UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number 1-5581
WATSCO, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-0778222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2665 South Bayshore Drive, Suite 901, Coconut Grove, FL 33133
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 858-0828
Securities Registered Pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.50 par value New York Stock Exchange
Class B Common Stock, $.50 par value American Stock Exchange
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-K or any amendment to this
Form l0-K. X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 25, 1997 was $355,359,855.
The number of shares of common stock outstanding as of March 25, 1997 was
14,987,621 shares of Common Stock and 2,213,897 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Parts I and II is incorporated by reference from
the Annual Report to Shareholders for the year ended December 31, 1996, attached
hereto as Exhibit 13. The information required by Part III (Items 10, 11, 12 and
13) will be incorporated by reference from the Registrant's definitive proxy
statement (to be filed pursuant to Regulation 14A).
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WATSCO, INC.
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INDEX TO ANNUAL REPORT
ON FORM 10-K
YEAR ENDED DECEMBER 31, 1996
PART I PAGE
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ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 11
MATTERS
ITEM 6. SELECTED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 12
RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 12
FINANCIAL DISCLOSURE
PART III 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 12
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PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding, among other items, (i) the
Company's business and acquisition strategies, (ii) potential acquisitions by
the Company, (iii) the use of the net proceeds from the Company's public
offering, (iv) the Company's financing plans, and (v) industry, demographic and
other trends affecting the Company's financial condition or results of
operations. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, certain of
which are beyond the Company's control. Actual results could differ materially
from these forward-looking statements as a result of several factors, including
general economic conditions, prevailing interest rates, competitive factors and
the ability of the Company to continue to implement its acquisition strategy. In
light of these uncertainties, there can be no assurance that the forward-looking
information contained herein will in fact transpire.
ITEM 1. BUSINESS
GENERAL
Watsco, Inc. (the "Registrant" or the "Company") is the largest distributor
of residential central air conditioning and heating equipment and related parts
and supplies in the United States. In 1989, the Company began 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 its strategy, Watsco has
acquired 16 distributors of air conditioning and heating equipment and the
Company currently has strong market positions in 14 sunbelt states, including
leading positions in Florida, Texas and California, the three largest air
conditioning markets in the country, as well as five additional states in the
midwest. The Company's revenues have increased from $25 million in 1988 to $425
million in 1996. The Company believes it is the only major company pursuing a
consolidation strategy of making significant acquisitions in the highly
fragmented air conditioning segment of the climate control industry.
The Company's distribution network currently conducts its distribution
business through various subsidiaries: Gemaire Distributors, Inc. and its
subsidiaries ("Gemaire"); Heating & Cooling Supply, Inc. ("Heating & Cooling");
Comfort Supply, Inc. and its subsidiaries ("Comfort Supply"); Central Air
Conditioning Distributors, Inc. and its subsidiary ("CAC Distributors"); Three
States Supply Company, Inc. ("Three States"); Coastline Distribution, Inc.
("Coastline"); A&C Distributors, Inc. (d/b/a Comfortmaker Distribution)
("Comfortmaker Distribution"); Comfort Products Distributing, Inc. ("Comfort
Products"); and Central Plains Distributing, Inc. ("Central Plains")
(collectively, the "Distribution Operations").
In addition to distributing air conditioning and heating equipment, the
Company also produces over 4,000 electronic and mechanical components for air
conditioning, heating and refrigeration equipment through its manufacturing
subsidiaries: Watsco Components, Inc., Rho Sigma, Inc. and Cam-Stat, Inc. (the
"Manufacturing Operations"). These components are sold to over 5,000 wholesale
distribution locations and original equipment manufacturers.
The Company also owns Dunhill Staffing Systems, Inc. ("Dunhill"), a
national provider of permanent and temporary personnel services to business,
professional and service organizations, government agencies, health care
providers and other employers.
The Company's principal executive offices are located at 2665 South
Bayshore Drive, Suite 901, Coconut Grove, Florida 33133, and its telephone is
(305) 858-0828.
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RESIDENTIAL CENTRAL AIR CONDITIONING INDUSTRY
The Company estimates that the market for residential central air
conditioning and heating equipment and related parts and supplies in the sunbelt
was over $7 billion in 1996 and has grown at an annual rate of 6.3% since 1990.
Residential central air conditioners are manufactured primarily by seven major
companies that together account for substantially all units shipped in the U.S
each year. These companies are: Carrier Corporation ("Carrier") (a subsidiary of
United Technologies Corporation), Goodman Manufacturing Corporation, Rheem
Manufacturing Company ("Rheem"), The Trane Company (a subsidiary of American
Standard Companies Inc.), York Air Conditioning & Refrigeration, Inc.,
Inter-City Products Corporation ("Inter-City") and Lennox Industries, Inc. 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.
Residential central air conditioning and heating equipment is 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 Air Conditioning and Refrigeration Institute, over 72 million
central air conditioner units have been installed in the United States since
1975, with approximately 60% of those units installed in the sunbelt. Many 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 eight to 12 years in Texas and Florida to approximately 18 years in
California. These three states are the largest markets for air conditioning and
heating equipment in the United States, based on annual unit sales.
BUSINESS AND ACQUISITION STRATEGY
The Company focuses on satisfying the needs of the higher margin
replacement market, where customers generally demand immediate, convenient and
reliable service. In response to this need, 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 or furnace, (ii)
maintaining multiple warehouse locations in a single metropolitan market for
increased customer convenience, and (iii) maintaining well-stocked inventories
to ensure that customer orders are filled in a timely manner. The Company
believes this strategy provides a competitive advantage over smaller,
lesser-capitalized competitors who are unable to maintain the same inventory
levels and product variety as the Company. The Company also believes it has a
competitive advantage over factory-owned distributors who typically do not
maintain inventories of all parts and supplies 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, allow 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.
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The Company's acquisition strategy is to establish a network of
distribution facilities and, since 1989, it has acquired 16 air conditioning
distributors. The geographical focus of the Company's strategy has been
primarily on the sunbelt where U.S. population growth is greatest, weather
patterns are predictably hot and air conditioning is seen as a necessity. The
Company believes it is the only major company pursuing a consolidation strategy
of making significant acquisitions in the highly fragmented air conditioning
distribution industry. The Company's growth strategy seeks to enhance the value
of acquired operations by better serving the "one-stop" shopping needs of
contractors. This includes broadening product lines and committing other capital
resources to develop the acquired businesses, including expanding existing
branches and opening new branches. The Company also runs its distribution
operations on a decentralized basis in recognition of the value of the long-term
relationships established between the distributors and their customers. The
Company seeks to preserve the identity of acquired businesses by retaining their
management and sales organizations, maintaining the product brand name offerings
previously distributed by them, and selectively expanding complementary product
offerings. The Company believes this strategy builds on the value of the
acquired operations by creating additional sales opportunities, improving
operating efficiencies and attaining greater leveraging of expenses.
The Company currently operates 137 branch warehouses in 19 states. This
geographic diversification minimizes the impact of unseasonably mild weather on
the sale of replacement air conditioning and heating equipment.
The following is a description of the Company's acquisitions completed in
1996:
THREE STATES SUPPLY COMPANY, INC. In April 1996, the Company acquired
certain assets of Three States, a Tennessee-based distributor of air
conditioning, heating and other building supplies. Three States operates eleven
branches in five states and had 1996 revenues of approximately $51 million.
Since its acquisition, the Company has expanded the products offered by Three
States to include air conditioning and heating equipment.
SERVICEMAN SUPPLIES, INC. In October 1996, the Company acquired Serviceman,
a Texas-based wholesale distributor of residential central air conditioning and
heating equipment and related parts and supplies with six branches covering the
greater Dallas-Ft. Worth metropolitan area. Serviceman reported revenues of
approximately $10 million for its fiscal year ended October 31, 1996.
COASTAL SUPPLY COMPANY, INC. In December 1996, the Company acquired Coastal
Supply, a Georgia-based wholesale distributor of equipment, parts and supplies
used in heating and air conditioning systems. Coastal Supply sells from seven
branches in Georgia and three in South Carolina. Revenues for 1996 were
approximately $8 million.
RECENT DEVELOPMENTS
INTER-CITY ACQUISITION In January 1997, the Company completed the
acquisition of the common stock of Coastline Distribution, Inc. and
substantially all of the operating assets of four branch operations from
Inter-City Products Corporation (USA). Coastline and the branch operations sell
air conditioning and heating products from 25 locations serving markets in
Florida, Georgia, southern Alabama, North Carolina, South Carolina, southern
California, northern Virginia and Maryland. Cash consideration paid by the
Company totaled $22.4 million and is subject to adjustment upon the completion
of an audit of the assets purchased and liabilities assumed.
OFFERING OF COMMON STOCK In February 1997, the Company completed a public
offering of 3,000,000 shares of Common Stock resulting in net proceeds of $85.5
million, a significant portion of which was used to repay outstanding borrowings
under its revolving credit agreement. The Company anticipates using the
remainder of the proceeds to fund its growth strategy and for general corporate
purposes.
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CARRIER ACQUISITION In March 1997, the Company completed the purchase of
substantially all of the operating assets and assumption of certain liabilities
of Carrier Corporation's Comfort Products Distributing and Central Plains
Distributing distribution operations. Comfort Products and Central Plains sell
air conditioning and heating products from eight locations serving markets in
Missouri, Kansas, Nebraska, Iowa, North Dakota and South Dakota. Cash
consideration paid by the Company totaled $26.4 million and is subject to
adjustment upon the completion of an audit of the assets purchased.
Also see "Liquidity and Capital Resources" in Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report to Shareholders for the year ended December 31, 1996
(the "1996 Annual Report").
INDUSTRY SEGMENT INFORMATION
The Company operates in two industry segments: Climate Control and
Personnel Services. The Climate Control segment consists of the Distribution
Operations and the Manufacturing Operations. The Distribution Operations
distribute residential central air conditioning and heating equipment and
related parts and supplies in 19 states, located in the sunbelt and midwest, as
well as in Latin America and South America. The Manufacturing Operations make
components and equipment which are sold and distributed to the air conditioning,
refrigeration and heating industry (see "Climate Control Segment").
