integrated Prospectus or any amendment or supplement
thereto, or other materials, if any, permitted by the Act.
(ix) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue
Code of 1986, as amended, with respect to the transactions
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<PAGE>
herein contemplated, the Selling Stockholders agree to deliver
to you prior to or on the Firm Closing Date, as hereinafter
defined, a properly completed and executed United States
Treasury Department Form W-8 or W-9 (or other applicable form
of statement specified by Treasury Department regulations in
lieu thereof).
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, the Company agrees to issue and sell, and each of the Selling
Securityholders, severally and not jointly, agrees to sell, to each of
the Underwriters, and each of the Underwriters, severally and not
jointly, agrees to purchase from the Company and each of the Selling
Securityholders, at a purchase price of $___ per share, the number of
Firm Securities (to be adjusted by you so as to eliminate fractional
shares) determined by multiplying the aggregate number of Firm Securities
to be sold by the Company and each of the Selling Securityholders as set
forth opposite their respective names in Schedule 2 hereto by a fraction,
the numerator of which is the aggregate number of Firm Securities to be
purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule 1 hereto and the denominator of which is the
aggregate number of Firm Securities to be purchased by all the
Underwriters from the Company and each of the Selling Securityholders.
One or more certificates in definitive form for the Firm Securities that
the several Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Representative requests upon notice to the Company and each of the
Selling Securityholders at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company and each of the Selling
Securityholders to the Representative for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by certified or official bank check or checks
drawn upon or by a New York Clearing House bank and payable in next-day
funds to the order of the Company or the Custodian as their interests may
appear. Such delivery of and payment for the Firm Securities shall be
made at the offices of King & Spalding, 120 W. 45th Street, New York, New
York at 9:30 A.M., New York time, on ________, 1996, or at such other
place, time or date as the Representative, the Company and each of the
Selling Securityholders may agree upon or as the Representative may
determine pursuant to Section 9 hereof, such time and date of delivery
against payment being herein referred to as the "Firm Closing Date". The
Company will make such certificate or certificates for the Firm
Securities available for checking and packaging by the Representative at
the offices in New York, New York of the Company's transfer agent or
registrar or of Prudential Securities Incorporated at least 24 hours
prior to the Firm Closing Date.
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<PAGE>
(b) For the purpose of covering any over allotments in connection
with the distribution and sale of the Firm Securities as contemplated by
each of the Prospectus and any Integrated Prospectus, the Company hereby
grants to the several Underwriters an option to purchase, severally and
not jointly, the Option Securities. The purchase price to be paid for any
Option Securities shall be the same price per share as the price per
share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any
part of the Option Securities from time to time within thirty days after
the date of the Prospectus (or, if such 30th day shall be a Saturday or
Sunday or a holiday, on the next business day thereafter when the New
York Stock Exchange is open for trading). The Underwriters shall not be
under any obligation to purchase any of the Option Securities prior to
the exercise of such option. The Representative may from time to time
exercise the option granted hereby by giving notice in writing or by
telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Securities. Any such date of
delivery shall be determined by the Representative but shall not be
earlier than two business days or later than three business days after
such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or
such other time on such other date as the Representative and the Company
may agree upon or as the Representative may determine pursuant to Section
9 hereof, is herein called the "Option Closing Date" with respect to such
Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several
Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of the total
number of Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representative in
such manner as it deems advisable to avoid fractional shares. If the
option is exercised as to all or any portion of the Option Securities,
one or more securities in definitive form for such Option Securities, and
payment therefor, shall be delivered on the related Option Closing Date
in the manner, and upon the terms and conditions, set forth in paragraph
(a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of
this paragraph (b), to refer to such Option Securities and Option Closing
Date, respectively.
(c) It is understood that you, individually and not as the
Representative, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their
obligations hereunder.
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<PAGE>
4. OFFERING BY THE UNDERWRITERS. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
5. COVENANTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
(a) The Company covenants and agrees with each of the
Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of
execution of this Agreement, and any amendments thereto
to become effective as promptly as possible. If
required, the Company will file the Prospectus or any
Term Sheet that constitutes a part thereof, any
Integrated Prospectus and any amendment or supplement
thereto with the Commission in the manner and within
the time period required by Rules 434 and 424(b) under
the Act. During the time when a prospectus relating to
the Securities is required to be delivered under the
Act, the Company (A) will comply with all requirements
imposed upon it by the Act, the Exchange Act and the
respective rules and regulations of the Commission
thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities
in accordance with the provisions hereof and of each of
the Prospectus and any Integrated Prospectus, as then
amended or supplemented, and (B) will not file with the
Commission, the Prospectus, Term Sheet or any
Integrated Prospectus or the amendment referred to in
the third sentence of Section 2(a)(i) hereof, any
amendment or supplement to such Prospectus, Term Sheet
or any Integrated Prospectus or any amendment to the
Registration Statement (including amendments of the
documents incorporated by reference therein) or any
Rule 462(b) Registration Statement of which the
Representative shall not previously have been advised
and furnished with a copy for a reasonable period of
time prior to the proposed filing and as to which
filing the Representative shall not have given its
consent. The Company will prepare and file with the
Commission, in accordance with the rules and
regulations of the Commission, promptly upon request by
the Representative or counsel for the Underwriters, any
amendments to the Registration Statement (including
amendments of the documents incorporated by reference
therein) or any Rule 462(b) Registration Statement or
amendments or supplements to the Prospectus and any
Integrated Prospectus that may be necessary or
advisable in connection with the distribution of the
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<PAGE>
Securities by the several Underwriters, and will use
its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will
advise the Representative, promptly after receiving
notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any Integrated
Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to
the Representative of each such filing or
effectiveness.
(ii) The Company will advise the Representative, promptly
after receiving notice or obtaining knowledge thereof,
of (A) the issuance by the Commission of any stop order
suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration
Statement or any post-effective amendment thereto or
any order directed at any document incorporated by
reference in the Registration Statement, the Prospectus
or any Integrated Prospectus or any amendment or
supplement thereto or any order preventing or
suspending the use of any Preliminary Prospectus, the
Prospectus or any Integrated Prospectus or any
amendment or supplement thereto, (B) the suspension of
the qualification of the Securities for offering or
sale in any jurisdiction, (C) the institution,
threatening or contemplation of any proceeding for any
such purpose or (D) any request made by the Commission
for amending the Original Registration Statement or any
Rule 462(b) Registration Statement, for amending or
supplementing any Preliminary Prospectus, the
Prospectus or any Integrated Prospectus or for
additional information. The Company will use its best
efforts to prevent the issuance of any such stop order
and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(iii) The Company will arrange for the qualification of the
Securities for offering and sale under the securities
or blue sky laws of such jurisdictions as the
Representative may designate and will continue such
qualifications in effect for as long as may be
necessary to complete the distribution of the
Securities, PROVIDED, HOWEVER, that in connection
therewith the Company shall not be required to qualify
as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
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<PAGE>
(iv) If, at any time prior to the later of (A) the final
date when a prospectus relating to the Securities is
required to be delivered under the Act or (B) the
Option Closing Date, any event occurs as a result of
which the Prospectus or any Integrated Prospectus, as
then amended or supplemented, would include any untrue
statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which
they were made, not misleading, or if for any other
reason it is necessary at any time to amend or
supplement the Prospectus or any Integrated Prospectus
to comply with the Act, the Exchange Act or the
respective rules or regulations of the Commission
thereunder, the Company will promptly notify the
Representative thereof and, subject to Section 5(a)(i)
hereof, will prepare and file with the Commission, at
the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to each of the
Prospectus and any required Integrated Prospectus that
corrects such statement or omission or effects such
compliance.
(v) The Company will, without charge, provide (A) to the
Representative and to counsel for the Underwriters a
conformed copy of the registration statement originally
filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) or
any Rule 462(b) Registration Statement, certified by
the Secretary or an Assistant Secretary of the Company
to be true and complete copies thereof as filed with
the Commission by electronic transmission, (B) to each
other Underwriter, a conformed copy of such
registration statement and any Rule 462(b) Registration
Statement and each amendment thereto (in each case
without exhibits thereto) and (C) so long as a
prospectus relating to the Securities is required to be
delivered under the Act, as many copies of each
Preliminary Prospectus, the Prospectus or any
Integrated Prospectus or any amendment or supplement
thereto as the Representative may reasonably request;
without limiting the application of clause (iii) of
this sentence, the Company, not later than (A) 6:00 PM,
New York City time, on the date of determination of the
public offering price, if such determination occurred
at or prior to 12:00 Noon, New York City time, on such
date or (B) 6:00 PM, New York City time, on the
business day following the date of determination of the
public offering price, if such determination occurred
after 12:00 Noon, New York City time, on such date,
will deliver to the Representative,
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<PAGE>
without charge, as many copies of the Prospectus and
any amendment or supplement thereto as the
Representative may reasonably request for purposes of
confirming orders that are expected to settle on the
Firm Closing Date.
(vi) The Company, as soon as practicable, will make
generally available to its securityholders and to the
Representative a consolidated earnings statement of the
Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158
thereunder.
(vii) The Company will apply the net proceeds from the
sale of the Securities as set forth under "Use of
Proceeds" in each of the Prospectus and any Integrated
Prospectus.
(viii) The Company will not, directly or indirectly, without
the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer,
sell, offer to sell, contract to sell, grant any option
to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, grant
of any option to purchase or other sale or disposition)
of any shares of Common Stock or Class B Common Stock
or any securities convertible into, or exchange or
exercisable for, shares of Common Stock or Class B
Common Stock for a period of 120 days after the date
hereof, except pursuant to this Agreement and except
for issuances pursuant to the exercise of employee
stock options outstanding on the date hereof or
pursuant to the terms of convertible securities of the
Company outstanding on the date hereof.
(ix) The Company will not, directly or indirectly, (A)
take any action designed to cause or to result in, or
that has constituted or which might reasonably be
expected to constitute, the stabilization or
manipulation of the price of any security of the
Company to facilitate the sale or resale of the
Securities of (B) (1) sell, bid for, purchase, or pay
anyone any compensation for soliciting purchases of,
the Securities or (2) pay or agree to pay to any person
any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of
Securities by the Selling Securityholders pursuant to
this Agreement).
(x) During a period of five years from the date of the
Prospectus, the Company will deliver to you and, upon
request, to each of
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<PAGE>
the other Underwriters, without charge, promptly upon
their becoming available, copies of any current,
regular and periodic reports filed with the Commission
or any national securities exchange.
(xi) If at any time during the 25-day period after the
Registration Statement becomes effective or the period
prior to the Option Closing Date, any rumor,
publication or event relating to or affecting the
Company shall occur as a result of which in your
opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus or any
Integrated Prospectus), the Company will, after written
notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press
release or other public statement, reasonably
satisfactory to you responding to or commenting on such
rumor, publication or event.
(xii) If the Company elects to rely on Rule 462(b), the
Company shall both file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule
462(b) and pay the applicable fees in accordance with
Rule 111 promulgated under the Act by the earlier of
(i) 10:00 P.M. Eastern time on the date of this
Agreement and (ii) the time confirmations are sent or
given, as specified by Rule 462(b)(2).
(xiii) The Company will obtain the agreements described
in Section 7(j) hereof prior to the Firm Closing Date.
(xiv) The Company will cause the Securities to be duly
authorized for listing by the New York Stock Exchange.
(b) Each of the Selling Securityholders covenants and agrees
with each of the Underwriters that:
(i) Such Selling Securityholder will not, directly or
indirectly, without the prior written consent of
Prudential Securities Incorporated, 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 any option to purchase or other sale or
disposition) of
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<PAGE>
any shares of Common Stock or Class B Common Stock
legally or beneficially owned by such Selling
Securityholder or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock
or Class B Common Stock for a period of 120 days after
the date hereof, other than any such securities
disposed of as bona fide gifts to persons who agree in
writing with you to be bound by the provisions of this
clause.
(ii) Such Selling Securityholder will not, directly or
indirectly, (A) take any action designed to cause or
result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the
Company to facilitate the sale or resale of the
Securities or (B) (1) sell, bid for, purchase, or pay
anyone any compensation for soliciting purchases of,
the Securities or (2) pay or agree to pay to any person
any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of
Securities by the Selling Securityholders under this
Agreement).
6. EXPENSES. Except as provided in the immediately succeeding sentence,
the Company and each of the Selling Securityholders will pay all costs and
expenses incident to the performance of their respective obligations under this
Agreement (on such basis as shall be agreed between them as described in Part II
of the Registration Statement), whether or not the transactions contemplated
herein are consummated or this Agreement is terminated pursuant to Section 11
hereof, including all costs and expenses incident to (i) the printing or other
production of documents with respect to the transactions, including any costs of
printing the registration statement originally filed with respect to the
Securities and any amendment thereto, any Rule 462(b) Registration Statement,
any Preliminary Prospectus, the Prospectus and any Integrated Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel,
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and disbursements of counsel for the Underwriters relating
thereto, (vi) the filing fees of the Commission and the National Association of
Securities Dealers, Inc. relating to the Securities, (vii) the listing of the
Securities on the New York Stock Exchange, (viii) meetings with prospective
investors in the Securities (other than shall have been specifically approved by
the Representative to be paid for by the Underwriters), (ix) any fees and
expenses of counsel for such Selling Securityholder and (x) the fees and
expenses of the Attorney-in-Fact and the Custodian. Each of the Selling
Securityholders will pay or cause to be paid all costs and expenses incident to
the performance of such Selling Securityholder's obligations under this
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<PAGE>
Agreement which are not otherwise specifically provided for in this Section,
including all expenses and taxes incident to the sale and delivery of the
Securities to be sold by such Selling Securityholder to the Underwriters
hereunder. If the sale of the Securities provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 7 hereof is not satisfied, because this Agreement is terminated pursuant
to Section 11 hereof or because of any failure, refusal or inability on the part
of the Company to perform all obligations and satisfy all conditions on its part
to be performed or satisfied hereunder other than by reason of a default by any
of the Underwriters, the Company and the Selling Securityholders pro rata (based
on the number of Firm Securities to be sold by the Company and such Selling
Securityholder) will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities. Neither the Company nor any of the Selling Securityholders shall
in any event be liable to any of the Underwriters for the loss of anticipated
profits from the transactions covered by this Agreement.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representative's sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholders
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers and the Selling Securityholders made pursuant to the
provisions hereof, to the performance by the Company and each of the Selling
Securityholders of their respective covenants and agreements hereunder and to
the following additional conditions:
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared
effective as of the time of execution hereof, the Original Registration
Statement or such amendment and, if the Company has elected to rely
upon Rule 462(b), the Rule 462(b) Registration Statement shall have
been declared effective not later than earlier of (i) 11 A.M., New York
time, on the date on which the amendment to the registration statement
originally filed with respect to the Securities or to the Registration
Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission, and (ii) the time confirmations are sent or given as
specified by Rule 462(b)(2) or, with respect to the Original
Registration Statement, such later time and date as shall have been
consented to by the Representative; if required, the Prospectus or any
Term Sheet that constitutes a part thereof and any Integrated
Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period
required by Rules 434 and 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement, the Prospectus
or any Integrated Prospectus or any
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<PAGE>
amendment or supplement thereto shall have been issued and no
proceedings for that purpose shall have been instituted or threatened
or, to the knowledge of the Company or the Representative, shall be
contemplated by the commission; and the Company shall have complied
with any request of the Commission for additional information (to be
included in the Registration Statement, the Prospectus or any
Integrated Prospectus or otherwise).