In the Personnel Services segment, Dunhill and its subsidiaries provide
temporary staffing and permanent placement services (see "Personnel Services
Segment"). The Company also has certain employees and resources which provide
services to each of these segments. Note 11 of Notes to Consolidated Financial
Statements, included in the Company's 1996 Annual Report, incorporated herein by
reference under Item 8, contains a table setting forth the revenues and
operating income of the Company's two industry segments during the three years
ended December 31, 1996, 1995 and 1994.
DESCRIPTION OF BUSINESS
DISTRIBUTION OPERATIONS
PRODUCTS The Company sells a complete line of residential central air
conditioning and heating equipment and related parts and supplies and maintains
sufficient inventory to meet customers' immediate needs for products. 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. The products distributed by the Company in all of its markets
consist of: (i) equipment, including residential central air conditioners
ranging from 1-1/2 to 5 tons*, light commercial air conditioners ranging up to
20 tons, gas, electric and oil furnaces ranging from 50,000 to 150,000 BTUs and
other specialized machinery; (ii) parts, including replacement compressors,
evaporator coils, thermostats, motors and other component parts; (iii) supplies,
including insulation, ductwork, grills, registers, sheet metal, tools, copper
tubing, concrete pads, tape, adhesives and other ancillary supplies. With the
purchase of Comfort Products and Central Plains from Carrier, the Company also
sells commercial air conditioning and heating equipment and systems ranging from
20 to 400 tons throughout five midwestern states.
Sales of air conditioning and heating equipment accounted for approximately
57% of the Distribution Operations' revenues for 1996. Sales of parts and
supplies (currently numbering approximately 60,000 different inventory items)
comprised the remaining revenues.
* 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.
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DISTRIBUTION AND SALES The Company currently operates from 137 branch
warehouses, most of which are 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 315 trucks or making the products available for pick-up at
the branch nearest to the customer. The company has 208 commissioned salespeople
who average 12 years of experience in the residential central air conditioning
and heating equipment distribution industry.
MARKETS The Company's branch network serves 19 states from 137 locations.
The Company's primary markets in the sunbelt include (in order of market size)
Texas, Florida, California, Georgia, North Carolina, Tennessee, Virginia,
Alabama, Arizona, Louisiana, South Carolina, Arkansas, Mississippi and Nevada.
The Company also serves the midwestern states of Missouri, Kansas, Nebraska,
Iowa, North Dakota and South Dakota. The Company also distributes products on an
export basis in substantially all of Latin America.
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. The Company currently serves over
30,000 customers, with no single customer in 1996 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
and broad product lines.
KEY SUPPLIERS The Company maintains significant relationships with Rheem,
Inter-City and Carrier, each a leading manufacturer of residential central air
conditioning and heating equipment in the United States. Carrier is also
recognized as the leading international manufacturer of commercial air
conditioning and heating equipment and systems. Each manufacturer has a
well-established reputation of producing high-quality, competitively priced
products. The Company believes the manufacturers' current product offerings,
quality, serviceability and brand-name recognition allow the Company to operate
favorably against its competitors. To maintain brand-name recognition, the
manufacturers provide national advertising and participate with the Company in
cooperative advertising programs and promotional incentives that are targeted to
both contractors and homeowners. The Company estimates the replacement market
currently accounts for approximately 65% of industry sales in the United States
and expects this percentage to increase as units installed in the 1970s and
1980s wear out and get replaced or updated to more energy-efficient models. The
Company believes the products it offers have wide acceptance in the replacement
market based on their high efficiency and low noise level -- two key homeowner
considerations.
On a pro forma basis, assuming the combination of the Company's purchases
in 1996 and the purchases for businesses recently acquired from Inter-City and
Carrier as if such transactions had occurred on January 1, 1996, the Company's
proportionate share of purchases from Rheem, Inter-City and Carrier would have
been 32%, 11% and 11%, respectively. A significant interruption in the delivery
of products would impair 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 these manufacturers' products and their ability
to continue to manufacture products that comply with laws relating to
environmental and efficiency standards. However, the Company believes that its
sales of other complimentary equipment products and continued emphasis to expand
the sale of parts and supplies are mitigating factors against such risks.
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DISTRIBUTION AGREEMENTS The Company has distribution agreements with each
of its key equipment suppliers, either on an exclusive or non-exclusive basis,
for terms generally ranging from two to ten years. Under such agreements, the
Company distributes the following brand-name products: (i) Gemaire, Heating &
Cooling, Comfort Supply and CAC Distributors - "Rheem" and Ruud"; (ii) Coastline
and Comfortmaker Distribution - "Tempstar "and "Comfortmaker", respectively;
(iii) Comfort Products - "Carrier" and "Payne"; and (iv) Central Plains -
"Carrier", Bryant" and "Payne". Certain of the distribution agreements contain
restrictions that limit the sale of competitive products in the markets served.
Other than the markets where such provisions apply, the Company may distribute
other manfacturers' lines of air conditioning or heating equipment without
restriction.
RHEEM TRANSACTION Rheem acquired minority ownership interests as a joint
venture partner in certain of the Company's subsidiaries as follows: (i) 20% of
Gemaire (1989); (ii) 50% of Heating & Cooling (1990); and (iii) 20% of Comfort
Supply (1993). In March 1996, the Company and Rheem completed a transaction
pursuant to a Stock Exchange Agreement and Plan of Reorganization (the "Exchange
Agreement") whereby the Company acquired Rheem's minority ownership interests of
these three subsidiaries in exchange for 1,446,542 shares of the Company's
unregistered Common Stock. Following completion of this transaction, Gemaire,
Comfort Supply and Heating & Cooling became wholly owned subsidiaries of the
Company.
MANUFACTURING OPERATIONS
The Company's Manufacturing Operations produce over 4,000 electronic and
mechanical components for air conditioning, heating and refrigeration equipment
that are sold to over 5,000 wholesale distribution locations and original
equipment manufacturers ("OEMs"), with no single customer accounting for more
than 1% of consolidated revenues in 1996. Product offerings include: components,
such as line tap and specialty valves, motor compressor protectors, liquid sight
glasses and warm air controls; and equipment, such as vacuum pumps and
refrigerant recovery systems. Many of the products are patented and compete in
the market place based on uniqueness as well as quality and price. OEM customers
include most of the major residential air conditioning manufacturers, including
Rheem, Carrier, Inter-City and York International (through its Evcon
subsidiary).
Research and development is conducted to improve the quality and
performance of manufactured products and to develop new products both in-house
and by extensive field testing of products. An engineering staff develops new
customized products to end-user specification and continuously improves,
supplements and enhances product lines with newly developed products.
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PERSONNEL SERVICES SEGMENT
Dunhill, founded in 1952, is one of the nation's best known personnel
service networks. Through franchised, licensed, and company-owned offices in 40
states, Puerto Rico and Canada, Dunhill provides permanent placement and
temporary staffing services to businesses, professional and service
organizations, government agencies, health care providers and other employers.
Dunhill's operations primarily consist 14 company-owned and 8 licensed temporary
staffing offices, as well as 104 franchised permanent placement offices and 18
franchised temporary staffing 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.
Dunhill receives an initial fee from all licensees and franchisees, and
on-going revenues in the form of royalty fees and commissions from temporary
staffing licensees and franchisees and permanent placement operations. Licenses
and franchises are generally granted for 5 and 10 year terms, respectively, and
are typically renewable at the option of the licensee or franchisee for
additional terms of 5 and 10 years, respectively.
OTHER INFORMATION
COMPETITION
All of the Company's businesses operate in highly competitive environments.
The Company's distribution business competes with a number of distributors and
also with air conditioning and heating equipment manufacturers which distribute
a significant portion of their products through their own distribution
organizations. Many of the manufacturers' distribution organizations are larger
than the Company and have substantial financial resources. 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 substantial 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.
EMPLOYEES
The Climate Control segment employed 1,685 persons and the Personnel
Services segment employed 105 persons as of March 25, 1997. The Company believes
that its relations with these employees are good.
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 central air conditioning replacement
market is highest in the second and third quarters with demand for heating
equipment highest in the fourth quarter. Demand related to the new construction
market varies according to the season, with increased demand generally from
March through October.
OTHER
Order backlog is not a material aspect of the Company's business and no
material portion of the Company's business is subject to government contracts.
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ITEM 2. PROPERTIES
The Company's significant facilities are currently in the following
locations:
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SQUARE OWNED/
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Watsco:
Coconut Grove, FL Headquarters 3,137 Leased
Manufacturing Operations:
Hialeah, FL Manufacturing 90,000 Owned
Hialeah, FL Manufacturing 36,000 Owned
Hialeah, FL Manufacturing 12,000 Owned
Gemaire:
Deerfield Beach, FL Headquarters 10,768 Leased
Tampa, FL Warehouse 50,000 Leased
Deerfield Beach, FL Warehouse 48,500 Leased
Miami, FL Warehouse 43,645 Leased
Orlando, FL Warehouse 40,000 Leased
Orlando, FL Warehouse 30,000 Leased
Clearwater, FL Warehouse 16,500 Leased
Lakeland, FL Warehouse 15,000 Leased
Mobile, AL Warehouse 15,000 Leased
Perrine, FL Warehouse 13,234 Leased
Riviera Beach, FL Warehouse 12,800 Leased
Ft. Myers, FL Warehouse 12,000 Leased
Lakeland, FL Warehouse 12,000 Leased
Pensacola, FL Warehouse 12,000 Leased
Hollywood, FL Warehouse 11,400 Leased
Tampa, FL Warehouse 11,000 Leased
Daytona Beach, FL Warehouse 10,000 Leased
Melbourne, FL Warehouse 10,000 Leased
New Port Richey, FL Warehouse 10,000 Leased
Ocala, FL Warehouse 10,000 Leased
St. Petersburg, FL Warehouse 10,000 Leased
Vero Beach, FL Warehouse 10,000 Leased
Jacksonville, FL Warehouse 9,790 Leased
Sarasota, FL Warehouse 8,578 Leased
St. Petersburg, FL Warehouse 8,500 Leased
Ft. Walton Beach, FL Warehouse 8,000 Leased
Jacksonville, FL Warehouse 8,000 Leased
Tallahassee, FL Warehouse 8,000 Leased
Panama City, FL Warehouse 7,500 Leased
Lakeland, FL Warehouse 7,200 Leased
Sebring, FL Warehouse 7,000 Leased
Winter Haven, FL Warehouse 7,000 Leased
Murdock, FL Warehouse 6,300 Leased
Tampa, FL Warehouse 3,000 Leased
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SQUARE OWNED/
LOCATION USE FOOTAGE LEASED
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Heating & Cooling:
San Diego, CA Headquarters 7,200 Leased
Modesto, CA Warehouse 60,000 Leased
Phoenix, AZ Warehouse 30,000 Leased
Fresno, CA Warehouse 25,079 Leased
Orange, CA Warehouse 25,050 Leased
San Diego, CA Warehouse 25,000 Leased
Riverside, CA Warehouse 24,940 Leased
Sacramento, CA Warehouse 24,000 Leased
Van Nuys, CA Warehouse 22,100 Leased
City of Industry Warehouse 20,000 Leased
Santa Clara, CA Warehouse 20,000 Leased
Las Vegas, NV Warehouse 19,600 Leased
Escondido, CA Warehouse 15,000 Leased
Long Beach, CA Warehouse 15,000 Leased
Tucson, AZ Warehouse 14,500 Leased
Oxnard, CA Warehouse 14,344 Leased
El Cajon, CA Warehouse 5,836 Leased
North Phoenix, AZ Warehouse 5,000 Leased
Yuma, AZ Warehouse 3,800 Leased
Dublin, CA Warehouse 3,000 Leased
Comfort Supply:
Houston, TX Headquarters/Warehouse 38,780 Leased
Carrollton, TX Warehouse 35,000 Leased
Arlington, TX Warehouse 33,500 Leased
North Little Rock, AR Warehouse 25,000 Leased
Bryan, TX Warehouse 21,750 Leased
Harlingen, TX Warehouse 17,000 Leased
Killeen, TX Warehouse 17,000 Leased
Shreveport, LA Warehouse 16,000 Leased
Austin, TX Warehouse 15,700 Leased
Haltom City, TX Warehouse 15,000 Leased
Houston, TX Warehouse 15,000 Leased
Longview, TX Warehouse 15,000 Owned
Houston, TX Warehouse 14,800 Leased
San Antonio, TX Warehouse 14,000 Leased
Houston, TX Warehouse 12,000 Leased
Dallas, TX Warehouse 11,250 Leased
Houston, TX Warehouse 10,570 Leased
Arlington, TX Warehouse 10,350 Leased
Plano, TX Warehouse 10,200 Leased
McAllen, TX Warehouse 10,000 Leased
Monroe, LA Warehouse 10,000 Leased
Texarkana, TX Warehouse 10,000 Leased
North Richland Hills, TX Warehouse 9,600 Leased
Dallas, TX Warehouse 8,650 Leased
Stephenville, TX Warehouse 7,100 Leased
Stafford, TX Warehouse 5,500 Leased
Jonesboro, AR Warehouse 5,000 Leased
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SQUARE OWNED/
LOCATION USE FOOTAGE LEASED
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Three States:
Memphis, TN Headquarters/Warehouse 105,000 Owned
St. Louis, MO Warehouse 100,000 Leased
Huntsville, AL Warehouse 46,584 Leased
Jackson, MS Warehouse 43,000 Leased
Nashville, TN Warehouse 34,000 Leased
Little Rock, AR Warehouse 28,600 Owned
Ft. Smith, AR Warehouse 27,000 Leased
Memphis, TN Warehouse 25,000 Leased
Springfield, MO Warehouse 24,000 Leased
Memphis, TN Warehouse 16,400 Leased
Memphis, TN Warehouse 12,000 Owned
Decatur, AL Warehouse 10,000 Leased
CAC Distributors:
Winston-Salem, NC Headquarters/Warehouse 12,500 Leased
Charlotte, NC Warehouse 66,300 Leased
Savannah, GA Warehouse 25,000 Leased
Hickory, NC Warehouse 22,806 Leased
Greensboro, NC Warehouse 20,000 Leased
Winston-Salem, NC Warehouse 14,500 Leased
Statesboro, GA Warehouse 10,400 Leased
Asheville, NC Warehouse 10,000 Leased
Athens, GA Warehouse 10,000 Leased
Gainesville, GA Warehouse 10,000 Leased
Seneca, SC Warehouse 7,970 Leased
Vidalia, GA Warehouse 7,500 Leased
Milledgeville, GA Warehouse 6,400 Leased
Anderson, SC Warehouse 6,000 Leased
Greenwood, SC Warehouse 5,000 Leased
Savannah, GA Warehouse 3,000 Leased
Coastline:
Sanford, FL Headquarters 20,000 Leased
Ft. Lauderdale, FL Warehouse 43,047 Leased
Doraville, GA Warehouse 35,047 Leased
Sanford, FL Warehouse 30,000 Leased
Orlando, FL Warehouse 25,000 Leased
Tampa, FL Warehouse 24,000 Leased
Ft. Myers, FL Warehouse 20,150 Leased
Riviera Beach, FL Warehouse 20,000 Leased
Miami, FL Warehouse 19,030 Leased
Gainesville, FL Warehouse 18,000 Leased
Sanford, FL Warehouse 17,500 Leased
Jacksonville, FL Warehouse 15,000 Leased
Clearwater, FL Warehouse 14,500 Leased
Ocala, FL Warehouse 14,000 Leased
Tallahassee, FL Warehouse 12,500 Leased
Pensacola, FL Warehouse 12,080 Leased
Sarasota, FL Warehouse 12,000 Leased
Naples, FL Warehouse 11,500 Leased
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
SQUARE OWNED/
LOCATION USE FOOTAGE LEASED
-------- --- ------- ------
<S> <C> <C> <C>
Coastline (cont.):
West Melbourne, FL Warehouse 11,250 Leased
Holly Hill, FL Warehouse 10,300 Leased
Marietta, GA Warehouse 10,000 Leased
Port Richey, FL Warehouse 10,000 Leased
Dothan, AL Warehouse 8,424 Leased
Sanford, FL Warehouse 6,000 Leased
Daytona, FL Warehouse 3,000 Leased
Comfortmaker Distribution:
Chino, CA Warehouse 43,000 Leased
Savage, MD Warehouse 37,000 Leased
Charlotte, NC Warehouse 36,000 Leased
Norcross, GA Warehouse 30,000 Leased
Comfort Products:
Kansas City, MO Headquarters/Warehouse 39,860 Leased
Springfield, MO Warehouse 18,000 Leased
Lenexa, KS Warehouse 12,500 Leased
Wichita, KS Warehouse 10,000 Leased
Central Plains:
Omaha, NE Headquarters/Warehouse 52,800 Leased
Des Moines, IA Warehouse 18,000 Leased
Sioux Falls, SD Warehouse 15,450 Leased
Lincoln, NE Warehouse 5,250 Leased
Dunhill:
Woodbury, NY Headquarters 6,300 Leased
</TABLE>
The Company believes that its facilities are well maintained and adequate to
meet its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation. Based on the
advice of legal 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Page 28 of the 1996 Annual Report contains "Information on Common Stock",
which identifies the market on which the Registrant's common stocks are being
traded and contains the high and low sales prices and dividend information for
the years ended December 31, 1996, 1995 and 1994 and is incorporated herein by
reference.
- 11 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Page 8 of the Company's 1996 Annual Report contains "Selected Consolidated
Financial Data" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 9 through 11 of the Company's 1996 Annual Report contain
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 12 through 26 of the Company's 1996 Annual Report contain the 1996
and 1995 Balance Sheets and other financial statements for the years ended
December 31, 1996, 1995 and 1994, together with the report thereon of Arthur
Andersen LLP dated March 24, 1997, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
This part of Form 10-K, which includes Items 10 through 13, is omitted
because the Registrant will file definitive proxy material pursuant to
Regulation 14A not more than 120 days after the close of the Registrant's year
end, which proxy material will include the information required by Items 10
through 13 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NO. IN
ANNUAL REPORT
-------------
<S> <C> <C>
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements (incorporated by reference from the 1996
Annual Report of Watsco, Inc.):
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994 12
Consolidated Balance Sheets as of December 31, 1996 and 1995 13
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 14
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 15
Notes to Consolidated Financial Statements 16
Report of Independent Certified Public Accountants 26
Selected Quarterly Financial Data (Unaudited) 27
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
PAGE NO. IN
FORM 10-K
-----------
<S> <C>
(2) Financial Statement Schedule:
For the three years ended December 31, 1996:
Report of Independent Certified Public Accountants on Schedules S-1
II. Valuation and Qualifying Accounts S-2
</TABLE>
All other schedules have been omitted since the required information
is not present, or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Financial Statements or notes thereto.
(3) Exhibits: The following list of exhibit includes exhibits
submitted with this Form 10-K as filed with the SEC
and those incorporated by reference to other filings.
3.1 Company's Amended and Restated Articles of Incorporation (filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995 and incorporated herein by
reference).
3.2 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).
4.1 Specimen form of Class B Common Stock Certificate (filed as
Exhibit 4.6 to the Company's Registration Statement on Form S-1
(No. 33-56646) and incorporated herein by reference).
4.2 Specimen form of Common Stock Certificate (filed as Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference).
10.1 Rheem Manufacturing Company Distributor Agreement by and between
Rheem Manufacturing Company and Gemaire Distributors, Inc., dated
December 30, 1988 (filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference).
10.2 Amendment dated January 4, 1991 to Distribution Agreement
dated December 30, 1990 between Rheem Manufacturing Company and
Gemaire Distributors, Inc. (filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (No. 33-56646) and incorporated
herein by reference).
10.3 Distributor Agreement between Heating & Cooling Supply, Inc.
and Rheem Manufacturing, Inc. dated October 15, 1990 (filed as
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated herein by
reference).