(b) The Representative shall have received an opinion, dated
the Firm Closing Date, of Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel, P.A., counsel for the Company, to the effect that:
(i) the Company and each of its subsidiaries listed in
Schedule 3 hereto (the "Subsidiaries") have been duly
incorporated and are validly existing as corporations
in good standing under the laws of their respective
jurisdictions of incorporation and are duly qualified
to transact business as foreign corporations and are in
good standing under the laws of all other jurisdictions
where the ownership or leasing of their respective
properties or the conduct of their respective
businesses requires such qualification, except where
the failure to be so qualified does not amount to a
material liability or disability to the Company and its
subsidiaries, taken as a whole;
(ii) the Company and each of the Subsidiaries have
corporate power to own or lease their respective
properties and conduct their respective businesses as
described in the Registration Statement, the Prospectus
and any Integrated Prospectus, and the Company has
corporate power to enter into this Agreement and to
carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and, except as
otherwise set forth in each of the Prospectus and any
Integrated Prospectus, are owned beneficially by the
Company free and clear of any perfected security
interests or, to the best knowledge of such counsel,
any other security interests, liens, encumbrances,
equities or claims;
(iv) the Company has an authorized capitalization as
set forth in each of the Prospectus and any Integrated
Prospectus; all of the issued shares of capital stock
of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have
either been issued in compliance with the
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<PAGE>
registration requirements of all applicable federal and
state securities laws or the applicable statute of
limitation periods have expired without any claim
having been made in respect thereof, and were not
issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase
securities; the Firm Securities have been duly
authorized by all necessary corporate action of the
Company and, when issued and delivered to and paid for
by the Underwriters pursuant to this Agreement, will be
validly issued, fully paid and nonassessable; the Firm
Securities have been duly authorized for listing on The
New York Stock Exchange; no holders of outstanding
shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for
any of the Securities; and no holders of securities of
the Company are entitled to have such securities
registered under the Registration Statement;
(v) the statements set forth under the heading
"Description of Common Stock" in each of the Prospectus
and any Integrated Prospectus, insofar as such
statements purport to summarize certain provisions of
the capital stock of the Company, provide a fair
summary of such provisions;
(vi) the execution and delivery of this Agreement have
been duly authorized by all necessary corporate action
of the Company and this Agreement has been duly
executed and delivered by the Company;
(vii) to the best knowledge of such counsel, no legal
or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to
which the property of its Company or any of its
subsidiaries is subject that are required to be
described in the Registration Statement, the Prospectus
or any Integrated Prospectus and are not described
therein, and no such proceedings have been threatened
against the Company or any of its subsidiaries or with
respect to any of their respective properties; and no
contract or other document is required to be described
in the Registration Statement, the Prospectus or any
Integrated Prospectus or to be filed as an exhibit to
the Registration Statement that is not described
therein or filed as required;
(viii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this
Agreement, the
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<PAGE>
compliance by the Company with the other provisions of
this Agreement and the consummation of the other
transactions herein contemplated do not (A) require the
consent, approval, authorization, registration or
qualification of or with any governmental authority,
except such as have been obtained and such as may be
required under state securities or blue sky laws, or
(B) conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a
default under, any material indenture, mortgage, deed
of trust, lease or other agreement or instrument known
to such counsel, to which the Company or any of its
subsidiaries is a party or by which the Company or any
of its subsidiaries or any of their respective
properties are bound, or the charter documents or the
by-laws of the Company or any of the Subsidiaries, or
any statute or any material judgment, decree, order,
rule or regulation of any court or other governmental
authority or any arbitrator known to such counsel and
applicable to the Company or any of its subsidiaries;
(ix) the Registration Statement is effective under the
Act; any required filing of the Prospectus or any Term
Sheet that constitutes a part thereof pursuant to Rules
434 and 424(b) has been made in the manner and within
the time period required by Rules 434 and 424(b); and
no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment
thereto and no order directed at any document
incorporated by reference in the Registration
Statement, the Prospectus or any Integrated Prospectus
or any amendment of supplement thereto has been issued,
and no proceedings for that purpose have been
instituted or threatened or, to the best knowledge of
such counsel, are contemplated by the Commission;
(x) the registration statement originally filed with
respect to the Securities and each amendment thereto,
any Rule 462(b) Registration Statement, the Prospectus
and any Integrated Prospectus (in each case, including
the documents incorporated by reference therein but not
including the financial statements and other financial
information contained therein, as to which such counsel
need express no opinion) comply as to form in all
material respects with the applicable requirements of
the Act, the Exchange Act, and the respective rules and
regulations of the Commission thereunder;
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<PAGE>
Such counsel shall also state that they have no reason to
believe that the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus or any
Integrated Prospectus, as of its date or the date of such opinion,
included or includes any untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and public
officials and, as to matters involving the application of laws of any
jurisdiction other than the State of Florida or the United States, to
the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion of [insert name of local counsel]
satisfactory to counsel for the Underwriters. Insofar as the opinion in
clause (viii)(B) above relates to the Company's subsidiaries other than
Gemaire Distributors, Inc., Heating & Cooling Supply, Inc., Comfort
Supply, Inc., Central Air Conditioning Distributors, Inc., Dunhill
Personnel System, Inc., Watsco Components, Inc., Rho Sigma, Inc.,
Cam-Stat, Inc. and P.E./Del Mar, Inc., such opinion may be limited to
actual awareness of such counsel without any inquiry other than
inquiries of officers of the Company. The foregoing opinion shall also
state that the Underwriters are justified in relying upon such opinion
of [insert name of local counsel], and copies of such opinion shall be
delivered to the Representative and counsel for the Underwriters.
References to the Registration Statement, the Prospectus or
any Integrated Prospectus in this paragraph (b) shall include any
amendment or supplement thereto at the date of such opinion.
(c) The Selling Securityholders shall have furnished to the
Representative the opinion of Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A., counsel for the Selling Securityholders, dated
the Firm Closing Date, to the effect that:
(i) Such Selling Securityholder has full power to enter
into this Agreement, the Custody Agreement and the
Power-of-Attorney and to sell, transfer and deliver the
Securities being sold by such Selling Securityholder
hereunder in the manner provided in this Agreement and
to perform its obligations under the Custody Agreement;
this Agreement, the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered
by each Selling Securityholder; assuming due
authorization, execution and delivery by the Custodian,
the Custody Agreement and the Power-of-Attorney are the
legal, valid, binding and enforceable instruments of
such Selling
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<PAGE>
Securityholder, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law);
(ii) the delivery by each Selling Securityholder to the
several Underwriters of certificates for the Securities
being sold hereunder by such Selling Securityholder
against payment therefor as provided herein, will
convey good and valid title to such Securities to the
several Underwriters, free and clear of all security
interests, liens, encumbrances, equities, claims or
other defects;
(iii) the sale of the Securities to the Underwriters by
such Selling Securityholder pursuant to this Agreement,
the compliance by such Selling Securityholder with the
other provisions of this Agreement, the Custody
Agreement and the consummation of the other
transactions herein contemplated do not (A) require the
consent, approval, authorization, registration or
qualification of or with any governmental authority,
except such as have been obtained and such as may be
required under state securities or blue sky laws, or
(B) conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a
default under any material indenture, mortgage, deed of
trust, lease or other agreement or instrument to which
such Selling Securityholder is a party or by which such
Selling Securityholder or any of such Selling
Securityholder's properties are bound, or any statute
or any judgment, decree, order, rule or regulation of
any court or other governmental authority or any
arbitrator applicable to such Selling Securityholder.
In rendering such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and public
officials and, as to matters involving the application of laws of any
jurisdiction other than the State of Florida or the United States, to
the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion of [insert name of local counsel]. The
foregoing opinion shall also state that the Underwriters are justified
in relying upon such opinion of [insert name of local counsel], and
copies of such opinion shall be delivered to the Representative and
counsel for the Underwriters.
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<PAGE>
References to the Registration Statement, the Prospectus or
any Integrated Prospectus in this paragraph (c) shall include any
amendment or supplement thereto at the date of such opinion.
(d) The Representative shall have received an opinion, dated
the Firm Closing Date, of King & Spalding counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the
Registration Statement, the Prospectus or any Integrated Prospectus,
and such other related matters as the Representative may reasonably
require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters. In rendering such opinion, such counsel
may rely as to all matters of Florida law upon the opinion of
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., referred to
in paragraph (b) above.
(e) The Representative shall have received from Arthur
Anderson LLP a letter or letters dated, respectively, the date hereof
and the Firm Closing Date, in form and substance satisfactory to the
Representative to the effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the
meaning of the Act, the Exchange Act and the applicable
rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules and pro forma financial
statements of the Company examined by them and included
in the Registration Statement, the Prospectus and any
Integrated Prospectus comply in form in all material
respects with the applicable accounting requirements of
the Act, the Exchange Act and the related published
rules and regulations thereunder;
(iii) on the basis of their limited review in accordance with
standards established by the American Institute of
Certified Public Accountants of the interim unaudited
consolidated condensed financial statements of the
Company and its consolidated subsidiaries as of and for
the nine months ended September 30, 1995 included in
the Registration Statement, the Prospectus and any
Integrated Prospectus, and carrying out certain
specified procedures (which do not constitute an
examination made in accordance with generally accepted
auditing standards) that would not necessarily reveal
matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the
minute books of the shareholders, the board of
directors and any committees thereof
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<PAGE>
of the Company and each of its consolidated
subsidiaries, and inquiries of certain officials of the
Company and its consolidated subsidiaries who have
responsibility for financial and accounting matters,
nothing came to their attention that caused them to
believe that:
(A) the unaudited consolidated condensed financial
statements of the Company and its consolidated
subsidiaries included in the Registration
Statement, the Prospectus and any Integrated
Prospectus do not comply in form in all material
respects with the applicable accounting
requirements of the Act, the Exchange Act and the
related published rules and regulations
thereunder, or are not in conformity with
generally accepted accounting principles applied
on a basis substantially consistent with that of
the audited consolidated financial statements
included in the Registration Statement, the
Prospectus and any Integrated Prospectus; and
(B) at a specific date not more than five business
days prior to the date of such letter, there were
any changes in the capital stock or long-term debt
of the Company and its consolidated subsidiaries
or any decreases in net current assets or
shareholders' equity of the Company and its
consolidated subsidiaries, in each case compared
with amounts shown on the September 30, 1995
unaudited consolidated condensed balance sheet
included in the Registration Statement, the
Prospectus and any Integrated Prospectus, or for
the period from October 1, 1995 to such specified
date there were any decreases, as compared with
the corresponding period in the preceding year, in
total revenues, income before income taxes and
minority interests or total or per share amounts
of net income of the Company and its consolidated
subsidiaries, except in all instances for changes,
decreases or increases set forth in such letter;
(iv) they have carried out certain specified
procedures, not constituting an audit, with respect to
certain amounts, percentages and financial information
that are derived from the general accounting records of
the Company and its consolidated subsidiaries and are
included in the Registration Statement, the Prospectus
and any Integrated Prospectus and have compared
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<PAGE>
such amounts, percentages and financial information
with such records of the Company and its consolidated
subsidiaries and with information derived from such
records and have found them to be in agreement,
excluding any questions of legal interpretation; and
(v) on the basis of a reading of the unaudited pro
forma consolidated condensed financial statements
included in the Registration Statement, the Prospectus
and any Integrated Prospectus, carrying out certain
specified procedures that would not necessarily reveal
matters of significance with respect to the comments
set forth in this paragraph (v), inquiries of certain
officials of the Company and its consolidated
subsidiaries and Three States who have responsibility
for financial and accounting matters and proving the
arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the unaudited
pro forma consolidated condensed financial statements,
nothing came to their attention that caused them to
believe that the unaudited pro forma consolidated
condensed financial statements do not comply in form in
all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of
such statements.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representative deems such explanation unnecessary, and (B) such changes,
decreases, increases do not, in the sole judgment of the Representative, make it
impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement, the Prospectus and any
Integrated Prospectus in this paragraph (e) with respect to either letter
referred to above shall include any amendment or supplement thereto at the date
of such letter.
(f) The Representative shall have received from Rhea & Ivy,
PLC a letter or letters dated, respectively, the date hereof and the
Firm Closing Date, in form and substance satisfactory to the
Representative to the effect that:
(i) they are independent accountants with respect to
Three States and its consolidated subsidiaries within
the meaning of the Act,
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<PAGE>
the Exchange Act and the applicable rules and
regulations thereunder;
(ii) in their opinion, the audited consolidated
financial statements of Three States examined by them
and included in the Registration Statement, the
Prospectus and any Integrated Prospectus comply in form
in all material respects with the applicable accounting
requirements of the Act, the Exchange Act and the
related published rules and regulations thereunder; and
(iii) on the basis of their limited review in accordance with
standards established by the American Institute of
Certified Public Accountants of the interim unaudited
consolidated condensed financial statements of Three
States and its consolidated subsidiaries as of and for
the nine months ended September 30, 1995 included in
the Registration Statement, the Prospectus and any
Integrated Prospectus, and carrying out certain
specified procedures (which do not constitute an
examination made in accordance with generally accepted
auditing standards) that would not necessarily reveal
matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the
minute books of the shareholders, the board of
directors and any committees thereof of Three States
and each of its consolidated subsidiaries, and
inquiries of certain officials of Three States and its
consolidated subsidiaries who have responsibility for
financial and accounting matters, nothing came to their
attention that caused them to believe that the
unaudited consolidated condensed financial statements
of Three States and its consolidated subsidiaries
included in the Registration Statement, the Prospectus
and any Integrated Prospectus do not comply in form in
all material respects with the applicable accounting
requirements of the Act, the Exchange Act and the
related published rules and regulations thereunder, or
are not in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with that of the audited consolidated
financial statements included in the Registration
Statement, the Prospectus and any Integrated
Prospectus.
(g) The Representative shall have received a certificate,
dated the Firm Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect
that:
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<PAGE>
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and
as of the Firm Closing Date; the Registration
Statement, as amended as of the Firm Closing Date, does
not include any untrue statement of a material fact or
omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus
and any Integrated Prospectus, as amended or
supplemented as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit
to state any material fact necessary in order to make
the statements therein, in the light of the
circumstances under which they were made, not
misleading; and the Company has performed all covenants
and agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment
thereto and no order directed at any document
incorporated by reference in the Registration
Statement, the Prospectus or any Integrated Prospectus
or any amendment or supplement thereto has been issued,
and no proceedings for that purpose have been
instituted or threatened or, to the best of the
Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and
each of the Prospectus and any Integrated Prospectus,
neither the Company nor any of its subsidiaries have
sustained any material loss or interference with their
respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not
been any material adverse change, or any development
involving a prospective material adverse change, in the
condition (financial or otherwise), management,
business prospects, net worth or results of operations
of the Company or any of its subsidiaries, except in
each case as described in or contemplated by the
Prospectus and any Integrated Prospectus.
(h) The Representative shall have received a certificate from
each Group 1 Selling Securityholder, signed by such Selling
Securityholder, dated the Firm Closing Date, to the effect that:
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<PAGE>
(i) the representations and warranties of such Group 1
Selling Securityholder in this Agreement are true and
correct as if made on and as of the Firm Closing Date;
(ii) the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact
necessary to make the statements therein not
misleading, and each of the Prospectus and any
Integrated Prospectus, as amended or supplemented as of
the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any
material fact necessary in order to make the statements
therein, in the light of the circumstances under which
they were made, not misleading; and
(iii) such Group 1 Selling Securityholder has performed all
covenants and agreements on its part to be performed or
satisfied at or prior to the Firm Closing Date.
(i) The Representative shall have received a certificate from
each Group 2 Selling Securityholder, signed by such Group 2 Selling
Securityholder, dated the Firm Closing Date, to the effect that:
(i) the representations and warranties of such Group 2
Selling Securityholder in this Agreement are true and
correct as if made on and as of the Firm Closing Date;
(ii) to the extent that any statements or omissions are
made in the Registration Statement, the Prospectus and
any Integrated Prospectus in reliance upon and in
conformity with written information furnished to the
Company by the Group 2 Selling Securityholder
specifically for use therein, the Registration
Statement, as amended as of the Firm Closing Date, does
not include any untrue statement of a material fact or
omit to state any material fact necessary to make the
statements therein not misleading, and each of the
Prospectus and any Integrated Prospectus, as amended or
supplemented as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit
to state any material fact necessary in order to make
the statements therein, in the light of the
circumstances under which they were made, not
misleading; and
- 37 -
<PAGE>
(iii) such Group 2 Selling Securityholder has performed all
covenants and agreements on its part to be performed or
satisfied at or prior to the Firm Closing Date.
(j) The Representative shall have received from each person
who is a director or executive officer of the Company an agreement to
the effect that such person will not, directly or indirectly, without
the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, offer, sell, offer to sell, pledge,
contract to sell, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, pledge, contract
of sale grant of an option to purchase or other sale or disposition) of
any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of
120 days after the date of this Agreement.
(k) On or before the Firm Closing Date, the Representative and
counsel for the Underwriters shall have received such further
certificates, documents or other information as they may have
reasonably requested from the Company.
(l) Prior to the commencement of the offering of the
Securities, the Securities shall have been approved for listing on the
New York Stock Exchange, subject to official notice of issuance.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative and
counsel for the Underwriters. The Company shall furnish to the Representative
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representative and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. INDEMNIFICATION AND CONTRIBUTION
(a) The Company and each Group 1 Selling Securityholder
jointly and severally agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter or such controlling person may
become subject under the Act, the Exchange Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon:
- 38 -
<PAGE>
(i) any untrue statement or alleged untrue statement made
by the Company or such Group 1 Selling Securityholder
in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration
Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any Integrated Prospectus
or any amendment or supplement thereto or (B) any
application or other document, or any amendment or
supplement thereto, executed by the Company or such
Group 1 Selling Securityholder or based upon written
information furnished by or on behalf of the Company
filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities
association or securities exchange (each an
"Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any
Integrated Prospectus or any amendment or supplement
thereto, or any Application a material fact required to
be stated therein or necessary to make the statements
therein not misleading, or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual
materials used in connection with the marketing of the
Securities, including without limitation, slides,
videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred
by such Underwriter or such controlling person in connection with
investigating, defending against or appearing as a third-party witness
in connection with any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the Company and such Group 1 Selling
Securityholder will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus, any Integrated
Prospectus or any amendment or supplement thereto, or any Application
in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representative
specifically for use therein; and PROVIDED, FURTHER, that the Company
and such Group 1 Selling Securityholder will not be liable to any
Underwriter or any person controlling such Underwriter with respect to
any such untrue statement or omission made in any
- 39 -
<PAGE>
Preliminary Prospectus that is corrected in the Prospectus or any
Integrated Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased
Securities from such Underwriter but was not sent or given a copy of
the Prospectus or any Integrated Prospectus (as amended or
supplemented), other than the documents incorporated by reference
therein, at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the
Prospectus or any Integrated Prospectus (as amended or supplemented) is
required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company
with Section 5(a)(iv) or 5(a)(v) of this Agreement. This indemnity
agreement will be in addition to any liability which the Company and
such Group 1 Selling Securityholder may otherwise have. Neither the
Company nor any Group 1 Selling Securityholder will, without the prior
written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such
Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of
all of the Underwriters and such controlling persons from all liability
arising out of such claim, action, suit or proceeding.
(b) The Group 2 Selling Securityholder agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers
who signs the Registration Statement, each Underwriter and each person
who controls the Company or any Underwriter within the meaning of
Section 15 of the Act against any such losses, claims, damages or
liabilities to which the Company, any such director, officer, such
Underwriter or any such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or any amendment or supplement thereto, or any Application
or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or
any Integrated Prospectus or any amendment or supplement thereto, or
any Application or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Group 2 Selling
Securityholder for use therein; PROVIDED, HOWEVER, that the Group 2
Selling Securityholder will not be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue
statement or omission
- 40 -
<PAGE>
made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any
such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus or any
Integrated Prospectus (as amended or supplemented) at or prior to the
written confirmation of the sale of such Securities to such person in
any case where such delivery of the Prospectus (as amended or
supplemented) is required by the Act, unless such failure to deliver
the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5(a)(iv) or 5 (a)(v) of this
Agreement; and subject to the limitation set forth immediately
preceding this clause, will reimburse, as incurred, any legal or other
expenses reasonably incurred by the Company, any such director,
officer, such Underwriter or any such controlling person in connection
with investigating or defending any such loss, claim, damage, liability
or any action in respect thereof. This indemnity agreement will be in
addition to any liability which the Group 2 Selling Securityholder may
otherwise have. The Group 2 Selling Securityholder will not, without
the prior written consent of the Underwriters purchasing greater than
fifty percent of the Securities, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls
such Underwriter within the meaning of Section 15 of the Act is a party
to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of the
Underwriters and each such controlling person from all liability
arising out of such claim, action, suit or proceeding.
(c) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors, each of
its officers who signed the Registration Statement, each Selling
Securityholder and each person, if any, who controls the Company or
such Selling Securityholder within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act against any losses, claims, damages
or liabilities to which the Company, any such director, officer of the
Company, any Selling Securityholder or any such controlling person may
become subject under the Act, the Exchange Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus, or the Prospectus or any Integrated Prospectus or any
amendment or supplement thereto, or any Application or (ii) the
omission or the alleged omission to state therein a material fact
required to be stated in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or any amendment or supplement thereto, or any Application
or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written
- 41 -
<PAGE>
information furnished to the Company by such Underwriter through the
Representative specifically for use therein; and, subject to the
limitation set forth immediately preceding this clause, will reimburse,
as incurred, any legal or other expenses reasonably incurred by the
Company, any such director, officer or controlling person or such
Selling Securityholder in connection with investigating or defending
any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any liability
which such Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party otherwise than under this Section 8. In
case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to it
and/or other indemnified parties which are different from or additional
to those available to the indemnifying party, the indemnifying party
shall not have the right to direct the defense of such action on behalf
of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such
action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the
defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that in connection with such
action the indemnifying party shall not be liable for the expenses of
more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or
circumstances, designated by the Representative in the case of
paragraph (a) or (b) of this Section 8, representing the indemnified
parties under such paragraph (a) or (b) who are parties to such action
or actions) or (ii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to
such indemnified party, the indemnifying party will not be liable for
the costs and expenses
- 42 -
<PAGE>
of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified
party waived its rights under this Section 8 in which case the
indemnified party may effect such a settlement without such consent. It
is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections 8(a), 8(b) and
8(c) hereof, including the amounts of any requested reimbursement
payments and the method of determining such amounts, shall be settled
by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for
arbitration or written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event that the party
demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said
demand or notice is authorized to do so. Such an arbitration would be
limited to the operation of the interim reimbursement provisions
contained in Sections 8(a), 8(b) and 8(c) hereof and would not resolve
the ultimate propriety or enforceability of the obligation to reimburse
expenses which is created by the provisions of such Sections 8(a), 8(b)
and 8(c) hereof.
(e) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in
respect of any losses, claims, damages or liabilities (or actions in
respect thereof), each indemnifying party, in order to provide for just
and equitable contribution, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits
received by the indemnifying party or parties on the one hand and the
indemnified party or parties on the other from the offering of the
Securities or (ii) if the allocation provided by the foregoing clause
(i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the
one hand and the indemnified party or parties on the other in
connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liabilities
(or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company
on the one hand, such Selling Securityholder on another hand and the
Underwriters on the other hand shall be deemed to be in the same
proportion as the total proceeds from the offering (before deducting
expenses) received by the Company and such Selling Securityholder bear
to the total underwriting discounts and commissions received by the
Underwriters. The relative fault of the parties shall be determined by
referenced to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company,
such Selling Securityholder or the Underwriters, the parties' relative
intents, knowledge, access to information and opportunity to correct or
prevent such
- 43 -
<PAGE>
statement or omission, and any other equitable considerations
appropriate in the circumstances. The Company, each Selling
Securityholder and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro
rata or per capita allocation (even if the Underwriters were treated as
one entity for such purpose) of by any other method of allocation that
does not take into account the equitable considerations referred to
above in this paragraph (e). Notwithstanding any other provision of
this paragraph (e), no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the total public
offering price of the Securities purchased by such Underwriter under
this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same
or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective
underwriting obligations and not joint, and contributions among
Underwriters shall be governed by the provisions of the Prudential
Securities Incorporated Master Agreement Among Underwriters. For
purposes of this paragraph (e), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as such
Underwriter, each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who
controls the Company or such Selling Securityholder within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, shall have
the same rights to contribution as the Company and such Selling
Securityholder.
(f) The liability of each Selling Securityholder under this
Section 8 shall not exceed an amount equal to the net proceeds of the
Securities sold by such Selling Securityholder to the Underwriters.
9. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate of Firm
Securities or Option Securities, as the case may be, to
- 44 -
<PAGE>
be purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representative are not made within 36 hours
after such default for the purchase by other persons (who may include on or more
of the non-defaulting Underwriters, including the Representative) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company other than as provided in Section 10 hereof. In the event of any default
by one or more Underwriters as described in this Section 9, the Representative
shall have the right to postpone the Firm Closing Date or the Option Closing
Date, as the case may be, established as provided in Section 3 hereof for not
more than seven business days in order that any necessary changes may be made in
the arrangements or documents for the purchase and delivery of the Firm
Securities or Option Securities, as the case may be. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. SURVIVAL. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company,
its officers, the Selling Securityholders and the several Underwriters
set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the
Company, any of its officers or directors, any Selling Securityholder,
any Underwriter or any controlling person referred to in Section 8
hereof and (ii) delivery of any payment for the Securities. The
respective agreements, covenants, indemnities and other statements set
forth in Sections 6 and 8 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
11. TERMINATION.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representative by notice to the Company and the Selling Securityholders
given prior to the Firm Closing Date or the related Option Closing
Date, respectively, in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the Firm Closing Date or such
Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have,
in the sole judgment of the Representative, sustained
any material loss or interference with their respective
businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any
material adverse change, or any development involving a
prospective material adverse change (including without
limitation a change
- 45 -
<PAGE>
in management or control of the Company), in the
condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and
its subsidiaries, except in each case as described in
or contemplated by the Prospectus and any Integrated
Prospectus (exclusive of any amendment or supplement
thereto);
(ii) trading in the Common Stock or the Class B Common
Stock shall have been suspended by the Commission or
the New York Stock Exchange or American Stock Exchange,
as the case may be, or trading in securities generally
on the New York or American Stock Exchanges shall have
been suspended or minimum or maximum prices shall have
been established on either such exchange;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign
power, (B) an outbreak or escalation of any other
insurrection or armed conflict involving the United
States or (C) any other calamity or crisis or material
adverse change in general economic, political or
financial conditions having an effect on the U.S.
financial markets that, in the sole judgment of the
Representative, makes it impractical or inadvisable to
proceed with the public offering or the delivery of the
Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11
shall be without liability of any party to any other party except as
provided in Section 10 hereof.
12. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in
the last paragraph on the front cover page and in the first and third paragraphs
under the heading "Underwriting" in any Preliminary Prospectus, the Prospectus
or any Integrated Prospectus (to the extent such statements relate to the
Underwriters) constitute the only information furnished by any Underwriter
through the Representative to the Company for the purposes of Sections 2(a)(ii)
and 8 hereof. The Underwriters confirm that such statements (to such extent) are
correct.
13. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and
- 46 -
<PAGE>
confirmed in writing to Prudential Securities Incorporated, One New York Plaza,
New York, New York 10292, telecopy number (212) 778-7621, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
2665 South Bayshore Drive, Coconut Grove, Florida 33133, telecopy number (305)
858-4492, Attention: President.
14. SUCCESSORS. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company, each Selling
Securityholder and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement, or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company and the Selling
Securityholders contained in Section 8 of this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons who
control the Company or such Selling Securityholder within the meaning of Section
15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from
any Underwriter shall be deemed a successor because of such purchase.
15. APPLICABLE LAW. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
- 47 -
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, each of
the Selling Securityholders and each of the several Underwriters.
Very truly yours,
WATSCO, INC.
By:________________________________
Name:
Title:
THE SELLING SECURITYHOLDERS
[IDENTIFY]
By:________________________________
Name:
Title: Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
By:_____________________________
Name: Jean-Claude Canfin
Title: Director
- 48 -
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
UNDERWRITERS
NUMBER OF FIRM
SECURITIES TO
UNDERWRITER BE PURCHASED
----------- ------------
<S> <C>
Prudential Securities Incorporated...........................
[Insert names of other Underwriters]
Total........................................................ 1,400,000
=========
</TABLE>
- 49 -
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
NUMBER OF FIRM
SECURITIES TO
BE SOLD
-------
<S> <C> <C>
The Company...................................... 1,000,000
Group 1 Selling Securityholders:................. 105,720
Alna Capital Associates..................... 25,720
Albert H. Nahmad............................ 50,000
Ronald P. Newman............................ 30,000
-------
............................................ 105,720
Group 2 Selling Securityholders:................. 294,280
Oliver M. Butler and
Marjorie E. Butler Declaration of Trust.. 286,405
O.M. Butler................................. 7,875
-------
............................................ 294,280
Total............................................ 1,400,000
=========
</TABLE>
- 50 -
<PAGE>
SCHEDULE 3
SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
- 51 -
GREENBERG
ATTORNEYS AT LAW
TRAURIG
January 22, 1996
Watsco, Inc.
2665 South Bayshore Drive
Suite 901
Miami, Florida 33133
Re: OFFERING OF COMMON STOCK OF WATSCO, INC.
Gentlemen:
On the date hereof, Watsco, Inc., a Florida corporation (the
"Company"), filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act"). Such Registration Statement relates to the sale by
the Company and certain selling shareholders of up to 1,610,000 shares of the
Company's Common Stock, par value $.50 per share (the "Shares"). We have acted
as counsel to the Company in connection with the preparation and filing of the
Registration Statement.
In connection therewith, we have examined and relied upon the original
or a copy, certified to our satisfaction, of (i) the Amended and Restated
Articles of Incorporation and the By-laws of the Company; (ii) resolutions of
the Board of Directors of the Company authorizing the offering and the issuance
of the shares and related matters; (iii) the
GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & QUENTEL, P.A.
1221 BRICKELL AVENUE MIAMI, FLORIDA 33131 305-579-0500 FAX 305-579-0717
MIAMI FORT LAUDERDALE WEST PALM BEACH TALLAHASSEE
NEW YORK WASHINGTON, D.C.
<PAGE>
Watsco, Inc.
January 22, 1996
Page 2
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Registration Statement and the exhibits thereto; and (iv) such other documents
and instruments as we have deemed necessary for the expression of the opinions
herein contained. In making the foregoing examinations, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, and the conformity to original documents of all documents
submitted to us as certified or photostatic copies. As to various questions of
fact material to this opinion, we have relied, to the extent we deem reasonably
appropriate, upon representations or certificates of officers or directors of
the Company and upon documents, records and instruments furnished to us by the
Company, without independently checking or verifying the accuracy of such
documents, records, and instruments.