10.4 Rheem Manufacturing Company Distributor Agreement by and
between Rheem Manufacturing Company and Comfort Supply, Inc. (filed
as Exhibit 10.20 to the Company's Form 8-K dated May 26, 1993 and
incorporated herein by reference).
- 13 -
<PAGE>
10.5 Preferred Stock Purchase Agreement between Heating & Cooling
Supply, Inc. and Rheem Manufacturing Company dated June 10, 1993
(filed as Exhibit 10.27 to the Company's Quarterly Report on Form
10-Q dated September 30, 1993 and incorporated herein by
reference).
10.6 Stock Exchange Agreement and Plan of Reorganization dated
February 6, 1996 by and between Watsco, Inc. and Rheem
Manufacturing Company (filed as Exhibit 10.29 to the Company's
Registration Statement on Form S-3 (No. 333-00371) and incorporated
herein by reference).
10.7 Amendment dated February 6, 1996 to Distributor Agreement dated
December 30, 1998 between Rheem Manufacturing Company and Gemaire
Distributors, Inc. (filed as Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 and
incorporated herein by reference).
10.8 Amendment dated February 6, 1996 to Distributor Agreement dated May
25, 1993 (and as amended by Supplemental Agreement dated as of June
1, 1995) between Rheem Manufacturing Company and Comfort Supply,
Inc. (filed as Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference).
10.9 Amendment dated February 6, 1996 to Distributor Agreement dated
October 15, 1990 between Rheem Manufacturing Company and Heating &
Cooling Supply, Inc. (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and incorporated herein by reference).
10.10 Revolving Credit and Reimbursement Agreement dated September 25,
1996 by and among Watsco, Inc., NationsBank, National Association
(South) and the Lenders Party Hereto from Time to Time (filed as
Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996 and incorporated herein by
reference).
10.11 Asset Purchase Agreement dated March 24, 1997 by and between
CP Distributors, Inc. and Carrier Corporation. #
10.12 1983 Executive Stock Option Plan of Watsco, Inc. (filed as
Exhibit 10.3 to the Company's Registration Statement on Form S-8
(Registration No. 33-6229) and incorporated herein by
reference).
10.13 Key Executive Deferred Compensation Agreement dated January
31, 1983, between Watsco, Inc. and Albert H. Nahmad (filed as
Exhibit 10.8 to the Company's Registration Statement on Form S-1
(No. 33-56646) and incorporated herein by reference).
10.14 Watsco, Inc. Amended and Restated 1991 Stock Option Plan (filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q dated
June 30, 1993 and incorporated herein by reference).
10.15 Watsco, Inc. Amended and Restated Profit Sharing Retirement Plan
and Trust Agreement dated October 21, 1994 (filed as Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
- 14 -
<PAGE>
10.16 Employment Agreement and Incentive Plan dated January 31, 1996 by
and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit
10.20 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996 and incorporated herein by
reference).
10.17 Watsco, Inc. 1996 Qualified Employee Stock Purchase Plan
(filed as Exhibit 4.3 to the Company's Registration Statement on
Form S-8 (333-10363) and incorporated herein by reference.
11. Computation of Earnings Per Share for the years ended December
31, 1996, 1995 and 1994. #
13. 1996 Annual Report to Shareholders (with the exception of the
information incorporated by reference into Items 1, 5, 6, 7 and 8
of this Form 10-K, the 1996 Annual Report to Shareholders is
provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form 10-K). #
21. Subsidiaries of the Registrant. #
23. Consent of Independent Certified Public Accountants. #
27. Financial Data Schedule. #
Note to exhibits:
# Submitted electronically herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1996.
- 15 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WATSCO, INC.
March 28, 1997 By: /S/ ALBERT H. NAHMAD
---------------------
Albert H. Nahmad, President
March 28, 1997 By: /S/ RONALD P. NEWMAN
---------------------
Ronald P. Newman, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ ALBERT H. NAHMAD Chairman of the Board and March 28, 1997
- ------------------------- President (principal
Albert H. Nahmad executive officer)
/S/ RONALD P. NEWMAN Vice President of Finance March 28, 1997
Ronald P. Newman and Secretary (principal
accounting officer)
/S/ D.A. COAPE-ARNOLD Director March 28, 1997
- -------------------------
D.A. Coape-Arnold
/S/ DAVID B. FLEEMAN Director March 28, 1997
- -------------------------
David B. Fleeman
/S/ JAMES S. GRIEN Director March 28, 1997
- -------------------------
James S. Grien
/S/ PAUL F. MANLEY Director March 28, 1997
- -------------------------
Paul F. Manley
/S/ BOB L. MOSS Director March 28, 1997
- -------------------------
Bob L. Moss
/S/ ROBERTO MOTTA Director March 28, 1997
- -------------------------
Roberto Motta
/S/ ALAN H. POTAMKIN Director March 28, 1997
- -------------------------
Alan H. Potamkin
/S/ GARY L. TAPELLA Director March 28, 1997
- -------------------------
Gary L. Tapella
</TABLE>
- 16 -
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and
Shareholders of Watsco, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Watsco, Inc.'s Annual Report to
Shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated March 24, 1997. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The accompanying
Schedule II is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 24, 1997.
S-1
<PAGE>
WATSCO, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
BALANCE, December 31, 1993 $3,012
Allowances from acquisitions 597
Write-offs, net (928)
--------
BALANCE, December 31, 1994 2,681
Allowance from acquisitions 453
Additions charged to costs and expenses 1,197
Write-offs, net (1,230)
--------
BALANCE, December 31, 1995 3,101
Allowances from acquisitions 109
Additions charged to costs and expenses 1,541
Write-offs, net (1,655)
--------
BALANCE, December 31, 1996 $3,096
========
S-2
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.11 Asset Purchase Agreement dated March 24, 1997 by and between
CP Distributors, Inc. and Carrier Corporation.
11. Computation of Earnings Per Share for the years ended December
31, 1996, 1995 and 1994.
13. 1996 Annual Report to Shareholders (with the exception of the
information incorporated by reference into Items 1, 5, 6, 7 and 8
of this Form 10-K, the 1996 Annual Report to Shareholders is
provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form 10-K).
21. Subsidiaries of the Registrant.
23. Consent of Independent Certified Public Accountants.
27. Financial Data Schedule.
EXHIBIT 10.11
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered
into this 24th day of March, 1997, by and between CP DISTRIBUTORS, INC., a
Florida corporation (the "Purchaser"), and CARRIER CORPORATION, a Delaware
corporation (the "Seller").
RECITALS
A. The Seller uses the Assets (as defined in SECTION 1.1) in the
conduct of the businesses owned and operated by the Seller at the distribution
facilities for residential and light commercial HVAC products located in (a)
North Kansas City, Missouri, Springfield, Missouri, Wichita, Kansas and Lenexa,
Kansas (the "Comfort Products Business") and (b) Omaha, Nebraska, Lincoln,
Nebraska, Des Moines, Iowa and Sioux Falls, South Dakota (the "NAO Central
Plains Business" and, together with the Comfort Products Business, the
"Business").
B. The Seller desires to transfer and deliver the Assets to the
Purchaser, and the Purchaser desires to purchase, acquire and accept delivery of
the Assets from the Seller and assume, satisfy and discharge certain liabilities
of the Seller which are attributable to the Business, on the terms and subject
to the conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, for and in consideration of the mutual benefits to be
derived hereby and the representations, warranties, covenants and agreements
herein contained, the Purchaser and the Seller hereby agree, intending to be
legally bound, as follows:
II.
PURCHASE OF ASSETS
A. PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions of
this Agreement, the Seller agrees to transfer and deliver to the Purchaser, and
the Purchaser agrees to purchase, acquire and accept delivery of the following
assets used by the Seller in connection with the Business, but specifically
excluding any of the Excluded Assets set forth in SECTION 1.2 hereof (the
"Assets"):
1. Subject to the terms of the Real Property Leases and
Equipment Leases (as defined herein), furniture, fixtures, equipment and other
tangible personal property
<PAGE>
used by the Seller in the Business as set forth on the fixed asset list attached
hereto as SCHEDULE 1.1(A), including, without limitation, leasehold improvements
identified on the books and records of the Business;
2. Inventories of Carrier-branded, Bryant-branded,
Payne-branded, and Totaline-branded ("Branded") and non-Branded equipment,
components, parts and supplies used by the Seller in the Business which are on
hand as of the Closing as set forth on SCHEDULE 1.1(B) attached hereto,
excluding any equipment, components, parts and accessories which are sold in the
ordinary course of business on or prior to the Closing;
3. Accounts and notes receivable of the Business as set forth
on SCHEDULE 1.1(C) attached hereto, whether or not reflected on the financials
of the Business, including, without limitation, freight claims and accounts
payable by independent distributors (the "Receivables");
4. Prepaid expenses and assets of the Business as set forth
on SCHEDULE 1.1(D) attached hereto, including, without limitation, prepaid
rentals, taxes (excluding taxes based on or measured by net income) and
deposits;
5. Subject to the consent of the lessor where required, leases
of office, warehouse, or store premises currently occupied by Seller in
connection with the Business as set forth on SCHEDULE 1.1(E) attached hereto
(the "Real Property Leases");
6. Equipment leased by Seller for the Business as set forth on
SCHEDULE 1.1(F) attached hereto, with respect to which Purchaser shall, subject
to the consent of the lessor where required, accept an assignment of such leases
and assume Seller's obligations thereunder or enter into such other arrangements
as will transfer the benefits and obligations related thereto to Purchaser (the
"Equipment Leases");
7. Permits, licenses, approvals, customer contracts, supply
contracts, and other contracts, bids, offers, quotes, purchase orders,
commitments and arrangements to which Seller is a party or otherwise subject in
connection with the Business as of the Closing Date (collectively, the
"Contracts"), to the extent transferable and assignable, but excluding any
agreements between Seller and operating units of Seller and its parent or
agreements pertaining to employees of Seller and intercompany arrangements which
shall terminate as of the Closing Date;
8. Subject to the provisions of SECTION 5.16 hereof, certain
books, records, papers, files, customer lists, referral lists and advertising
materials of the Seller relating to the Business and/or the Assets which is
located on the premises of the Business;
2
<PAGE>
and
9. The petty cash held at locations of the Business as of the
Closing Date.