Based upon the foregoing examination, we are of the opinion that the
Shares have been duly and validly authorized and, when issued and delivered in
accordance with the Underwriting Agreement filed as Exhibit 1.1 to the
Registration Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category or persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission thereunder.
Sincerely,
GREENBERG, TRAURIG, HOFFMAN,
LIPOFF, ROSEN & QUENTEL, P.A.
By:__________________________
REVOLVING CREDIT AGREEMENT
________________________________________________________________________________
BY AND BETWEEN
CAC ACQUISITION, INC.
- AND -
NATIONSBANK OF FLORIDA, N.A.
________________________________________________________________________________
DATED AS OF OCTOBER 26, 1995
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1
DEFINITIONS........................ 1
1.1 DEFINED TERMS ............................................ 1
1.2 OTHER DEFINITIONAL PROVISIONS ............................ 4
SECTION 2
AMOUNT AND TERMS OF REVOLVING CREDIT ............ 5
2.1 REVOLVING CREDIT ......................................... 5
2.2 ADVANCES UNDER REVOLVING CREDIT .......................... 5
2.3 LIBOR OPTION ............................................. 6
2.4 NOTE ..................................................... 9
2.5 INTEREST ON THE NOTE ..................................... 9
2.6 MATURITY OF REVOLVING CREDIT ............................. 9
2.7 ACCESS TO REVOLVING CREDIT ............................... 9
2.8 INTEREST ................................................. 9
2.9 PAYMENTS ................................................. 10
2.10 STANDBY L/C AGREEMENT .................................... 10
SECTION 3
ADDITIONAL COSTS AND FEES ................ 10
3.1 ADDITIONAL COSTS ......................................... 10
3.2 FACILITY FEE ............................................. 11
SECTION 4
COLLATERAL ........................ 12
SECTION 5
GUARANTY ......................... 12
SECTION 6
REPRESENTATIONS AND WARRANTIES ............. 12
6.1 ORGANIZATION, STANDING, CORPORATE POWER, ETC ............. 12
6.2 AUTHORIZATION ............................................ 13
6.3 LITIGATION ............................................... 13
6.4 FINANCIAL STATEMENTS ..................................... 13
6.5 TAXES .................................................... 14
6.6 BURDENSOME RESTRICTIONS .................................. 14
6.7 CENTRAL OWNERSHIP ........................................ 14
6.8 PROPERTY AND ASSETS ...................................... 14
(i)
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
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6.9 PERMITS, LICENSES AND APPROVALS .......................... 14
6.10 ENFORCEABILITY ........................................... 14
6.11 DEFAULT .................................................. 15
6.12 REGULATION U ............................................. 15
6.13 ERISA .................................................... 15
6.14 INVESTMENT COMPANY ACT ................................... 15
6.15 USE OF PROCEEDS .......................................... 15
6.16 OTHER ASSETS ............................................. 15
SECTION 7
CONDITIONS PRECEDENT .................. 15
7.1 OPINION OF COUNSEL ....................................... 16
7.2 SUPPORTING DOCUMENTS ..................................... 16
7.3 CONDITIONS TO ALL ADVANCES AND STANDBY L/C'S ............. 17
SECTION 8
AFFIRMATIVE COVENANTS .................. 18
8.1 CORPORATE EXISTENCE ...................................... 18
8.2 INSURANCE ................................................ 19
8.3 OBLIGATIONS AND TAXES .................................... 19
8.4 NOTICE ................................................... 19
8.5 BOOKS AND RECORDS/AUDITS ................................. 19
8.6 COMPLIANCE WITH LAW ...................................... 19
8.7 TRANSACTIONS WITH AFFILIATES ............................. 20
8.8 CONTINGENT LIABILITIES ................................... 20
8.9 EXECUTION OF OTHER DOCUMENTS ............................. 20
8.10 REPORTING REQUIREMENTS - BORROWER ........................ 20
8.11 NET WORTH - BORROWER ..................................... 21
8.12 FUNDED DEBT/EARNINGS RATIO - BORROWER .................... 22
8.13 FIXED CHARGE COVERAGE RATIO - BORROWER ................... 22
8.14 DISTRIBUTORSHIP AGREEMENT - BORROWER ..................... 22
8.15 REPORTING REQUIREMENTS - GUARANTOR ....................... 22
8.16 TANGIBLE NET WORTH - GUARANTOR ........................... 24
8.17 LEVERAGE RATIO - GUARANTOR ............................... 24
8.18 MANAGEMENT - GUARANTOR ................................... 24
SECTION 9
NEGATIVE COVENANTS .................... 24
9.1 DEFAULT UNDER OTHER AGREEMENTS OR CONTRACTS .............. 24
9.2 ACCOUNTING PRACTICES ..................................... 25
9.3 GUARANTIES/DEBT ASSUMPTIONS - BORROWER ................... 25
9.4 SALE/LEASEBACK AND CAPITALIZED LEASE
TRANSACTIONS - BORROWER ................................. 25
9.5 DISPOSAL OF PROPERTY - BORROWER .......................... 25
(ii)
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TABLE OF CONTENTS
(CONTINUED)
PAGE
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9.6 OWNERSHIP - BORROWER ..................................... 25
9.7 ADDITIONAL INDEBTEDNESS - BORROWER ....................... 25
9.8 DIVIDENDS - BORROWER ..................................... 25
9.9 ADDITIONAL LIENS - BORROWER .............................. 26
9.10 CAPITAL EXPENDITURES - BORROWER .......................... 26
9.11 ADVANCES TO AFFILIATES ................................... 26
9.12 LIMITATION ON MERGERS AND SALE OF ASSETS ................. 26
9.13 CONTROL/NAME ............................................. 26
9.14 NOTES, ACCOUNTS RECEIVABLE ............................... 26
SECTION 10
(iii)
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
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DEFAULTS AND REMEDIES ................... 26
10.1 EVENTS OF DEFAULT AND REMEDIES ........................... 26
SECTION 11
MISCELLANEOUS ....................... 29
11.1 NOTICES .................................................. 29
11.2 SURVIVAL OF REPRESENTATIONS .............................. 30
11.3 EFFECT OF DELAY .......................................... 30
11.4 EXPENSES ................................................. 30
11.5 MODIFICATIONS AND WAIVERS ................................ 30
11.6 DISCLAIMER ............................................... 30
11.7 REMEDIES CUMULATIVE ...................................... 31
11.8 APPLICATION OF PAYMENTS .................................. 31
11.9 CONSTRUCTION ............................................. 31
11.10 SEVERABILITY OF PROVISIONS ............................... 31
11.11 HEADINGS ................................................. 31
11.12 SUCCESSORS AND ASSIGNS ................................... 31
11.13 INDEMNIFICATION .......................................... 32
11.14 TIME OF PAYMENTS ......................................... 32
11.15 MANDATORY ARBITRATION .................................... 32
(iv)
<PAGE>
REVOLVING CREDIT AGREEMENT
THIS REVOLVING CREDIT AGREEMENT (the "Agreement") is made and entered
into as of the 26th day of October, 1995, by and between:
CAC ACQUISITION, INC.,
a North Carolina corporation, which corporation shall
immediately change its name to CENTRAL AIR CONDITIONING
DISTRIBUTORS, INC. upon the acquisition described in
Section 5.15 herein
-and-
NATIONSBANK OF FLORIDA, N.A.,
(hereinafter the "Lender")
R E C I T A L S
A. The Borrower has requested Lender to provide a Revolving
Credit (as said term is defined herein) to the Borrower, as set forth herein.
B. The Lender is willing to provide the Revolving Credit to the
Borrower for the purposes, upon the terms, and subject to the conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, and for other good and valuable consideration, it is agreed as
follows:
SECTION 1
DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, the following terms
shall have the meanings set forth below:
"ADVANCE": an Advance to the Borrower pursuant to Section 2.2
herein.
"AFFILIATES": any Person that directly or indirectly through
one or more intermediaries controls or are controlled by or are under common
control with Borrower.
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"AGREEMENT": this Revolving Credit Agreement, as the same may
be amended, supplemented, modified or extended from time to time.
"BUSINESS DAY": a day other than a Saturday, Sunday or other
day on which commercial banks in the States of Florida and North Carolina are
authorized or required by law to close.
"CLOSING DATE": as of October 26, 1995.
"CODE": the Internal Revenue Code of 1986, as amended,
supplemented or modified from time to time.
"DEFAULT": any of the events specified in Section 10 herein,
whether or not any requirement for the giving of notice, the lapse of time, or
both, has been satisfied, provided such Default has not been waived in writing
by the Lender.
"DEFAULT RATE": an interest rate per annum equal to the lesser
of (i) two (2.0%) percent in excess of the Prime Rate; or (ii) the maximum rate
of interest permitted by law.
"ERISA": the Employee Retirement Income Security Act of 1974
and all related provisions of the Code, as the same may be amended, supplemented
or modified from time to time, together with all applicable rulings and
regulations issued under the provisions of either of them.
"EVENT OF DEFAULT": any of the events specified in Section 10
herein, provided that any requirement for the giving of notice, the lapse of
time, or both, or any other conditions, has been satisfied.
"FUNDED DEBT": Indebtedness of Borrower other than trade
payables, accrued expenses incurred in the ordinary course of business, deferred
tax obligations and the Subordinated Indebtedness.
"GUARANTOR": Watsco, Inc., a Florida corporation.
"INDEBTEDNESS": at any date, any obligation for money borrowed
or other monetary obligations incurred, whether or not evidenced by notes,
bonds, debentures or other similar instruments, or any obligation under
conditional sale or other title retention agreements or capitalized leases or
any obligation issued or assumed as full or partial payment for property whether
or not secured by a purchase money mortgage or any guaranty of any of the
foregoing.
"LIABILITIES": at any date, all liabilities, direct and
indirect, contingent and absolute, computed in accordance
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<PAGE>
with generally accepted accounting principles applied on a consistent basis.
"LIBOR RATE": the rate at which United States Dollar deposits
are offered in the London Interbank Market, fully adjusted for any reserve
requirements established from time to time by the Board of Governors of the
Federal Reserve System.
"LIEN": any mortgage, pledge, hypothecation, assignment,
security interest, lien, charge or encumbrance, or preference, priority or other
security agreement or arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, and
the filing of, or agreement to give, any financing statement under the Uniform
Commercial Code or comparable law or any jurisdiction).
"LINE AGREEMENT": that certain Amendment to Line of Credit
Agreement by and between the Lender and Guarantor dated as of April 30, 1994;
and that certain Second Amendment to Line of Credit Agreement by and
between the Lender and Guarantor dated as of June 23, 1995.
"LOAN DOCUMENTS": this Agreement, the Note, the Stock Pledge
Agreement, the Financing Statements, the Guaranty, the Solvency Certificate and
all documents, instruments and agreements executed in connection herewith or
therewith.
"MATURITY DATE": December 31, 1998.
"NET WORTH": (A) the aggregate amount of assets shown on the
balance sheet of Borrower at any particular date less (B) all Liabilities of
Borrower at such date; all as determined in accordance with generally accepted
accounting principals consistently applied.
"NOTE": as said term is defined in Section 2.4 herein.
"PERSON": an individual, sole proprietorship, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture or other entity or a governmental or any agency or
political subdivision thereof.
"PLAN": any plan of a type described in Section 4021(a) of
ERISA which may be established (or maintained by the Borrower in respect of
which the Borrower is an "employer" as defined in Section 3(5) of ERISA.
"PRIME RATE": the index rate of interest (but not necessarily
the best or lowest rate charged borrowing customers of the Lender) announced by
the Lender from time to time as its
3
<PAGE>
prime rate. Said rate is a reference rate for the information and use of the
Lender in establishing the actual rates to be charged to its borrowers.
"REPORTABLE EVENT": any of the events set forth in Section
4034(b) of ERISA or the regulations thereunder.
"REVOLVING CREDIT": as said term is defined in Section 2.1
herein.
"RHEEM": Rheem Manufacturing Company, a Delaware corporation.
"RHEEM AGREEMENT": the distributorship agreement by and
between Rheem and Borrower, together with all amendments thereto, which
agreement shall be in form and content acceptable to Lender.
"STANDBY L/C AGREEMENT": the Lender's current form of
Application and Agreement for Standby Letter of Credit attached hereto and made
a part hereof as Exhibit "A".
"SUBORDINATED INDEBTEDNESS": the subordinated indebtedness of
Borrower to Guarantor in the principal amount of ONE MILLION TWO HUNDRED
THOUSAND DOLLARS ($1,200,000.00) under that certain Subordination Agreement by
and among Lender, Borrower and Guarantor of even date herewith (the
"Subordination Agreement).
"TANGIBLE NET WORTH": the aggregate amount of assets shown on
the balance sheet of Guarantor on any particular date (but excluding from such
assets, capitalized organizational and development costs, capitalized interest,
debt discount and expense, goodwill, patents and trademarks, copyrights,
franchises, licenses, amounts due from officers, employees, directors,
stockholders and affiliates, and other assets as are properly classified as
intangible assets under generally accepted accounting principles), less
Liabilities of Guarantor at such date with the exception of those certain ten
percent (10%) Convertible Subordinated Debentures due 1996 under that certain
Indenture dated September 12, 1986, all computed in accordance with generally
accepted accounting principles applied on a consistent basis.
"TERMINATION DATE": the earlier of the Maturity Date or any
other date beyond which the Lender shall have no obligation hereunder to make
Advances, whether as a result of maturity, Default or otherwise.
1.2 OTHER DEFINITIONAL PROVISIONSOTHER DEFINITIONAL PROVISIONS.
(a) all terms defined in or incorporated into this Agreement shall have the
defined
4
<PAGE>
meanings when used herein or in the Loan Documents or any certificate or other
instrument made or delivered pursuant hereto unless the context otherwise
requires; (b) each accounting term used but not defined herein shall have the
meaning given to it under generally accepted accounting principles.
SECTION 2
AMOUNT AND TERMS OF REVOLVING CREDIT
2.1 REVOLVING CREDIT.
(a) The Lender agrees, upon the terms and subject to the
conditions hereof, to extend a revolving credit facility to the Borrower (the
"Revolving Credit"), in an aggregate principal amount at any one time
outstanding not to exceed EIGHT MILLION DOLLARS ($8,000,000.00), to be used by
the Borrower in order to obtain loans and advances from the Lender ("Advances")
pursuant to the terms and provisions set forth in Section 2.2 herein and for the
issuance of two (2) standby letters of credit in the maximum aggregate face
amount of FOUR MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($4,250,000.00) (the
"Standby L/C's"). The aggregate principal amount of all Advances and the face
amount of the Standby L/C's outstanding at any one time under the Revolving
Credit shall not at any time exceed EIGHT MILLION DOLLARS ($8,000,000.00). The
Advances to the Borrower and issuance of the Standby L/C's on behalf of Borrower
shall at all times be conditioned upon there existing no Default or Event of
Default hereunder, and the Lender shall have no obligation to make Advances or
issue the Standby L/C's at any time that a Default or Event of Default exists
hereunder. Until the Termination Date, the Borrower may use the Revolving Credit
by borrowing, repaying in whole or in part, and reborrowing under the Revolving
Credit, all in accordance with this Agreement; provided, however, at the time of
each Advance or issuance of the Standby L/C's under the Revolving Credit, the
Borrower shall not be in Default hereunder, or in default under any other
agreement with or obligation to the Lender.
2.2 ADVANCES UNDER REVOLVING CREDIT.
(a) Subject to the terms and conditions hereof, from time to
time the Borrower may obtain Advances under the Revolving Credit in an aggregate
principal amount at any one time outstanding not to exceed EIGHT MILLION DOLLARS
($8,000,000.00). The Borrower may use Advances to pay or prepay any Advances
outstanding under such facility in whole or in part, subject to the terms and
conditions of this Agreement; provided that at the time of each such Advance,
the Borrower shall not be in Default hereunder, or in default under any other
agreement with or obligation to the Lender.
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(b) Interest on the Advances outstanding from time to time
under the Revolving Credit shall accrue at an annual rate to be selected by
Borrower equal to either: (i) a fixed rate equal to seventy-five (75) basis
points in excess of the LIBOR Rate for periods of thirty (30) days, sixty (60)
days, ninety (90) days, one hundred twenty (120) days, one hundred fifty (150)
days, one hundred eighty (180) days or one (1) year, but in any event not to
exceed the Maturity Date (the "LIBOR Option"); or (ii) a fluctuating rate equal
to the Prime Rate minus one and five-eighths of one percent (1 5/8%) (the "Prime
Option"). All interest shall be computed on a daily basis based on a 360-day
year. All interest accrued on Advances under the Revolving Credit shall be due
and payable quarterly on the fifth (5th) day of each month. If such day is not a
Business Day, the Business Day next succeeding such date shall be the date on
which interest shall be due and payable.
(c) The Borrower may request Advances on any Business Day,
provided that the Borrower shall give the Lender irrevocable telephonic notice
confirmed in writing (via facsimile or hand delivery) on Lender's usual and
customary form, substantially in the form attached hereto as Exhibit "B",
received by the Lender prior to 12:00 noon (Miami, Florida time) two (2)
Business Days prior to the borrowing date in the event an Advance subject to the
LIBOR Option is selected, specifying the amount to be borrowed and the borrowing
date. Upon fulfillment of the applicable conditions set forth herein, the Lender
shall make such funds available to the Borrower on the borrowing date by
crediting same to the Borrower's demand deposit account with Lender. Upon each
crediting of a sum to the account of the Borrower, the Borrower shall have
effected an Advance from the Lender under the Revolving Credit and shall be
indebted to the Lender for the amount thereof, plus interest thereon, in
accordance with the terms and conditions hereof. Lender shall incur no liability
to Borrower in acting upon any advice referred to above, whether oral or
written, which Lender believes in good faith to have been given by an officer or
other person authorized to borrow on behalf of Borrower. Further, all documents
required to be executed in conjunction with Advances under this Agreement may be
signed by any of the officers or other persons duly authorized by the general
borrowing resolution of Borrower, as such resolution may be amended from time to
time.
2.3 LIBOR OPTION. On the Closing Date, or at the expiration of any
Interest Period (as hereinafter defined), if Borrower selects the LIBOR Option,
it shall simultaneously advise Lender whether such selection is for a thirty
(30) day, sixty (60) day, ninety (90) day, one hundred twenty (120) day, one
hundred fifty (150) day, one hundred eighty (180) day or a one (1) year period
and the applicable interest rate shall remain
6
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effective for the period selected (an "Interest Period"). If Borrower elects to
renew a LIBOR Option Advance, two (2) Business Days prior to the expiration of
any Interest Period, Borrower shall give telephone instructions to Lender
(confirmed in writing), of its election to renew the LIBOR Option Advance for a
subsequent Interest Period and failure to give such instructions shall
conclusively be presumed to be a selection by Borrower of the Prime Option. If
Borrower has selected the Prime Option with respect to any Advance, it may
elect, at any time, to change the interest rate to the LIBOR Option, by
telephonic notice (confirmed in writing) no later than two (2) Business Days
prior to the date the LIBOR Option selection is to become effective. Borrower
may select the LIBOR Option to be in effect with respect to all or specified
portions of the Revolving Credit, provided, however, Advances subject to the
LIBOR Option shall be in minimum increments of FIVE HUNDRED THOUSAND DOLLARS
($500,000.00) and no more than three (3) Advances shall be subject to the LIBOR
Option at any one time.
In the event Borrower has selected the LIBOR Option with
respect to the initial funding or any Interest Period, such selection shall be
subject to the following terms and conditions:
(1) If, at any time, Lender shall have
determined (which determination shall be final and
conclusive and binding on the parties hereto provided
Lender has made such determination in good faith)
that, as a result of any change in any applicable law
or governmental (federal, state or local, domestic or
foreign) rule, regulation or order or any
interpretation thereof (including without limitation,
the introduction of any new or revised law or
governmental rule, regulation or order) or its
compliance with any directive or request of any
central bank or other governmental authority (whether
or not having the force of law), the cost to Lender
of making, funding or maintaining the portion of the
Revolving Credit which then is subject to one or more
LIBOR Options (the "LIBOR Loan") has increased from
its cost at the time of the commencement of the
relevant Interest Period, then Lender shall promptly
so notify Borrower thereof by telephone (confirmed in
writing) and Borrower shall pay to Lender within
thirty (30) days an amount sufficient to indemnify
Lender against such increased cost.
(2) In the event that, at any time, Lender
shall have reasonably determined (which determination
shall be final and conclusive and binding upon the
parties hereto) that it has become unlawful for
7
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Lender to obtain funds in the relevant offshore
interbank markets in order to make or maintain its
LIBOR Loan, Lender shall promptly give notice to
Borrower by telephone (confirmed in writing) of that
determination, whereupon the Prime Rate Option, or a
certificate of deposit based pricing option (the "CD
Option") to be made available to Borrower by Lender
upon such determination, shall be in effect for the
duration of the pending Interest Periods with respect
to the LIBOR Loan.
(3) If, on or before the date of commencement
of any Interest Period, Lender shall have determined
(which determination shall be final, conclusive and
binding on all the parties hereto) that (i) deposits
in United States dollars in amounts equal to the
portion of the Revolving Credit to be subject to the
LIBOR Option for that Interest Period are not being
offered to Lender in the relevant markets, or (ii) by
reason of changes affecting the relevant markets, the
LIBOR Option to be in effect for that period will not
adequately and fairly reflect the cost to Lender of
maintaining the LIBOR Loan for that period, Lender
shall promptly so notify Borrower by telephone
(confirmed in writing) whereupon the Prime Option, or
CD Option to be made available to Borrower by Lender
upon such determination, shall be in effect for that
period with respect to the LIBOR Loan;
(4) Borrower shall compensate Lender within
thirty (30) days of the written request of Lender
(which shall set forth in reasonable detail the basis
for requesting such compensation) for all reasonable
losses, expenses and liabilities (including without
limitation, any interest paid by Lender to lenders of
funds borrowed by it to carry its LIBOR Loan during
any Interest Period and for any loss sustained by
Lender in connection with the re-employment of such
funds) which Lender may sustain: (i) as a result of
Borrower's failure to borrow funds which had been
committed by Lender in advance, at Borrower's
request; or (ii) as a result of Borrower's prepayment
of any outstanding LIBOR Loan.
In the event Lender shall have determined (which determination shall be
binding and conclusive on Borrower) that, by reason of circumstances affecting
the relevant markets for the LIBOR Option, adequate and reasonable means do not
exist for
8
<PAGE>
ascertaining the LIBOR Option with respect to (a) the continuation of the LIBOR
Option then in existence pursuant to a prior request of Borrower, or (b) any
request by Borrower to change the Prime Option then in existence, to the LIBOR
Option, Lender shall promptly notify Borrower by telephone (confirmed in
writing) of such determination. Upon receipt of such notice, the Prime Option,
or CD Option to be made available to Borrower by Lender upon such determination,
shall be in effect until Lender notifies Borrower that it may resume selection
of the LIBOR Option.
In any case where Borrower may select an interest rate option
and fails or neglects to do so, then the Prime Option shall apply.
2.4 NOTE.
(a) All obligations of the Borrower to the Lender under the
Revolving Credit shall be evidenced by a master revolving promissory note in
form and content acceptable to Lender, executed by Borrower payable to the order
of Lender dated of even date with this Agreement in the principal amount of
EIGHT MILLION DOLLARS ($8,000,000.00) (the "Note").
(b) The Note shall be deemed to reflect the aggregate unpaid
principal amount of all obligations created under the Revolving Credit,
including the aggregate outstanding principal balance of all Advances made
pursuant to Section 2.2 hereof, whether or not the face amount of the Note is in
excess of the amount actually outstanding from time to time, and whether or not
the indebtedness outstanding thereunder or any portion thereof is from time to
time repaid and reborrowed.
2.5 INTEREST ON THE NOTE.
(a) Except as otherwise provided in this Section 2.5, the
aggregate principal balance of the Advances outstanding from time to time shall
bear interest and shall be payable as set forth in Section 2.2 hereof.
(b) If the Borrower shall Default in the payment of the
principal of, or interest on, any Advances made pursuant to Section 2.2 hereof,
then in any such event the Borrower shall, on demand, pay interest on the amount
in Default from the date of such Default up to the date of actual payment, at
the Default Rate.
(c) Interest hereunder shall be charged only on the sums
outstanding and shall be computed from the date such indebtedness is incurred to
the date of repayment.
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2.6 MATURITY OF REVOLVING CREDIT. The outstanding principal
balance on the Revolving Credit, together with all accrued and unpaid interest
thereon, shall be due and payable on the earlier of the Revolving Credit
Maturity Date or the Termination Date.
2.7 ACCESS TO REVOLVING CREDIT. Until the Lender receives further
written notice from the Borrower, only W. Stokes Huff, Jr., Mike Huff and Ronald
P. Newman shall be the authorized signatories of the Borrower, authorized to
request Advances.
2.8 INTEREST. All interest hereunder shall be computed on a daily
basis, based on a 360-day year. In no event shall interest be due at a rate in
excess of the highest lawful rate in effect from time to time. It is not the
intention of the parties hereto to make any agreement which shall be violative
of the laws of the State of Florida or the United States of America relating to
usury. In no event shall Borrower pay or Lender accept or charge any interest
which, together with any other charges upon the principal or any portion
thereof, howsoever computed, after taking into account any requirement for
commitment and facility fees, shall exceed the maximum lawful rate of interest
allowable under the laws of the State of Florida or the United States of America
from time to time. Should any provision of this Agreement or any existing or
further notes, loan agreements or any other agreements between the parties be
construed to require the payment of interest which, together with any other
charges upon the principal or any portion thereof, after taking into account any
requirement for commitment and facility fees, shall exceed such maximum lawful
rate of interest, then any such excess shall not be charged to the Borrower and
shall be applied against the remaining principal balance.
2.9 PAYMENTS. All payments of principal and interest under the
Note shall be made to Lender at 150 S.E. Third Avenue, Miami, Florida 33131, in
immediately available funds.
2.10 STANDBY L/C AGREEMENT. (a) Lender will, upon Borrower's
application on the Standby L/C Agreement issue two (2) Standby L/C's on behalf
of Borrower in connection with purchase by Borrower of the assets of Central Air
Conditioning Distributors, Inc., a North Carolina corporation (the "Asset
Purchase") in the maximum aggregate face amount of FOUR MILLION TWO HUNDRED
FIFTY THOUSAND DOLLARS ($4,250,000.00). Lender will not issue any Standby L/C
unless such instrument shall have an expiration date of not later than September
30, 1996. The issuance of the Standby L/C's shall, immediately upon the issuance
thereof, reduce the amount of borrowing availability under the Revolving Credit
by an amount equal to the face amount of the Standby L/C's.
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(a) Upon a draw under any Standby L/C the Borrower shall
reimburse Lender in accordance with the terms and conditions of the Standby L/C
Agreement.
(b) In connection with each Standby L/C, Borrower shall pay to
Lender a fee equal to one percent (1.0%) per annum on the face amount of each
Standby L/C issued, together with all other costs and expenses incurred by
Lender in connection with the issuance of a Standby L/C (the "Standby L/C Fee").
The Standby L/C Fee shall be due and payable on the date of issuance of each
Standby L/C, and on the date of any subsequent renewal and/or extension thereof.
SECTION 3
ADDITIONAL COSTS AND FEES
3.1 ADDITIONAL COSTS. If at any time after the date hereof, and
from time to time, the Lender determines that the adoption or modification of
any applicable law, rule or regulation regarding taxation, the Lender's required
levels of reserves, deposits, deposit insurance or capital (including any
allocations of capital requirements or conditions), or similar requirements, or
any interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation,
administration or compliance of the Lender with any of such requirements, has or
would have the effect of (i) increasing the Lender's costs relating to the
Revolving Credit hereunder and (ii) reducing the yield or rate of return of the
Lender on the Revolving Credit, to a level below that which the Lender could
have achieved but for the adoption or modification of any such requirements,
then, the Borrower shall, upon ninety (90) days prior written notice from the
Lender, pay to the Lender such additional amounts as (in the Lender's sole
judgment, after good faith and reasonable computation, the written explanation
of which shall be presented to the Borrower) will compensate the Lender for such
increase in costs which results in reduction in yield or rate of return of the
Lender, said compensation to be calculated prospectively from the date of notice
from the Lender. No failure of the Lender to immediately demand payment of any
additional amounts payable hereunder shall constitute a waiver of the Lender's
right to demand payment of such amounts at any subsequent time. Nothing herein
contained shall be construed or so operate as to require the Borrower to pay any
interest, fees, costs or charges greater than is permitted by applicable law.
3.2 FACILITY FEE. In connection with the Revolving Credit, the
Borrower shall pay to the Lender an annual facility fee (the "Facility Fee")
equal to the amount of the Revolving Credit multiplied by sixteen and
sixty-seven one hundredths (16.67)
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basis points per annum. The first annual payment of the Facility Fee shall be
made to the Lender upon the Closing Date of the Revolving Credit and each
subsequent payment of the Facility Fee shall be made on each anniversary of the
Closing Date; provided, however, the Facility Fee payable in the final year of
the Revolving Credit shall be reduced pro-rata based upon the number of months
remaining from the last anniversary date through the Maturity Date.
In the event the Revolving Credit is terminated by Borrower
prior to the Maturity Date, the Facility Fee shall be due and payable in full
upon said termination, calculated based upon the term of the Revolving Credit
minus any amounts previously paid. A restructure or renegotiation of the
Revolving Credit by and between Borrower and Lender shall not be considered a
termination by Borrower and any portion of the most recent installment of the
Facility Fee which has been paid in advance of the restructuring or
renegotiation of the Revolving Credit shall be credited to any new facility fee
due and payable in connection with said restructuring or renegotiation.
SECTION 4
COLLATERAL
In order to secure the full and timely payment of all Indebtedness
under the Revolving Credit, as well as any renewals, extensions or modifications
thereof, and to secure performance of all obligations of Borrower to Lender,
however and whenever created, and to protect the Lender's rights hereunder and
under the Revolving Credit, on or before the Closing Date, all of the holders of
the common stock of the Borrower shall execute a pledge agreement (the "Pledge
Agreement") wherein Guarantor, as one hundred percent (100%) shareholder of
Borrower, shall pledge in favor of the Lender its shares of common stock of the
Borrower. The Borrower shall cause to be delivered to the Lender all of the
stock certificates evidencing the Guarantor's ownership interest in the Borrower
(the "Stock Certificates"), together with undated executed stock powers related
thereto (the "Stock Powers") and a requisite UCC-1 financing statement (the
"UCC"), in order to perfect the Lender's first priority security interest in the
common stock of the Borrower, together with all proceeds thereof, said Pledge
Agreement and UCC-1 to be in form and content satisfactory to the Lender and its
counsel (all the foregoing hereinafter referred to as the "Collateral").