B. EXCLUDED ASSETS. Notwithstanding anything to the contrary in SECTION
1.1 hereof, it is specifically understood and agreed by the parties hereto that
the Seller is not selling, and the Purchaser is not purchasing, the following
assets used by the Seller in connection with the Business (the "Excluded
Assets"):
1. All insurance policies of the Seller obtained or maintained
by or on behalf of the Business and all rights thereunder and all rights or
refunds or loss adjustment claims or credits as may exist under self-insurance
programs maintained or established with respect to the Business;
2. All tax refunds, tax claims, rights to carrybacks or
carryforwards, and claims for tax credits, deductions, or other tax benefits of
Seller or its Affiliates (as defined in SECTION 8.3 hereof) in respect of the
Business for all tax periods ending on or before the Closing Date;
3. All assets relating to or arising out of any employee
benefit plans, including pension, savings or health plans maintained by Seller
or its parent or for employees of the Business;
4. All rights to the patents, trademarks, tradenames,
servicemarks and other intellectual property owned by Seller, including the
trade names "Carrier", "Payne", "Bryant", and "Totaline", and the rights to use
such names (alone or in conjunction with other words), and the logos, slogans or
marks of Seller, except as otherwise specifically permitted by the Distributor
Agreements;
5. All checks and drafts of Seller, all of Seller's records
and files, banking records, tax returns, accounting records and such other
similar books and records located at offices of Seller other than those of the
Comfort Products Business or the NAO Central Plains Business (the "Corporate
Files"), including, without limitation, such books and records as may relate to
the Business to the extent the same are archived documents (not stored in
actively maintained or accessed file systems), or documents which constitute
compilations or consolidations of documents located at facilities of the
Business or studies or analyses of the Business, its prospects or its personnel;
6. Except as set forth in SECTION 5.4 hereof, all computer
hardware and software used in connection with ROADS system and all software
licensed to Seller by
3
<PAGE>
The Climatic Corporation;
7. All indemnity and contribution rights granted to or owed by
third parties with respect to liabilities and obligations pertaining to the
Business that do not constitute Assumed Liabilities (as defined herein) and any
and all rights or assets arising from and directly related to the defense,
release, compromise, discharge or satisfaction by Seller of such liabilities and
obligations;
8. All cash and cash equivalents and deposit accounts of the
Business other than petty cash;
9. Except as set forth in SECTION 5.17 hereof, all lease
agreements pertaining to the vehicles heretofore used in connection with the
Business and all rights to use such vehicles;
10. All receivables, notes or accounts which have been
assigned, purchased or transferred to Carrier Distribution Credit Corporation
("CDCC") or for which CDCC has given value, and all chattel paper, notes,
security agreements, financing agreements, guarantees and similar agreements
pertaining thereto and rights arising therefrom and any rights or benefits
related thereto, and all receivables due from CDCC at Closing as set forth on
SCHEDULE 1.2(J) attached hereto;
11. All intercompany arrangements, which shall terminate as
of the Closing Date, all intercompany freight claims, the ROADS hardware and
software, and intercompany receivables; and
12. All bank accounts utilized by Seller with respect to the
Business.
C. METHOD OF CONVEYANCE. The Assets shall be transferred to Purchaser
at Closing pursuant to the following instruments of conveyance (collectively,
the "Instruments of Conveyance"):
1. The sale, transfer, conveyance, assignment and delivery by
the Seller of the Assets to the Purchaser hereunder shall be effected on the
Closing Date by Seller's delivery of a bill of sale in the form attached hereto
as EXHIBIT 1.3(A).
2. Each of the Real Property Leases shall be transferred to
Purchaser pursuant to assignment and assumption agreements in the form attached
hereto as EXHIBIT 1.3(B).
3. The Contracts and Equipment Leases (except for those for
which
4
<PAGE>
Seller and Purchaser executed sublease agreements at Closing) shall be
transferred to Purchaser pursuant to an assignment and assumption agreement in
the form attached hereto as EXHIBIT 1.3(C).
D. LIMITATIONS ON TRANSFER.
1. Anything herein to the contrary notwithstanding, no
contract, agreement, commitment or arrangement, lease, license or permit which
would otherwise constitute one of the Contracts, the Equipment Leases, the Real
Property Leases or the permits, shall be deemed transferred or assigned to
Purchaser pursuant to this Agreement, if the attempted transfer or assignment of
same to Purchaser without the consent or approval of another party or
governmental entity would be ineffective or would constitute a breach thereof or
a violation of any law or regulation or would, in any other way, have a Material
Adverse Effect on the rights of Seller (or Purchaser as a transferee or
assignee) thereunder (the "Unassigned Contracts"). If such consent or approval
is not obtained, or if any attempted assignment would be ineffective or
constitute such a breach or violation or so affect such rights, then Purchaser
and Seller shall, with respect thereto, enter into any other reasonable
arrangement, including a subcontracting, subleasing or agency arrangement,
designed to provide Purchaser with the benefit of the Unassigned Contracts,
transfer to Purchaser the performance obligations or full economic risk,
expenses and costs associated therewith and indemnify Seller with respect
thereto. In any event, Purchaser shall fully indemnify Seller with respect to
all liabilities and obligations arising out of the Unassigned Contracts.
2. In making the conveyance of the Assets to Purchaser as
contemplated by this Agreement, Seller is doing so on an "AS IS" and "WHERE IS"
basis and except for the representations and warranties expressly made by Seller
in this Agreement or in the agreements delivered by Seller in connection with
the consummation of transactions contemplated hereby, SELLER IS NOT MAKING ANY
REPRESENTATION, WARRANTY OR GUARANTEE WHATSOEVER, WHETHER EXPRESSED OR IMPLIED,
ARISING BY LAW OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO THE
DESIGN, CONDITION, CAPACITY, VALUE, UTILITY, PERFORMANCE, QUALITY, OR
DOCUMENTATION OF ANY ASSETS OR THE BUSINESS, OR THE COLLECTIBILITY OF ANY
ACCOUNTS, THE ENFORCEABILITY OF ANY LEASE OR CONTRACT, OR REGARDING THE
VIABILITY OR CONTINUED SUCCESS OF THE BUSINESS, IN CONNECTION WITH THE SALE,
ASSIGNMENT, LEASE, SUBLEASE, OR TRANSFER OF THE ASSETS OR THE BUSINESS, NOR IS
SELLER MAKING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS. Nonetheless, the inventory sold
herein shall be sold subject to the terms and conditions of the Distributor
Agreements executed by the Purchaser in connection with this Agreement.
3. Purchaser has been given the opportunity to make an
independent
5
<PAGE>
examination of the Assets and is relying on said independent examination at its
own risk. The parties have negotiated the Purchase Price extensively and in part
may have used the available financial statements of the Business as the basis
for some of the negotiations. However, notwithstanding the use of such financial
statements, and such matters as the level of reserves as may have been
established for obsolescence, bad debts or contingent liabilities of the
Business, no representation with respect thereto is being made by Seller herein
or in connection herewith, and other than the adjustments contemplated under
SECTION 2.3 hereof, no adjustments are to be made with respect to the Purchase
Price for the Assets on or after the Closing as a result of what is or is not
reflected therein.
E. RECONVEYANCE. Purchaser shall reconvey to Seller any assets that are
intended to be Excluded Assets but which are nonetheless conveyed to Purchaser
at Closing as a result of inadvertence, oversight, operation of law or whatever
cause. Such reconveyance shall be on a similar basis as the Seller's conveyance
of the Assets to Purchaser.
F. ASSUMED LIABILITIES. From and after the Closing Date, the Purchaser
hereby agrees to assume, satisfy and discharge the following liabilities,
duties, requirements, responsibilities and obligations of the Seller which are
attributable to the Business, as and when the same shall become due (the
"Assumed Liabilities"):
1. All trade payables arising out of or relating to the
Business as set forth on SCHEDULE 1.6(A) attached hereto, whether or not
reflected on the financials of the Business;
2. All liabilities arising out of or relating to the Real
Property Leases;
3. All liabilities and obligations arising out of or relating
to the Contracts, including Contracts which are not disclosed on SCHEDULE 3.8
attached hereto if Purchaser has assumed the benefit of or received value in
connection with any such Contracts;
4. All liabilities and obligations arising out of the
Equipment Leases and the permits;
5. All liabilities and obligations arising out of or relating
to collection actions or efforts relating to the Receivables;
6. All liabilities or obligations to credit or make payment to
customers of the Business with respect to sale, service, pricing, promotion or
collection related matters or disputes;
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7. All obligations and liabilities to pay commissions earned
by employees of the Business on sales that are completed after the Closing Date
(that is, payment is received after the Closing Date but an offer was made prior
to the Closing Date);
8. The Business has had an arrangement with CDCC wherein the
Business has undertaken certain obligations with respect to dealer inventories
financed by CDCC. Purchaser hereby agrees, as of the Closing Date, to assume all
obligations and duties of the Business with respect to inventories sold prior to
Closing and with respect to CDCC floor plan arrangements in effect on the
Closing Date. Purchaser will enter into a new agreement with CDCC with respect
to post-Closing sales of goods. A list of dealers for which inventories have
been financed by CDCC is set forth in SCHEDULE 1.6(H) hereto (the "CDCC Financed
Dealer List");
9. All liabilities and obligations arising out of or relating
to the Dealer Promotions established by the Business as set forth in SECTION 5.6
hereof;
10. All liabilities and obligations arising out of or relating
to customer advances received by the Business and all liabilities and
obligations of the Business to pay customer credits, including all those
reflected on the financial statements of the Business as of the Closing Date;
11. All liabilities and obligations arising out of product
warranty claims with respect to the Business or predecessors to the Business,
whether made before, on or after the Closing Date, whether or not disclosed or
reserved or reflected on the books and records or financial statements of the
Business and whether based on expressed or implied warranty, including claims
involving returns and allowances without regard to the date of shipment or sale
of the product in question or whether the product was discontinued prior to the
Closing Date;
12. All liabilities and obligations arising out of or relating
to recourse agreements or obligations applicable to receivables or accounts or
notes of the Business or receivables, accounts or notes assigned or transferred
to CDCC;
13. All liabilities and obligations of the Business arising in
the ordinary course and relating to the purchase and sale of products, whenever
incurred or accrued, other than Seller's obligations owed to employees of the
Business which accrued prior to the Closing Date and liabilities specifically
allocated under this Agreement;
14. All liabilities and obligations of Seller accrued through
the Closing Date for the payment to persons employed in the Business, for
accrued vacation pay, accrued sick days or any other absences from work for
which Seller would be obligated to pay an employee of the Business; provided,
however, that Seller shall give Purchaser a credit
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against the Purchase Price equal to the total amount of vacation days accrued by
Employees of the Business during the first three (3) months of calendar year
1997 in the amount set forth on SCHEDULE 1.6(N) attached hereto; and
15. All liabilities and obligations arising out of or relating
to the operation of the Business on or after the Closing Date, it being
understood however that notwithstanding any of the assumptions made in this
Section, Purchaser is not assuming liabilities arising out of the Excluded
Assets.