SECTION 5
GUARANTY
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All of the Borrower's obligations under the Revolving Credit, as well
as any renewals, modifications, amendments and extensions thereof, and all
obligations of the Borrower to the Lender, howsoever and whenever incurred shall
be unconditionally guaranteed by Watsco, Inc., a Florida corporation
(hereinafter the "Guarantor"), pursuant to a written guaranty (hereinafter the
"Guaranty") in form and content acceptable to Lender in its sole discretion.
SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to make the
Advances and issue the Standby L/C's contemplated hereby, Borrower and Guarantor
each represent and warrant to the Lender that:
6.1 ORGANIZATION, STANDING, CORPORATE POWER, ETC. It is duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has corporate power and authority to own
its properties and to carry on its business as now being conducted, in every
jurisdiction where it is conducting its business, and has corporate power and
authority to execute and perform this Agreement and to execute and deliver all
other documents, instruments and agreements provided for herein.
6.2 AUTHORIZATION. The execution and performance of this
Agreement, the borrowings hereunder and the execution and delivery of each of
the Loan Documents, and all other documents and instruments provided for herein:
(a) have been duly authorized by all requisite corporate
action, and do not require any consent or approval of any other Person,
including without limitation, any of its stockholders or creditors;
(b) will not violate any provision of law relating to it, or
its Articles of Incorporation or Bylaws, as amended to the date hereof; and
(c) will not violate or be in conflict with, result in a
breach of, or constitute a default under, any indenture, agreement and other
instrument to which it is a party or by which it or any of its properties is
bound, or any order, writ, injunction or decree of any court or governmental
institution, the result of which could have a material adverse effect on its
financial or business condition.
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6.3 LITIGATION. There are no actions, suits or proceedings
pending, or, to its knowledge, threatened against or adversely affecting it, at
law or in equity or before or by any federal agency or instrumentality, domestic
or foreign, which involve any of the transactions herein contemplated, or the
possibility of any judgment or liability which may result in any material
adverse change in the business, operations, prospects, properties or assets, or
in the condition, financial or otherwise, of Borrower or Guarantor or the
possible loss or forfeiture of any material license or permit. It is not in
default with respect to any judgment, order, writ, injunction, decree, or with
respect to any rule or regulation of any court, or federal, state, municipal or
other governmental department, the result of which could have a material adverse
effect on the financial or business condition of Borrower or Guarantor.
6.4 FINANCIAL STATEMENTS. It heretofore has furnished to the
Lender balance sheets, annual statements, and other financial information which,
to the best of its knowledge, fairly and accurately present in all material
respects the financial condition and the results of its operations as of the
dates and for the periods indicated, and said financial statements show all
known liabilities, direct or contingent material liabilities as of the dates
thereof, and have been prepared in accordance with generally accepted accounting
principles consistently applied. Since the date of the furnishing of the most
recent financial statements, there has been no material adverse change in its
financial or other condition.
6.5 TAXES. It has filed, or caused to be filed, all federal and
state tax returns which, to the knowledge of the officers thereof, are required
to be filed and has paid or caused to be paid all taxes as shown on said returns
or on any assessment received by it and not being contested in good faith, to
the extent that such taxes have become due.
6.6 BURDENSOME RESTRICTIONS. Except as are reflected on the most
recent financial statements, it is not a party to any material agreement or
instrument or subject to any charter or other corporate restrictions materially
and adversely affecting its business, properties or assets, operations or
condition, financial or otherwise.
6.7 CENTRAL OWNERSHIP. All of the issued and outstanding capital
stock of Borrower is owned one hundred percent (100%) by Guarantor.
6.8 PROPERTY AND ASSETS. It has good and indefeasible title to all
the property and assets reflected on the most recent financial statements
furnished by it to the Lender, except such as has been disposed of in the
ordinary course of business since
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the date of said financial statements, and all such property and assets are free
and clear of any liens, except liens for taxes not yet due, liens being
contested in good faith, liens permitted elsewhere in this Agreement, liens on
personal or real property as reflected in the most recent financial statements,
and also except for liens, if any, on properties acquired subsequent to said
statements and prior to the date of this Agreement.
6.9 PERMITS, LICENSES AND APPROVALS. It possesses all material
permits, licenses or other governmental approvals required by any federal, state
or local governmental authority for the conduct of its business as now
conducted. Each such permit, license or other governmental approval is
unencumbered, in good standing and there are no proceedings pending or, to the
knowledge of it, threatened against it or any other party, which seek to
suspend, revoke or terminate, or otherwise question the right of it to the
benefits of any such permit, license or other governmental approval.
6.10 ENFORCEABILITY. This Agreement and each of the Loan Documents,
when delivered hereunder, will constitute legal, valid and binding obligations
of it, as applicable, enforceable against it in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, equitable principles or other laws affecting the rights of creditors
generally.
6.11 DEFAULT. It is not in default in any respect under, or with
respect to, any contract, agreement or other instrument to which it is a party
or by which it or its assets may be bound, the result of which default could
have a material adverse effect on its financial or business condition and no
Default or Event of Default under this Agreement has occurred and is continuing.
6.12 REGULATION U. It is not engaged nor will it principally engage, or
engage as one of its important activities, in the business of extending credit
for the purpose of "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect. No part of the proceeds of any loans hereunder will be used
for "purchasing" or "carrying" "margin stock" as so defined or for any purpose
which violates, or would be inconsistent with, the provisions or Regulations G,
T, U or X of said Board or of any Regulations of such Board. Upon request, the
Borrower will furnish the Lender with a statement in conformity with the
requirements of Federal Reserve Form U-1 referred to in said Regulation U to the
foregoing effect.
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6.13 ERISA. The Plan, if any, maintained by it complies with all
applicable requirements of ERISA and of the Code, and with all applicable
rulings and regulations issued under the provisions of ERISA and the Code. No
Reportable Event has occurred and is outstanding with respect to any Plan.
6.14 INVESTMENT COMPANY ACT. It is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
6.15 USE OF PROCEEDS. The proceeds of the Revolving Credit shall be
used to finance the Asset Purchase, and for Borrower's general working capital
requirements and Borrower will not use any portion of such proceeds for the
benefit of any other Person unless permission is granted by the Lender in
writing.
6.16 OTHER ASSETS. Except as reflected in the financial information
previously furnished to the Lender, it did not, as of the date of said financial
information, own all or any portion of the stock, property, or assets of any
Person.
SECTION 7
CONDITIONS PRECEDENT
The obligations of the Lender under this Agreement are subject to the
following conditions precedent:
7.1 OPINION OF COUNSEL. The Lender shall have received, on or
prior to the Closing Date, the opinion of counsel (the "Opinion of Counsel") to
Borrower and Guarantor dated the Closing Date, addressed to the Lender,
confirming:
(a) Borrower and Guarantor are duly organized, validly
existing and in good standing in their respective states of incorporation and
otherwise qualified to conduct business in the states such business is
conducted; that the party or parties signing all documents and instruments
required in connection with this Agreement are each duly authorized to do so;
that this Agreement and all agreements, documents and instruments related
hereto, when executed and delivered to the Lender, will be valid and binding
obligations of Borrower and Guarantor, as applicable, enforceable according to
their respective terms;
(b) that there is no Charter or By-Law provision nor any
agreement, contract, indenture, document or instrument to which Borrower or
Guarantor is a party, nor any law or regulation or any decree of any court,
governmental, authority, bureau or agency binding on Borrower or Guarantor which
would be contravened by the execution or delivery of this Agreement or any
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of the Loan Documents or by the performance of any term, provision, covenant,
condition, agreement or obligation of Borrower or Guarantor contained herein or
therein;
(c) that no order, consent, permit, authorization or approval
is required by or from any governmental body, agency or authority, to validate
this Agreement or any of the Loan Documents or any action taken, or to be taken
by Borrower or Guarantor, hereunder or thereunder; and
(d) such other matters relating to Borrower and Guarantor
and/or this Agreement as the Lender or its counsel may reasonably require.
7.2 SUPPORTING DOCUMENTS. The Lender shall have received from
Borrower and Guarantor, as applicable, on or prior to the Closing Date or within
such other time period indicated:
(a) a certificate of the Secretary of Borrower and Guarantor
dated as of the Closing Date, certifying as to: (i) resolutions of its Board of
Directors authorizing the execution, delivery and performance of this Agreement,
the borrowings hereunder, and the execution and delivery to the Lender of each
of the Loan Documents, and the full force and effect of such resolutions on the
Closing Date; (ii) the incumbency and signature of each of the officers of
Borrower and Guarantor signing any of the Loan Documents;
(b) The executed Note;
(c) The executed Pledge Agreement;
(d) The executed Financing Statements;
(e) The executed Guaranty;
(f) The executed Solvency Certificate;
(g) The executed Subordination Agreement;
(h) The Opinion(s) of Counsel;
(i) Certified copies of the Articles of Incorporation and
Bylaws of Borrower and Guarantor and all amendments thereto, together with a
Certificate of Good Standing of Borrower and Guarantor and proof of
qualification to do business in each jurisdiction in which Borrower's and
Guarantor's business is conducted;
(j) Evidence or certification that, from the date of the
latest financial information furnished to Lender by Borrower
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and Guarantor there has been no adverse change in the business or financial
condition of Borrower or Guarantor;
(k) Evidence or certification that there exists no pending or
threatened litigation, the result of which could have a material adverse effect
on the business or financial condition of Borrower or Guarantor;
(l) Evidence that the Collateral is owned free and clear of
all liens and encumbrances except those in favor of Lender;
(m) Evidence of the Rheem Agreement;
(n) All agreements, documents, instruments or certificates
required to be reviewed by Lender in connection with the Asset Purchase;
(o) On or before October 26, 1995, proof satisfactory to
Lender that the Asset Purchase has been closed;
(o) such additional supporting documents as the Lender or its
counsel may reasonably request.
7.3 CONDITIONS TO ALL ADVANCES AND STANDBY L/C'S. On the date of
each Advance and issuance of each Standby L/C hereunder:
(a) REPRESENTATIONS AND WARRANTIES. The representations
and warranties set forth in Section 6 hereof shall be true and correct in all
material respects on and as of such date with the same force and effect as
though such representations and warranties had been made on and as of such date;
(b) NO DEFAULT. Borrower and Guarantor shall have observed and
performed in all material respects all of the terms, conditions and agreements
set forth herein on their part to be observed or performed and no Default or
Event of Default shall have occurred and be continuing;
(c) FINANCIAL STATEMENTS. All financial statements,
information and other data furnished by Borrower and Guarantor to the Lender
shall be, in all material respects, accurate and correct; the financial
statements shall have been prepared in accordance with generally accepted
accounting principles consistently applied, and shall accurately represent the
financial condition of Borrower and Guarantor, as applicable; no material
adverse changes in the financial or other condition of Borrower or Guarantor
shall have occurred since the date of said statements; and no material
liabilities, contingent or otherwise, not shown on said financial statements,
shall exist;
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(d) LITIGATION. There shall be no actions, suits, proceedings
or claims pending or threatened against or affecting Borrower or Guarantor, the
result of which are likely to substantially and adversely affect Borrower's or
Guarantor's financial condition, business or operations.
Each request for an Advance or issuance of a Standby L/C by
the Borrower hereunder shall constitute a representation and warranty by
Borrower as of the date of request for each such Advance that the conditions of
paragraphs (a) through (d) above have been satisfied and that no Default or
Event of Default has occurred as of such date.
SECTION 8
AFFIRMATIVE COVENANTS
Borrower and Guarantor, as applicable, covenant and agree with the
Lender, that from the date hereof and so long as this Agreement remains in
effect, or any obligations under the Loan Documents remain outstanding and
unpaid, unless the Lender shall otherwise consent in writing, Borrower and
Guarantor will:
WITH RESPECT TO BORROWER AND GUARANTOR:
8.1 CORPORATE EXISTENCE. Do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its corporate
existence, and all rights, licenses, permits and franchises required at the date
hereof, or which may be required in the future conduct of its business, and
comply with all applicable laws and regulations that affect it, and conduct and
operate its business in the same lines and in substantially the same manner in
which presently conducted and operated (subject to changes in the ordinary
course of business), and at all times, maintain, preserve and protect, in the
ordinary course of its business, all franchises, trade names and all property
used or required in the conduct of its business, and maintain all such property
in good working order and condition.
8.2 INSURANCE. Maintain its insurable properties adequately
insured at all times by financially sound and reputable insurers, to such extent
and against such risks, including liability, comprehensive, and property damage
insurance, flood, earthquake and other risks in amounts as is customary with
companies in the same or similar location and business, and the Borrower shall
deliver certificates evidencing such insurance to Lender on or before the
Closing Date. The Borrower shall provide at least ten (10) days prior written
cancellation notice of intended policy cancellation, non-renewal or material
modification.
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8.3 OBLIGATIONS AND TAXES. Pay and discharge promptly all taxes,
assessments and governmental charges or levies imposed upon it in respect of any
of its properties, before the same shall become in default, as well as all
lawful claims of labor, materials and supplies or otherwise which, if unpaid,
might become a lien or charge upon such properties or any part thereof;
provided, however, that it shall not be required to pay and discharge, or to
cause to be paid and discharged, any such tax, assessment, charge, levy or claim
so long as the validity thereof shall be contested in good faith by appropriate
proceedings and adequate reserves shall have been set aside and reflected on its
financial statements furnished to the Lender with respect to any such tax,
assessment, charge, levy or claim so contested.
8.4 NOTICE. Give prompt written notice to the Lender of all
Defaults or Events of Default of which it becomes aware, under any of the terms
and provisions of this Agreement or any of the Loan Documents, or of any default
or event of default under any other agreement, contract, indenture, document or
instrument entered, or to be entered into by it, or any changes in its current
management, and of any other matter which has resulted in, or might result in, a
materially adverse change in its financial condition or operations.
8.5 BOOKS AND RECORDS/AUDITS. Keep and maintain full and accurate
accounts, books and records of its operations according to generally accepted
accounting principles consistently applied. Borrower and Guarantor shall permit
the Lender or any of the Lender's designated officers, employees, agents and
representatives, to audit, examine and inspect, at all reasonable times,
Borrower's and Guarantor's operational procedures, systems, accounts receivable,
accounts payable, inventory, general ledger, books and records.
8.6 COMPLIANCE WITH LAW. Comply in all material respects with the
requirements of all applicable laws, rules, regulations, and orders of
governmental authorities relating to the conduct of its business.
8.7 TRANSACTIONS WITH AFFILIATES. Enter into all transactions with
Affiliates on an arms length basis, on substantially the same terms and
conditions as are customarily employed in transactions with non-affiliated
parties.
8.8 CONTINGENT LIABILITIES. Inform Lender of any material actual
or potential contingent liabilities.
8.9 EXECUTION OF OTHER DOCUMENTS. Promptly upon demand by the
Lender, execute all such additional agreements, contracts,
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indentures, documents and instruments in connection with this Agreement as the
Lender may reasonably deem necessary.
WITH RESPECT TO BORROWER:
8.10 REPORTING REQUIREMENTS - BORROWER. Cause to be furnished to
the Lender:
(a) as soon as available, but in any event not later than one
hundred twenty (120) days after the close of fiscal year ending December 31,
1995, a management prepared financial statement of Borrower for such fiscal
year, including a balance sheet, related statements of income and retained
earnings and the related statements of changes in financial position and cash
flows, and all schedules thereto, all in reasonable detail, prepared in
accordance with generally accepted accounting principles consistently applied.
(b) as soon as available, an audited balance sheet dated as of
the Closing Date, and all schedules thereto, all in reasonable detail, prepared
in accordance with generally accepted accounting principles consistently
applied.
(c) commencing December 31, 1996, as soon as available, but in
any event no later than one hundred twenty (120) days after the close of each
fiscal year, with a copy of the unqualified audited (consolidated and/or
consolidating, if appropriate) financial statements of the Borrower for such
fiscal year, including a balance sheet for such fiscal year as at the end of
such fiscal year, and related statements of income and retained earnings and
changes in financial position and cash flows, and all schedules thereto, for
such fiscal year, setting forth in each case in comparative form, the
corresponding figures for the preceding fiscal year, all in reasonable detail,
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, such financial statements to be audited by independent
certified public accountants of recognized standing selected by the Borrower and
acceptable to the Lender in its reasonable discretion (such certification not to
be qualified or limited because of any restricted or limited examination made by
such accountants);
(d) as soon as available, but in any event not later than
forty-five (45) days after the end of each of the first three (3) quarterly
periods of each fiscal year of the Borrower, with company prepared unaudited
financial statements of the Borrower, including a balance sheet as at the end of
such fiscal quarter, and related statements of income and retained earnings and
all schedules thereto, all for the period from the beginning of such fiscal year
to the end of such fiscal quarter, the financial statements setting forth in
each case corresponding figures for the like period of the preceding fiscal
year; all in
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reasonable detail, prepared in accordance with generally accepted accounting
principles applied on a basis consistently maintained throughout the period
involved and with prior periods and certified by the President or Chief
Financial Officer of the Borrower;
(e) concurrently with the delivery of the financial statements
referred to in clauses (c) and (d) above, with a certificate of the President or
Chief Financial Officer of the Borrower containing: (i) certification that the
financial statements are true and correct; that, to the best of his or her
knowledge, during such period the Borrower has kept, observed, performed and
fulfilled each and every covenant and condition contained in this Agreement, and
that he or she has no knowledge of any Default or Event of Default hereunder
except as specifically indicated in such certificate; (ii) computations and
conclusions, in such detail as Lender may request, with respect to compliance
with this Agreement and all documents executed in connection therewith,
including computations of all quantitative covenants;
(f) promptly after the filing or receiving thereof, copies of
all reports and notices which Borrower files, or after the occurrence of a
Reportable Event or condition which might constitute grounds for the termination
of or for the appointment of a trustee or administrator of any Plan, under ERISA
or the United States Department of Labor;
(g) within ten (10) days after service of process or
equivalent notice, written notice of any litigation, including arbitrations and
of any proceeding by or before any governmental agency where the amount involved
or the nature of the proceeding, if adversely determined, may materially and
adversely affect Borrower's business, operations, prospects, properties, or
assets, or the Borrower's condition, financial or otherwise;
(h) promptly, from time to time, such other information
relating to Borrower's business, properties, or conditions or operations,
financial or otherwise, as the Lender may reasonably request.
8.11 NET WORTH - BORROWER. With respect to Borrower, (A) achieve a
Net Worth (hereinafter defined) as of December 31, 1995 equal to or greater than
Borrower's Net Worth as of the Closing Date, plus an amount equal to Borrower's
net income reported as of December 31, 1995, less any amount paid in dividends
to shareholders as permitted herein; (B) achieve a Net Worth as of June 30,
1996, equal to or exceeding Borrower's Net Worth reported as of December 31,
1995; (C) achieve a Net Worth as of September 30, 1996 equal to or exceeding
Borrower's Net Worth reported as of June 30, 1996; and (D) commencing December
31,
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1996 and each fiscal year thereafter, Borrower shall achieve and maintain a Net
Worth equal to or exceeding Borrower's Net Worth reported as of the prior fiscal
year end plus an amount equal to Borrower's net income reported as of the end of
each respective fiscal year, less any amount paid in dividends to shareholders
as permitted herein.
8.12 FUNDED DEBT/EARNINGS RATIO - BORROWER. With respect to
Borrower, maintain at all times a Funded Debt/Earnings Ratio (hereinafter
defined) not to exceed 6.0 to 1.0 as of December 31, 1996; 5.0 to 1.0 commencing
as of December 31, 1997; and 4.0 to 1.0 commencing as of December 31, 1998. As
used herein, Funded Debt/Earnings Ratio shall be defined as the ratio determined
by comparing Borrower's: (A) Funded Debt; to (B) earnings before interest
expense, taxes and depreciation/amortization expense.
The Funded Debt/Earnings Ratio shall be determined each fiscal
quarter on a rolling four (4) quarter basis including the Borrower's financial
results for the immediately preceding four (4) fiscal quarters.
8.13 FIXED CHARGE COVERAGE RATIO - BORROWER. With respect to
Borrower, commencing December 31, 1996 and quarterly thereafter, maintain at all
times a Fixed Charge Coverage Ratio (hereinafter defined) of not less than
1.5:1.0. As used herein the Fixed Charge Coverage Ratio shall be defined as the
ratio determined by comparing Borrower's: (A) earnings before interest expense,
taxes and lease expense; to (B) interest expense and lease expense.
The Fixed Charge Coverage Ratio shall be determined each
fiscal quarter on a rolling four (4) quarter basis utilizing the Borrower's
financial results for the immediately preceding four (4) fiscal quarters.
8.14 DISTRIBUTORSHIP AGREEMENT - BORROWER. With respect to the
Borrower, maintain in full force and effect the Rheem Agreement.
WITH RESPECT TO GUARANTOR:
8.15 REPORTING REQUIREMENTS - GUARANTOR. Guarantor shall cause to
be furnished to the Lender:
(a) as soon as available, but in any event not later than one
hundred twenty (120) days after the close of each fiscal year of the Guarantor,
an audited consolidated balance sheet of the Borrower for such fiscal year as at
the end of such fiscal year, related audited statements of income and retained
earnings and the related consolidated statements of changes in financial
position, and cash flows, showing the cash inflows and cash
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outflows of the Guarantor for such fiscal year, setting forth, in each case in
comparative form, the corresponding figures for the preceding fiscal year, all
in reasonable detail, prepared in accordance with generally accepted accounting
principles applied on a basis consistently maintained throughout the period
involved and the prior year; such financial statements to be certified by
independent certified public accountants selected by the Guarantor and
acceptable to the Lender (the "CPA") (such certification not to be qualified or
limited by such accountants) and certified by its chief financial officer; (the
Lender's acceptance of the CPA shall not be unreasonably withheld);
(b) as soon as available, but in any event not later than one
hundred twenty (120) days after the close of each fiscal year of the Guarantor,
consolidating financial statements of the Guarantor for such fiscal year,
including a consolidating balance sheet, related consolidating statements of
income and retained earnings, and schedules thereto, setting forth in each case
in comparative form, the corresponding figures for the preceding fiscal year,
all in reasonable detail, prepared in accordance with generally accepted
accounting principles consistently applied.
(c) within ten (10) days of the filing thereof with the
Securities and Exchange Commission ("SEC") each 10-K and 10-Q filed by the
Guarantor with the SEC, together with all schedules and exhibits filed
therewith, said statements to be prepared according to the standards set forth
by the SEC for such reports;
(d) concurrently with the delivery of the financial statements
referred to in clause (a), (b) and (c) above, if requested by Lender, a
certificate of the President or Chief Financial Officer of Guarantor containing:
(i) certification that the financial statements are true and correct; that, to
the best of his or her knowledge, during such period the Guarantor has kept,
observed, performed and fulfilled each and every covenant and condition
contained in this Agreement and that he or she has obtained no knowledge of any
Default or Event of Default hereunder except as specifically indicated in such
certificate; and (ii) computations and conclusions, in such detail as Lender may
request, with respect to compliance with this Agreement and all documents
executed in connection therewith, including computations of all quantitative
covenants;
(e) promptly after the same are sent, copies of all proxy
statements, financial statements and reports which the Guarantor sends to its
stockholders, and within ten (10) days after the same are filed, copies of all
regular, periodic and special reports (including but not limited to reports on
Forms 10-K, 10-Q and 8-K), and all registration statements which the Guarantor
files with the SEC or any governmental authority which
24
<PAGE>
may be substituted therefor, or with any national securities exchange;
(f) promptly after the filing or receiving thereof, copies of
all reports and notices which the Guarantor files, after the occurrence of a
Reportable Event or condition which might constitute grounds for the termination
of or for the appointment of a trustee or administrator of any Plan, under ERISA
or the United States Department of Labor;
(g) within ten (10) days after service of process or
equivalent notice, written notice of any litigation, including arbitrations and
of any proceeding by or before any governmental agency where the amount involved
or the nature of the proceeding, if adversely determined, may materially and
adversely affect the Guarantor's business, operations, prospects, properties, or
assets, or the Guarantor's condition, financial or otherwise;
(h) promptly, from time to time, such other information
relating to Guarantor's business, properties, or conditions or operations,
financial or otherwise, as the Lender may reasonably request.
8.16 TANGIBLE NET WORTH - GUARANTOR. With respect to Guarantor,
achieve and maintain a Tangible Net Worth equal to at least THIRTY MILLION
DOLLARS ($30,000,000.00).
8.17 LEVERAGE RATIO - GUARANTOR. With respect to the Guarantor,
report a ratio of total Liabilities to Tangible Net Worth not to exceed 3.0 to
1.0 at all times.
8.18 MANAGEMENT - GUARANTOR. With respect to Guarantor, maintain
Albert H. Nahmad and Ronald P. Newman in its active day to day control and
management.
SECTION 9
NEGATIVE COVENANTS
The Borrower and Guarantor, as applicable, covenant and agree with the
Lender that from the date hereof and so long as this Agreement remains in effect
or any obligations under the Loan Documents remain outstanding and unpaid,
unless the Lender shall otherwise consent in writing, the Borrower and Guarantor
will not:
WITH RESPECT TO BORROWER AND GUARANTOR:
9.1 DEFAULT UNDER OTHER AGREEMENTS OR CONTRACTS. Commit or do, or
fail to commit to do, any act or thing which would constitute a default under
any of the terms or provisions of any
25
<PAGE>
other agreement, contract, indenture, document or instrument executed, or to be
executed by it if the effect of such default could materially and adversely
affect the business or financial condition of (i) the Borrower; (ii) Guarantor
and its subsidiaries taken as a whole;
9.2 ACCOUNTING PRACTICES. Change any of its accounting practices
or procedures, unless such change is in accordance with or permitted within
generally accepted accounting principles.
WITH RESPECT TO BORROWER:
9.3 GUARANTIES/DEBT ASSUMPTIONS - BORROWER. With respect to
Borrower, guarantee any obligations or assume any indebtedness, except that
Borrower shall be entitled to endorse instruments for collection in the ordinary
course of business.
9.4 SALE/LEASEBACK AND CAPITALIZED LEASE TRANSACTIONS - BORROWER.
With respect to Borrower, enter into any sale and lease-back or capitalized
lease obligation with respect to any of its fixed assets which would exceed TWO
HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) in the aggregate.
9.5 DISPOSAL OF PROPERTY - BORROWER. With respect to Borrower,
except for the sale of inventory in the ordinary course of business, sell
significant assets where the consideration or purchase price for such assets
would exceed TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) in the aggregate
during any fiscal year.
9.6 OWNERSHIP - BORROWER. With respect to Borrower, change in any
way its ownership.
9.7 ADDITIONAL INDEBTEDNESS - BORROWER. With respect to Borrower,
with the exception of (i) Indebtedness incurred in connection with the Asset
Purchase, in an amount not to exceed FOUR MILLION TWO HUNDRED FIFTY THOUSAND
DOLLARS ($4,250,000.00), and including the Subordinated Indebtedness; and (ii)
Indebtedness to Guarantor, advanced by Guarantor to Borrower to support short
term working capital needs of Borrower in an amount not to exceed TWO MILLION
DOLLARS ($2,000,000.00) outstanding at any time; incur, create, assume or permit
to exist any additional Indebtedness for borrowed money, secured or unsecured,
or in the form of purchase money obligations or capitalized leases in an amount
exceeding FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) in the aggregate at any
one time outstanding.
9.8 DIVIDENDS - BORROWER. With respect to Borrower, pay or declare
dividends to shareholders in excess of one hundred percent (100%) of net profit
after taxes for the immediately preceding fiscal year end.
26
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9.9 ADDITIONAL LIENS - BORROWER. With respect to Borrower, incur,
create, assume or permit to exist any additional Liens on any of its property or
assets now owned or hereafter acquired, except for Liens incurred in connection
with the purchase money financing permitted under Section 9.7 hereinabove.
9.10 CAPITAL EXPENDITURES - BORROWER. With respect to Borrower,
make capital expenditures in any fiscal year exceeding TWO HUNDRED FIFTY
THOUSAND DOLLARS ($250,000.00) in the aggregate.
9.11 ADVANCES TO AFFILIATES. Make any loans, advances or
distributions to stockholders, subsidiaries, Affiliates, officers, employees or
third parties.
9.12 LIMITATION ON MERGERS AND SALE OF ASSETS. With the exception
of the Asset Purchase, enter into any transaction or merger or consolidation or
amalgamation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), convey, sell, lease, transfer or otherwise dispose
of, in one transaction or a series of transactions, all or a substantial part of
its business or assets.
9.13 CONTROL/NAME. Change in any way its control, name or otherwise
change its nature of business.
9.14 NOTES, ACCOUNTS RECEIVABLE. Except for the purpose of
collection in the ordinary course of business, sell, assign, transfer, discount
or otherwise dispose of notes, accounts receivable or other rights to receive
payment, with or without recourse.
BORROWER, GUARANTOR AND LENDER EXPRESSLY ACKNOWLEDGE AND AGREE THAT THE
COVENANTS SET FORTH HEREIN PERTAINING TO GUARANTOR SHALL BE MODIFIED AND AMENDED
IN ACCORDANCE AND SIMULTANEOUSLY WITH ANY MODIFICATION OR AMENDMENT OF THE
COVENANTS SET FORTH IN THE LINE AGREEMENT.