G. EXCLUDED LIABILITIES. Except for the Assumed Liabilities, the
parties hereto acknowledge and agree that (a) the Purchaser shall not assume,
satisfy, discharge or otherwise be responsible for any liability, obligation,
debt or commitment of the Seller of any kind or nature whatsoever, whether
absolute or contingent, accrued or unaccrued, asserted or unasserted, known or
unknown or otherwise, including but not limited to any liabilities, obligations,
debts or commitments of the Seller arising out of or incurred with respect to
this Agreement and the transactions contemplated hereby (the "Excluded
Liabilities") and (b) all of the Excluded Liabilities shall remain the sole,
exclusive and absolute responsibility of the Seller.
III.
PURCHASE PRICE
A. PURCHASE PRICE. In reliance on the representations, warranties,
agreements and covenants of the Seller made herein, and as full consideration
for the Assets to be sold, transferred, conveyed or delivered by the Seller to
the Purchaser pursuant to this Agreement, the Purchaser agrees to pay to the
Seller an aggregate purchase price equal to the sum of the following (the
"Purchase Price"):
1. the book value of the Assets, less (i) reserves for
obsolete and damaged inventories, doubtful accounts and depreciation, and (ii)
the book value of all Assumed Liabilities as reflected on the financial
statements of the Business (such difference being hereinafter referred to as the
"Net Asset Value"); plus
2. the product obtained by multiplying the Net Asset Value
times thirty percent (30%) (the "Goodwill Value").
B. PAYMENT OF PURCHASE PRICE.
1. At Closing, the Seller shall deliver to the Purchaser an
itemization of the Purchase Price in the form attached hereto as SCHEDULE 2.2,
calculated in the
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manner set forth in SECTION 2.1 hereof.
2. At the Closing, the Purchaser shall deliver the Purchase
Price to the Seller, in immediately available funds by wire transfer to Chase
Manhattan Bank, N.A., New York, New York ABA #021000021 for the "Account of
Carrier Corporation NAO account #XXXXXX," or to such other account as Seller may
specify in writing at least two (2) Business Days (as defined in SECTION 8.3
hereof) prior to the Closing.
C. PURCHASE PRICE ADJUSTMENT.
1. Within forty-five (45) Business Days following the Closing
Date, Arthur Andersen, LLP (the "Auditor") shall have conducted, in accordance
with GAAP (as defined in SECTION 8.3 hereof) and Generally Accepted Auditing
Standards, an audit of the Purchase Price for the limited purpose of confirming
(i) that the reserves for obsolete and damaged inventories, doubtful accounts
and depreciation are, in the aggregate, adequate, and (ii) that the accounts for
the Assets and Assumed Liabilities are presented fairly in all material
respects. To the extent the audit reveals that the reserves, in the aggregate,
are inadequate or over-reserved or that the Assets and Assumed Liabilities are
materially misstated, the Auditor shall deliver to the Purchaser and Seller a
report detailing the discrepancies and the corresponding adjustment to the
Purchase Price (whether upward or downward), together with supporting
documentation (the "Auditor's Report").
2. If either the Purchaser or the Seller disagrees with any
adjustment to the Purchase Price set forth in the Auditor's Report, the
Purchaser or the Seller, as the case may be, may within twenty (20) Business
Days after receipt thereof deliver a written notice to the other disagreeing
with such adjustment. Any such notice of disagreement shall specify in
reasonable detail those items or amounts comprising the adjustment to the
Purchase Price as to which such party disagrees and the basis of such
disagreement. If no such notice of disagreement is timely delivered, the
adjustment to the Purchase Price as set forth in the Auditor's Report shall be
final and binding on the parties hereto.
3. If a notice of disagreement shall be timely delivered
pursuant to SECTION 2.3(B) hereof, the parties shall, during the ten (10)
Business Days following such delivery, use their reasonable best efforts to
reach agreement on the disputed items. If such an agreement is reached, the
Purchase Price as so agreed shall be final and binding on the parties hereto. If
the parties are unable to reach such agreement, a Big Six accounting firm, not
then performing services for the Seller or the Purchaser and which has not done
so for the past three (3) years, to which the parties mutually agree (the
"Accounting Referee") shall be retained to promptly review the Auditor's Report
and the disputed items or amounts. The Accounting Referee shall deliver to the
Seller and the Purchaser, as promptly as practicable, a report setting forth the
adjustments, if any, to the Purchase Price and the calculations supporting such
adjustments. The report of the Accounting Referee shall be final and binding
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upon the parties hereto and the Purchase Price, as determined by the Accounting
Referee, shall be final and binding on the parties hereto. The cost of the
Accounting Referee's review and report shall be borne equally by the Purchaser
and the Seller.
4. If the adjusted Purchase Price, as determined by the
Accounting Referee or as agreed upon by the parties (as the case may be),
exceeds the Purchase Price, then the Purchaser shall pay the amount of such
excess to the Seller, as an adjustment to the Purchase Price, in the manner and
with interest as provided in this SECTION 2.3(D). If the Purchase Price exceeds
the adjusted Purchase Price, as determined by the Accounting Referee or as
agreed upon the parties (as the case may be), then the Seller shall pay the
amount of such excess to the Purchaser, as an adjustment to the Purchase Price,
in the manner and with interest as provided in this SECTION 2.3(D). Any payments
pursuant to this SECTION 2.3(D) shall be made by wire transfer (to an account at
a United States bank designated in writing by the Purchaser or to an account at
a United States Bank designated in writing by the Seller, as the case may be) of
immediately available funds on the second Business Day following the date on
which the adjusted Purchase Price is finally determined (either by the
Accounting Referee or as agreed upon by the parties, as the case may be) or on
the twentieth (20th) Business Day after the receipt of the Auditor's Report, in
the event that neither the Purchaser nor the Seller disagrees with the
adjustments to the Purchase Price as set forth therein. The amount of any such
payment shall bear interest for the period from and including the Closing Date
to but excluding the payment date at the rate of six percent (6%), calculated on
the basis of a 365 day year and the actual number of days for which the payment
is due.
D. PURCHASE PRICE ALLOCATION. The Purchase Price shall be allocated
among the Assets in accordance with Section 1060 of the Internal Revenue Code of
1986, as amended (the "Code") and the regulations promulgated thereunder. The
allocation of the Purchase Price shall be agreed upon by the Seller and the
Purchaser within thirty (30) days after the resolution of any adjustments to the
Purchase Price as set forth in SECTION 2.3 hereof; provided, however, that the
Purchaser and Seller shall make a good faith estimate of the Purchase Price
allocation at Closing on Form 8594. The Seller and the Purchaser agree to file
timely all returns required under Code Section 1060 and the regulations
promulgated thereunder based on the allocations agreed to by the parties and
further agree that they will not take any position inconsistent therewith on any
Tax Return (as defined in SECTION 3.9), report or other document of any kind or
in the course of any audit, examination or other proceeding by any federal,
state, local or other taxing authority (or other governmental authority), court
or tribunal.
E. PRORATIONS AND ADJUSTMENTS. The operation of the Business and all
income and expenses attributable thereto through the Closing shall be for the
account of the Seller and thereafter shall be for the account of the Purchaser.
Expenses such as power and utility charges, property assessments, rents, license
fees, dues, subscriptions and other charges, real property taxes, ad valorem or
personal property taxes and all other items of
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income and expense (unless specifically provided otherwise in this Agreement)
relating to the Business shall be prorated between the Seller and the Purchaser
as of the Closing Date. All prorations shall be made and the Purchase Price
shall be adjusted insofar as feasible on the Closing Date. In the event that the
Purchaser or the Seller shall receive invoices or bills after the Closing Date
for expenses incurred prior to the Closing Date that were not prorated in
accordance with this SECTION 2.5, then the Purchaser or the Seller, as the case
may be, shall promptly notify the other party as to the amount of the expense
subject to proration and the responsible party shall pay its portion of such
expense without interest (or, in the event such expense has been paid on behalf
of the responsible party, reimburse the other party for its portion of such
expense without interest). All prorations shall be resolved by the parties
within thirty (30) days after the resolution of any adjustments to the Purchase
Price as set forth in SECTION 2.3 hereof.
IV.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby makes the following representations and warranties to
the Purchaser:
A. CORPORATE ORGANIZATION. The Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
with full corporate power and authority to (a) carry on and operate the Business
as it is now being conducted and (b) own and lease the Assets. With respect to
the operation of the Business, Seller is duly qualified or licensed to do
business, in good standing, in the jurisdictions set forth on SCHEDULE 3.1
attached hereto.
B. AUTHORIZATION, ETC. The Seller has corporate power and authority to
enter into this Agreement and the agreements and documents contemplated hereby
and perform its obligations hereunder and thereunder. All corporate and other
actions required to be taken by Seller to authorize it to execute and deliver
this Agreement and to carry out the transactions contemplated hereby have been
duly and properly taken. Upon execution and delivery of this Agreement, and all
other agreements contemplated hereby, by the parties hereto and thereto, this
Agreement and all other agreements contemplated hereby shall constitute the
legal, valid and binding obligation of the Seller, enforceable against the
Seller in accordance with their respective terms, except as limited by
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors, and subject to the effect of
general principles of equity, including without limitation concepts of
materiality, reasonableness, good faith and fair dealing and the possible
unavailability of specific performance or injunctive relief, regardless of
whether considered in a proceeding in equity or at law.
C. NO VIOLATION. The execution, delivery and performance by the Seller
of
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this Agreement, and all other agreements contemplated hereby, and the
fulfillment of and compliance with the respective terms hereof and thereof by
the Seller, do not and will not violate, conflict with or result in a breach of
the terms, conditions or provisions of (i) the articles of incorporation or
bylaws of the Seller, or (iii) any material Regulation or Order (as such terms
are defined in SECTION 8.3 hereof) applicable to the Business.
D. HART-SCOTT-RODINO FILING. Seller has filed the Notification and
Report Forms and related material that it is required to file with the Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice under the HSR Act (as defined in SECTION 8.3 hereof) in connection with
the transaction contemplated hereby. In connection therewith, Seller shall make
such further filings or information submissions pursuant thereto that may be
necessary, proper or advisable.
E. FINANCIAL INFORMATION. To the knowledge of Seller, SCHEDULE 3.5
attached hereto sets forth, in all material respects, (i) the gross margin of
the Business, and (ii) the sales of the Business for the years ended December
31, 1996, December 31, 1995, and December 31, 1994.
F. ACCOUNTS RECEIVABLE. To the knowledge of Seller, the accounts
receivable reflected in the unaudited financial statements of the Business arise
out of bona fide sales and deliveries of goods or the performance of services by
the Business.
G. EMPLOYEES. SCHEDULE 3.7 attached hereto sets forth a list of the
Seller's employees who perform services for, or on behalf of, the Business (the
"Employees") and the job title, service dates and current rate of compensation
of each such Employee. The Seller is not a party to any collective bargaining
agreement or other labor agreement relating to the Business or employees of the
Business.
H. CONTRACTS. A list of certain written Contracts to which Seller is
subject in connection with the Business is set forth on SCHEDULE 3.8 attached
hereto, copies of which have been provided to the Purchaser.
I. TITLE AND RELATED MATTERS. The Seller has good and marketable title
to the Assets (including, without limitation, the inventory), free and clear of
Liens (as defined in SECTION 8.3 hereof), except for (i) Liens reflected in the
financial statements of the Business or the notes thereto, (ii) statutory Liens
for current taxes and assessments not yet due and payable, (iii) minor defects
or encumbrances which do not materially impair use or value, and (iv) matters
and assets set forth on SCHEDULE 3.9 attached hereto. Subject to the Real
Property Leases, Equipment Leases, and permits, at the Closing Purchaser will
acquire good and valid title to the Assets (other than inventories sold or
disposed of in the ordinary course of business) free and clear of any Liens
except for the Liens to which the Assets are currently subject as set forth
above.
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J. LITIGATION. Except as disclosed on SCHEDULE 3.10 attached hereto,
there is no Claim (as defined in SECTION 8.3 hereof) pending against the
Business which, if adversely determined, would adversely affect the Business or
the Assets, nor is there any Order outstanding against the Business having a
Material Adverse Effect on the Business or the Assets.
K. TAX MATTERS.
1. With respect to the Business, the Seller has filed or
caused to be filed on a timely basis with the appropriate Authorities, federal,
state, local and other returns and reports in respect of Taxes (as defined
below) that are required to be filed on or before the Closing Date (the "Tax
Returns").
2. With respect to the Business, the Seller (i) has paid or
caused to be paid on a timely basis Taxes, assessments, fees and other
governmental charges required to be paid as of the Closing Date as shown on the
Tax Returns, (ii) has reserved on its books of account and/or financial
statements an amount sufficient to satisfy Taxes accrued, but not paid, as of
the Closing Date and (iii) shall timely pay, after the Closing Date, Taxes,
assessments, fees and other governmental charges accrued, but unpaid, as of the
Closing Date.
3. There are no liens, claims or other encumbrances upon the
Assets for any Taxes due under any Tax Return or for any Taxes due that are not
shown on any Tax Return.
4. For purposes of this Agreement, the term "Taxes" shall be
understood and interpreted to include any tax or similar governmental charge,
impost or levy (including, without limitation, income taxes, franchises taxes,
transfer taxes or fees, gross receipts taxes, value added taxes, employment
taxes, excise taxes, import taxes, ad valorem taxes, real and personal property
taxes, intangibles taxes, stamp taxes, withholding taxes, payroll taxes, minimum
taxes, sales and use taxes and windfall profits taxes), together with any
related penalties, fines, additions to tax and/or interest imposed by any
Authority (as defined in SECTION 8.3 hereof).
L. COMPLIANCE WITH LAW AND APPLICABLE GOVERNMENT REGULATIONS. Seller
has not received written notification of any failure to comply with any
Regulations applicable to the Business which would have a Material Adverse
Effect on the Business or the Assets as of the Closing Date that have not been
or will not be remedied and resolved by Seller or the Business prior to the
Closing Date if practicable. Seller has not received any written notice
regarding any violations of any Regulations or Orders relating to the Business
or the operation thereof enforced by any Authority claiming jurisdiction over
the Business, which violations would have a Material Adverse Effect on the
Business or the Assets as of the Closing Date.
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M. BROKERAGE. The Seller has not employed any broker, finder, advisor,
consultant or other intermediary in connection with this Agreement or the
transactions contemplated by this Agreement who is or might be entitled to any
fee, commission or other compensation from the Seller or its Affiliates, upon or
as a result of the execution of this Agreement or the consummation of the
transactions contemplated hereby.
N. CLAIMS. To the best of Seller's knowledge and recognizing that all
employees of the Business with particular knowledge of a Claim may have become
or will become employees of Purchaser, SCHEDULE 3.14 attached hereto sets forth
Claims seeking damages in excess of $50,000, other than collection claims and
service and concession claims arising in the ordinary course of business,
related to the Business of which Seller has received written notice.
O. DISCLAIMER. Seller's representations and warranties are subject to
and qualified by any relevant fact or facts disclosed in the Agreement, and the
schedules thereto, or any other document prepared by Seller and delivered to
Purchaser at Closing or pursuant to this Agreement. Disclosures made in the
schedules to this Agreement, or in such other documents, shall be deemed to be
disclosures made by Seller for all purposes with respect to this Agreement. The
inclusion by Seller in any particular schedule of items that may not be needed
or required to be given so as to make a representation or warranty true, correct
or not misleading shall not be construed as an indication that all items of
similar scope and degree are required or have been included in every other
schedule and shall be deemed to be included for the sole purpose of providing
additional information to the Purchaser. Purchaser acknowledges and agrees that
a representation or warranty made by the Seller will be deemed to have been
breached only if the principals of Purchaser had actual or constructive
knowledge of facts that rendered the representation untrue, and to the extent
Purchaser has actual or constructive knowledge of a fact or facts that should be
disclosed by Seller so as to make a representation or warranty true and correct
and not misleading, Seller shall not be deemed to be in breach of such
representation or warranty by reason of its failure to disclose such facts, and
further, to the extent representations are made to Seller's knowledge, such
knowledge will be deemed to mean the knowledge of the officers of Seller and its
Employees whose names are set forth on SCHEDULE 3.15 attached hereto.
V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby makes the following representations and warranties
to the Seller:
A. CORPORATE ORGANIZATION, ETC. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of
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incorporation with full corporate power and authority to carry on its business
as it is now being conducted and to own, operate and lease its properties and
assets. The Purchaser is duly qualified or licensed to do business, in good
standing, in the jurisdictions set forth on SCHEDULE 4.1 attached hereto.
B. AUTHORIZATION, ETC. The Purchaser has full corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The Board of Directors of the Purchaser has duly authorized
the execution, delivery and performance of this Agreement, and the other
agreements and transactions contemplated hereby, and no other corporate
proceedings on the part of the Purchaser are necessary to authorize this
Agreement or the transactions contemplated hereby. Upon execution and delivery
of this Agreement and all other agreements contemplated hereby by the parties
hereto and thereto, this Agreement, and all other agreements contemplated
hereby, shall constitute the legal, valid and binding obligations of the
Purchaser, enforceable against it in accordance with their respective terms.
C. NO VIOLATION. The execution, delivery and performance by the
Purchaser of this Agreement, and all other agreements contemplated hereby, and
the fulfillment of and compliance with the respective terms hereof and thereof
by the Purchaser, do not and will not violate, conflict with or result in a
breach of the terms, conditions or provisions of (i) the articles of
incorporation, bylaws or any other organizational document of the Purchaser, or
(iii) any material Regulation or Order applicable to Purchaser.
D. FURTHER ASSURANCES. Purchaser does not know of any fact or condition
which would render Seller's representations and warranties made under this
Agreement untrue, incorrect or misleading.
E. HART-SCOTT-RODINO FILING. Purchaser has filed the Notification and
Report Forms and related material that it is required to file with the Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice under the HSR Act in connection with the transaction contemplated
hereby. In connection therewith, Purchaser shall use its best efforts to obtain
an early termination of the applicable waiting period and shall make any further
filings or information submissions pursuant thereto that may be necessary,
proper or advisable.
F. NO ACTIVITY. Except for activities in connection with its formation
and arrangements with its lenders necessary to acquire the Assets at Closing,
Purchaser has transacted no business and entered into no agreements relative to
the Business.
G. FINANCING. Purchaser has cash on hand, or has received written
commitments from lenders, sufficient to enable Purchaser to acquire the Assets
at Closing and any such loan commitments remain in effect. Based upon reasonable
judgment and study,
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Purchaser has determined that Purchaser is solvent and will have adequate
capital to sustain the operations of the Business and retire Purchaser's
anticipated obligations as they come due during the reasonably foreseeable
period after the Closing Date.