SECTION 10
DEFAULTS AND REMEDIES
10.1 EVENTS OF DEFAULT AND REMEDIES. If any one or more of the
following Events of Default shall occur for any reason whatsoever (and whether
such occurrences shall be voluntary or involuntary, or come about or be affected
by operation of law or pursuant to or in compliance with any judgment, decree or
order of any court, or any order, rule or regulation of any administrative or
governmental body), that is to say:
27
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(a) any representation or warranty made herein or by the
Borrower or Guarantor in any report, certificate, financial statement or other
instrument furnished in connection with this Agreement, or any Advance or
borrowing hereunder, shall prove to be false or misleading in any material
respect, or any representation or warranty made by the Borrower or Guarantor in
any future report, certificate, financial statement or other instrument
furnished in connection with this Agreement, or any Advances or borrowings
hereunder, shall prove to be false or misleading in any material respect, which
representation or warranty made by the Borrower or Guarantor remains false or
misleading in any material respect for a period of thirty (30) days after the
occurrence thereof;
(b) the Borrower shall fail to pay the principal of or
interest on any obligations created hereunder, within five (5) days of when and
as the same shall become due and payable, whether at the due date or by
acceleration or otherwise;
(c) any default shall occur on the part of the Borrower or
Guarantor in the due observance or performance of any covenant, agreement or
other provision of this Agreement or any of the Loan Documents, other than for
the payment of money, which default remains in effect for a period of thirty
(30) consecutive days after the occurrence thereof;
(d) the Borrower or Guarantor shall fail to make payment of
principal or interest on any other Indebtedness beyond any period of grace
provided with respect thereto, or shall default in the performance of any other
agreement, covenant, term or condition contained in any agreement under which
any such obligation is created, if the effect of such default is to cause the
holder or holders of such Indebtedness to accelerate the maturity thereof or
results in a material adverse effect on its business or financial condition;
(e) Borrower or Guarantor shall (i) apply for or consent to
the appointment of a receiver, trustee in bankruptcy for benefit of creditors,
or liquidator of it or of any of its property; (ii) admit in writing its
inability to pay its debts as they mature or generally fail to pay such debts as
they mature; (iii) make a general assignment for the benefit of creditors; (iv)
be adjudicated a bankrupt or insolvent; (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors, or seeking to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute or
an answer admitting an act of bankruptcy alleged in a petition filed against it
in any proceeding under any such law; or (vi) take any corporate action for the
purpose of effecting any of the foregoing;
28
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(f) an order, judgment or decree shall be entered against
Borrower or Guarantor, without its application, approval or consent, or by any
court of competent jurisdiction, approving a petition seeking the reorganization
of it or appointing a receiver, trustee or liquidator of it or of all or a
substantial part of the assets thereof, and such order, judgment or decree shall
continue unstayed and in effect for a period of thirty (30) consecutive days
from the date of entry thereof;
(g) a final judgment or final judgments, excluding claims
covered by insurance, shall be rendered against the Borrower or Guarantor except
for final judgments which do not exceed FIVE HUNDRED THOUSAND DOLLARS
($500,000.00) in the aggregate, and the same shall remain undischarged for a
period of thirty (30) consecutive days during which execution shall not be
effectively stayed, provided that a judgment shall be deemed "final" only when
the time for appeal shall have expired without an appeal having been claimed, or
all appeals and further review claimed shall have been determined adversely to
it;
(h) any monies, deposits other property of the Borrower or
Guarantor now or hereafter on deposit with, or in the possession or under
control of the Lender, shall become subject to attachment proceedings, or
distraint proceedings or any order or process of court, and such proceedings are
not effectively stayed within a period of thirty (30) consecutive days after the
institution thereof;
(i) any default shall occur under any other existing or future
written agreements between the Borrower or Guarantor and the Lender which
remains uncured after expiration of any applicable grace period;
(j) any material adverse change in the business or financial
condition of Borrower or Guarantor, as determined by Lender;
(k) the liquidation, dissolution, or wind-up of Borrower or
Guarantor, whether voluntarily or involuntarily, or failure of Borrower or
Guarantor to maintain its corporate existence;
(l) the invalidation, discharge or subordination, in whole or
in part, of any of Lender's security documents or any of the Lender's liens;
(m) the sale, transfer or conveyance of any part or portion of
the Collateral, or any interest therein;
29
<PAGE>
(n) cancellation, termination or material breach of the Rheem
Agreement; provided, however, Borrower shall have thirty (30) days to cure any
breach of the Rheem Agreement;
(o) any default shall occur under the Guaranty, the Line
Agreement or the Standby L/C Agreement.
THEN, and in every such Event of Default, the Lender may, at its
option: (i) declare all obligations of the Borrower to the Lender hereunder and
under the Standby L/C Agreement to be due and payable forthwith, including
without limitation principal, interest, fees, costs and expenses, whereupon the
Note shall become due and payable immediately, both as to principal and
interest, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything contained herein or in such Notes to
the contrary notwithstanding; (ii) declare permanently terminated any commitment
of the Lender to make further Advances or issue any further Standby L/C's; and
(iii) pursue all of the rights and remedies available to the Lender under this
Agreement and each of the Loan Documents.
SECTION 11
MISCELLANEOUS
11.1 NOTICES. All notices, requests, demands and other
communications provided for hereunder shall be in writing and mailed by
registered or certified mail, sent by facsimile transmission or hand delivered
to the applicable party at the address indicated below:
IF TO THE BORROWER: CAC ACQUISITION, INC./CENTRAL
AIR CONDITIONING DISTRIBUTORS, INC.
c/o Watsco, Inc.
2665 South Bayshore Drive
Coconut Grove, Florida 33133
Attn: Ronald P. Newman
IF TO GUARANTORS: WATSCO, INC.
2665 South Bayshore Drive
Coconut Grove, Florida 33133
Attn: Ronald P. Newman,
Vice President-Finance
WITH A COPY TO: GREENBERG TRAURIG
1221 Brickell Avenue
Miami, Florida 33131
Attn: Cesar L. Alvarez, Esq.
30
<PAGE>
IF TO THE LENDER: NATIONSBANK OF FLORIDA, N.A.
150 S.E. Third Avenue
Miami, Florida 33131
Attn: Commercial Banking Manager
and Steven C. Mayer, Vice President
WITH A COPY TO: BUCHANAN INGERSOLL P.C.
One Turnberry Place
19495 Biscayne Boulevard, Suite 606
Miami, Florida 33180-2320
Attn: Ralph B. Bekkevold, Esq.
or, as to any party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section. All such notices, requests, demands and other communications
shall be deemed to have been duly given or made, in the case of facsimile
transmission when an appropriate answerback has been received by the sending
party, in the case of registered or certified mail, on the third Business Day
after the day on which mailed, and in the case of hand delivery, upon actual
delivery.
11.2 SURVIVAL OF REPRESENTATIONS. All covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto shall survive the making by the Lender of the borrowings herein
contemplated, and the execution and delivery to the Lender of each of the Loan
Documents and shall continue in full force and effect so long as any
Indebtedness created hereunder is outstanding and unpaid. All covenants and
agreements by or on behalf of the parties hereto which are contained or
incorporated in this Agreement shall bind and inure to the benefit of the
successors and assigns of all parties hereto.
11.3 EFFECT OF DELAY. Neither any failure nor any delay on the part
of the Lender in exercising any right, power or privilege hereunder or under any
of the Loan Documents shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any other
right, power or privilege.
11.4 EXPENSES. The Borrower shall pay all fees and out-of-pocket
expenses reasonably incurred by the Lender in connection with the preparation
and closing of this Agreement, including but not limited to the fees and
expenses of special counsel for the Lender, and shall pay the fees and expenses
incurred by the Lender in connection with the borrowings hereunder, and the
enforcement of the rights of the Lender in connection with this Agreement,
including but not limited to the reasonable fees and expenses of counsel.
31
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11.5 MODIFICATIONS AND WAIVERS. No modification or waiver of any
provision of this Agreement nor consent to any departure by the Borrower or
Guarantor therefrom shall in any event be effective unless the same shall be in
writing and signed by the Lender, and such waiver or consent shall be effective
only in the specific instance and for the purpose of which given. No notice to
or demand on the Borrower or Guarantor in any case shall thereby entitle it to
any other or further notice or demand in the same, similar or other
circumstances.
11.6 DISCLAIMER. The Lender shall incur no liability to the
Borrower or Guarantor in acting upon any advice received by the Lender, whether
oral or written, which the Lender believes in good faith to have been given by
an officer or other person authorized to borrow on behalf of the Borrower or in
otherwise acting in good faith under this Agreement. Further, all documents
required to be executed in conjunction with borrowings under this Agreement may
be signed by any of the officers or other persons duly authorized by the general
borrowing resolutions of the Borrower and Guarantor, as applicable, as such
resolutions may be amended from time to time.
11.7 REMEDIES CUMULATIVE. Any rights or remedies of the Lender
hereunder, or under any other writing shall be cumulative and in addition to
every other right or remedy contained therein or herein, now in existence or
existing hereafter, at law or in equity by statute or otherwise. Upon the
occurrence of an Event of Default, the Lender may proceed to enforce any of the
rights and remedies against the Borrower and Guarantor, or against any
collateral given as security for the Indebtedness hereunder, and the Lender may
enforce such rights and remedies simultaneously, or in such order and at such
time, or from time to time, as the Lender determines in its sole and absolute
discretion.
11.8 APPLICATION OF PAYMENTS. Payments received by the Lender from
the Borrower or Guarantor, whether direct or from realizations on any
collateral, may be applied to payment of such obligations of the Borrower in
such order of application as the Lender may elect, and the Borrower and
Guarantor hereby waives any rights to designate to which of its obligations any
such payments shall be applied.
11.9 CONSTRUCTION. This Agreement shall be governed and construed
in accordance with the laws of the State of Florida except as to regulations
governing interest rates or other terms of lending which are governed by all
applicable laws.
11.10 SEVERABILITY OF PROVISIONS. Any provision of this Agreement
which is unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective only to the extent of such unenforceability, without invalidating
the remaining provisions
32
<PAGE>
thereof or affecting the validity or enforceability of such provision in any
other jurisdiction.
11.11 HEADINGS. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
11.12 SUCCESSORS AND ASSIGNS. All of the terms and provisions of
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns, except that neither
the Borrower nor Guarantor shall have the right to assign its rights hereunder
or any interest herein.
11.13 INDEMNIFICATION. The Borrower agrees to indemnify the Lender
and to pay for all documentary stamp taxes, intangible taxes and penalties
thereon which may become due in connection with this Agreement or the Note. The
Borrower shall execute a letter in favor of the Lender evidencing this
indemnification.
11.14 TIME OF PAYMENTS. All payments required to be made by the
Borrower hereunder (except for direct debits by the Lender) shall be paid to the
Lender in readily available funds on or before 2:00 P.M. (Miami, Florida time)
on the dates such payments are due. Payments received by the Lender subsequent
to that time will be credited to the Borrower on the next successive Business
Day.
11.15 MANDATORY ARBITRATION. Any controversy or claim between or
among the parties hereto including but not limited to those arising out of or
relating to this Agreement or any related agreements or instruments, including
any claim based on or arising from an alleged tort, shall be determined by
binding arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Rules of Practice and Procedure for
the Arbitration of Commercial Disputes of Judicial Arbitration and Mediation
Services, Inc. (J.A.M.S.), and the "Special Rules" set forth below. In the event
of any inconsistency, the Special Rules shall control. Judgment upon any
arbitration award may be entered in any court having jurisdiction. Any party to
this Agreement may bring an action, including a summary or expedited proceeding,
to compel arbitration of any controversy or claim to which this Agreement
applies in any court having jurisdiction over such action.
(a) SPECIAL RULES. The arbitration shall be conducted in the
city of Lender's domicile at time of this Agreement's execution and administered
by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally
precluded from administering the arbitration, then the American Arbitration
33
<PAGE>
Association will serve. All arbitration hearings will be commenced within ninety
(90) days of the demand for arbitration; further, the arbitrator shall only,
upon a showing of cause, be permitted to extend the commencement of such hearing
for up to an additional sixty (60) days.
(b) RESERVATION OF RIGHTS. Nothing in this Agreement shall be
deemed to (i) limit the applicability of any otherwise applicable statutes of
limitation or repose and any waivers contained in this Agreement; or (ii) be a
waiver by Lender of the protection afforded to it by 12 U.S.C. ss.91 or any
substantially equivalent state law; or (iii) limit the right of Lender (A) to
exercise self help remedies such as (but not limited to) setoff, or (B) to
foreclose against any real or personal property collateral, or (C) to obtain
from a court provisional or ancillary remedies such as (but not limited to)
injunctive relief or the appointment of a receiver. Lender may exercise such
self help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. At Lender's option, foreclosure
under a pledge and assignment agreement, a deed of trust or mortgage may be
accomplished by any of the following: the exercise of a power of sale under the
security instrument, or by judicial sale under the security instrument, or by
judicial foreclosure. Neither this exercise of self help remedies nor the
institution or maintenance of an action for foreclosure or provisional or
ancillary remedies shall constitute a waiver of the right of any party,
including the claimant in any such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.
(c) ARBITRAL AWARD. The arbitral award shall include (i) a
provision that the prevailing party in such arbitration shall recover its costs
of the arbitration and reasonable attorneys' fees and expenses from the other
party; and (ii) the amount of such costs, fees and expenses. Any cause of action
subject to such arbitration shall be subject to the same statute of limitations
that would have been applicable to such cause of action in an action of law.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
[BORROWER]
CAC ACQUISITION, INC.,
a North Carolina corporation
By: /s/ BARRY S. LOGAN
----------------------------
As: President
---------------------------
[CORPORATE SEAL]
[GUARANTOR]
WATSCO, INC.,
a Florida corporation
By: /s/ RONALD P. NEWMAN
----------------------------
As: V.P. of Finance
----------------------------
[CORPORATE SEAL]
[LENDER]
NATIONSBANK OF FLORIDA, N.A.
By: /s/ SIGFREDO BIRRIEL
------------------------------
As: Senior Vice President
-----------------------------
35
<PAGE>
STATE OF NORTH CAROLINA )
) SS:
COUNTY OF FORSYTH )
The foregoing instrument was acknowledged before me in Winston-Salem,
North Carolina this 26th day of October, 1995 by Barry S. Logan, as President
of CAC ACQUISITION, INC., a North Carolina corporation, on behalf of said
corporation, who is personally known to me or has produced Florida Driver's
License as identification.
/s/ KAY F. HARPER
------------------------------------
[NOTARY SEAL] NOTARY PUBLIC
Print Name: Kay F. Harper
Serial No: ###-##-####
My Commission Expires: 3/8/98
STATE OF NORTH CAROLINA )
) SS:
COUNTY OF FORSYTH )
The foregoing instrument was acknowledged before me in Winston-Salem,
North Carolina this 26th day of October, 1995 by Ronald P. Newman, as
V.P. of Finance of WATSCO, INC., a Florida corporation, on behalf of said
corporation, who is personally known to me or has produced Florida Driver's
License as identification.
/s/ KAY F. HARPER
------------------------------------
[NOTARY SEAL] NOTARY PUBLIC
Print Name: Kay F. Harper
Serial No: ###-##-####
My Commission Expires: 3/8/98
36
<PAGE>
STATE OF NORTH CAROLINA )
) SS:
COUNTY OF FORSYTH )
The foregoing instrument was acknowledged before me in Winston-Salem,
North Carolina this 26th day of October, 1995 by Sigfredo Birriel, as
Sr. Vice President of NATIONSBANK OF FLORIDA, N.A., a national banking
association on behalf of said Bank, who is personally known to me or has
produced Florida Driver's License as identification.
/s/ KAY F. HARPER
------------------------------------
[NOTARY SEAL] NOTARY PUBLIC
Print Name: Kay F. Harper
Serial No: ###-##-####
My Commission Expires: 3/8/98
37
[Rheem logo]
- --------------------------------------------------------------------------------
Rheem Manufacturing Company Telex: 5106006-166
405 Lexington Avenue /bullet/ 22nd Floor Fax: (212) 916-8109
New York, New York 10174-0307
(212) 916-8100
Gary L. Tapella
President and
Chief Executive Officer
January 1, 1996
Watsco, Inc.
2665 South Bayshore Drive
Coconut Grove, Florida 33133
Attention: A. H. Nahmad, Chairman
Gentlemen:
This is to advise that Rheem will not exercise its right to Call Watsco's
interest in Gemaire Distributors, Heating and Cooling Supply and Comfort Supply
through the Election Period in 1997 as provided and defined in Sections 3.1.1
and 3.2 of our Shareholders Agreement in each company.
To assist Watsco in its examination of certain financing options this letter of
advise is being provided on this date rather than the effective date of such
right to Call.
Rheem Manufacturing Company
By /s/ GARY L. TAPELLA
------------------------
President
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,
January 18, 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,
January 18, 1996.