H. TAX AND OTHER MATTERS. Purchaser has independently investigated the
tax effect of this transaction, as well as the legal ramifications of same, has
consulted with and has relied only upon its own expert advisers, accountants,
and attorneys, and Seller has made no representations regarding taxes or other
matters to induce Purchaser to enter into this transaction.
VI.
COVENANTS AND AGREEMENTS
The Purchaser and the Seller covenant and agree as follows:
A. FURTHER ASSURANCES. If at any time after the Closing Date the
Purchaser or Seller shall consider or be advised that any further deeds,
assignments or assurances in law or in any other things are necessary,
desirable, advisable or proper to effectuate the transactions contemplated by
this Agreement, the Purchaser or Seller, as appropriate, shall execute and
deliver all such proper deeds, assignments and assurances in law and do all
things necessary, desirable or proper to carry out and fulfill the purpose and
intent of this Agreement and the other agreements contemplated hereby.
B. NON-COMPETITION AND TRANSFER RESTRICTION. At the Closing, the Seller
and Purchaser shall enter into a Non-Competition and Transfer Restriction
Agreement, in a form acceptable to Purchaser and Seller, which shall prohibit
the distribution of competing products by Purchaser and its Affiliates in the
territory serviced by the Business and shall impose restrictions on the sale,
transfer, disposition or closure of the Business by Purchaser following the
Closing Date. Purchaser acknowledges and agrees that the Non-Competition and
Transfer Restriction Agreement is essential and material to Seller entering into
this Agreement and the Distributor Agreements with Purchaser, and Seller will
not enter into this Agreement and the Distributor Agreements without the
Non-Competition and Transfer Restriction Agreement.
C. EMPLOYEES.
1. The Purchaser hereby agrees that the Employees listed on
SCHEDULE 3.7 attached hereto, will remain employees of the Business and that
Purchaser shall offer employment to such Employees immediately following the
Closing Date at the salary
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levels (or higher) and subject to comparable employee benefits and rights under
existing employment agreements or arrangements in effect with Seller immediately
prior to the Closing Date, as set forth on SCHEDULE 3.7 attached hereto.
Employees shall be fully vested in Purchaser's health insurance plan on the
effective date of hire, with no exclusions for pre-existing conditions.
Purchaser shall not terminate the Employees for a period of one hundred eighty
(180) days following the Closing Date, except for just and sufficient cause, or,
in the event Purchaser shall terminate any Employee without cause during such
180 day period, Purchaser shall pay such Employee in accordance with the
severance policies of Seller as set forth on SCHEDULE 5.3 attached hereto.
2. After the Closing Date, the Purchaser will give to each
Employee the same service credit with the Purchaser as each such Employee
previously earned up to the Closing Date for purposes of determining the
Employee's eligibility to participate in, vesting under, benefit accrual under,
eligibility for early distribution of benefits from and eligibility for early
retirement or any other subsidized benefit provided for in any employee benefit
plan, practice or policy established, maintained or contributed to by the
Purchaser in which such Employee is eligible to participate; PROVIDED that the
Purchaser is permitted to do so under applicable Regulations without any
liability to the Purchaser.
3. The Purchaser shall allow Employees to take, during the one
(1) year period after the Closing, all vacation days earned by the Employees and
accrued by the Seller, but unused by the Employees prior to the Closing.
4. The Purchaser and the Seller agree that, subject to the
indemnification obligations of Purchaser pursuant to SECTION 7.3 hereof, the
Purchaser shall have responsibility for (i) workers' compensation Claims
occurring on or after the Closing Date and (ii) all other liabilities and
obligations pertaining to the Employees and employment related matters occurring
on or after the Closing Date. All liabilities pertaining to the Employees and
employment related matters occurring prior to the Closing Date shall be the sole
responsibility of the Seller, except to the extent to which Seller is entitled
to seek indemnification from Purchaser hereunder.
D. COMPUTER ASSISTANCE. From and after the Closing Date until December
31, 1997, Seller shall, upon written request of Purchaser, allow Purchaser to
continue to utilize the ROADS computer system hardware and software for the
period and on the terms set forth in EXHIBIT 5.4 hereto (the "ROADS Agreement")
but Seller shall have no liability for services provided under the ROADS
Agreement. With respect to software used for the accounts payable, this software
is owned by The Climatic Corporation, and Purchaser should seek a license
directly from The Climatic Corporation if it desires to continue using such
software. Nothing contained in this Agreement shall constitute a license of or
authorization to use such software.
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E. DISTRIBUTOR AGREEMENTS.
1. At the Closing, the Seller will enter into two distributor
agreements, in the form provided by Seller (the "Distributor Agreements"), for
Carrier, Payne and Bryant products: (a) one for the Comfort Products Business
(Carrier and Payne brand products) and (b) one for NAO Central Plains Business
(Carrier, Payne and Bryant brand products). The Distributor Agreements will have
a term of two years, be non-exclusive, and grant to the Purchaser the right to
distribute the relevant residential and light commercial products in the trade
areas specified therein.
2. From and after the Closing, the Purchaser shall conduct the
distribution operations of the Business and its relationship with various
operating entities of Seller in accordance with the Distributor Agreements and
the policies and procedures related thereto and the Marketing Plan attached to
such Distributor Agreements. All other agreements, arrangements or commitments
between or among the Business and Seller or its parent or one or more Affiliates
of Seller or its parent, United Technologies Corporation ("UTC"), shall
terminate as of Closing, except as expressly provided in this Agreement.
F. DEALER PROMOTIONS. From and after the Closing Date:
1. Purchaser shall be responsible for all obligations,
whenever incurred, for which the Business was not invoiced prior to the Closing
Date, in connection with Dealer Incentive Programs for dealers served by the
Business.
2. Purchaser shall be responsible for all distributor
obligations of the Business under consumer rebate programs and extended warranty
programs with respect to any equipment installed by dealers regardless of
installation date, and any other similar program pending as of the Closing Date.
3. Purchaser shall be responsible for the distributor portion
of all Advertising Program obligations whenever incurred with respect to the
Business.
4. It is understood and agreed that although there is no
retention by Seller of any responsibility as described in subsections (a)
through (c) above, Purchaser shall carry out administrative functions with
respect to such programs, at least through the end of the applicable program
year, on a basis consistent with the past practice of the Business, accept the
burdens and benefits of the programs, and fulfill the Business' obligations to
its customers and to end-users as contemplated by the programs.
5. It is further understood and agreed that Purchaser's
agreement to
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perform and discharge all of the Assumed Liabilities above shall continue in
full force and effect in the event that Purchaser shall cease to be a
distributor of Carrier, Payne and/or Bryant Branded products for any reason
whatsoever.
G. ADVERTISING.
1. Seller agrees to assign all of its rights to its current
telephone numbers and yellow page and other advertising with respect to the
Business to Purchaser, and Purchaser agrees to assume and pay any and all
charges with respect thereto not paid by the Business prior to the Closing Date,
except that the actual charges for telephone calls and monthly service shall be
pro-rated in accordance with SECTION 2.5 hereof.
2. To the extent permitted by the telephone company and
subject to whatever conditions the telephone company may impose, Seller will
cooperate with Purchaser in signing such documents as Purchaser may reasonably
request in order to obtain for Purchaser the right to use the telephone numbers
currently assigned to the Business by the telephone company.
H. PRICING, SPECIAL QUOTES AND CLAIMS.
1. With respect to all pricing programs in effect for the
Business as of the Closing Date, Seller shall continue to honor such programs
subsequent to the Closing in accordance with their respective terms and
conditions until the respective expiration dates of such programs, except with
respect to programs specifically modified by this Agreement.
2. Any special quotes or job quotes extended to the Business
with respect to Branded equipment scheduled to be delivered on or after the
Closing Date will be honored as Purchaser pricing claims within the limits of
the respective quotes and subject to Seller's normal terms with respect to the
filing of pricing claims.
I. FLOOR PLAN INVENTORY. Purchaser shall enter into at Closing the
standard Distributor Floor Plan Agreement with CDCC with respect to additions to
dealer inventories financed by CDCC subsequent to the Closing Date. Purchaser
shall assume responsibility to CDCC for all dealer inventories financed by CDCC
with respect to the Business and for dealerships serviced by the Business,
including all guarantees and obligations of the Business which have been
instituted pursuant to arrangements with CDCC, the payment of accrued interest
to CDCC on floor planned equipment, and the repurchase of any repossessed
equipment floor planned by dealers. Purchaser shall assume all the duties and
obligations of the Business, if any, with relation to CDCC floor plan
arrangements in effect on the Closing Date.
J. NAME CHANGE. As soon as possible but no later than six (6) months
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after the Closing Date, Purchaser shall identify itself as the owner of the
Business and all properties related thereto and shall place its name in a
prominent position viewable by the public on all of the leased or subleased
property, all business records and other sales or advertising relating material
(including materials used for the packaging of any product) received by
Purchaser hereunder. Purchaser shall use its best efforts promptly to cause the
appropriate telephone companies to change the listing of all telephone numbers
used by the Business to Purchaser's name.
K. PERMITS. Purchaser shall, as soon as possible after the Closing
Date, obtain in its own name all permits, licenses and approvals necessary to
operate the Business and will immediately identify itself on all waste disposal
bills of lading and certificates as owners of the Business.
L. FORWARDING OF PAYMENTS. From and after the Closing Date:
1. Any payment of monies to which Seller is entitled but which
is made instead to Purchaser for whatever reason shall be promptly and in good
faith forwarded to Seller by Purchaser in the manner directed by Seller.
2. Any payment of monies to which Purchaser is entitled but
which is made instead to Seller for whatever reason shall be promptly and in
good faith forwarded to Purchaser by Seller in the manner directed by Purchaser.
M. TERMINATION OF INTERCOMPANY ARRANGEMENTS. Prior to the date hereof,
the Business has benefitted from a number of arrangements with Seller or its
parent, UTC, and their respective Affiliates, including the use of Seller's cash
management system, coverage under insurance policies obtained by Seller or
self-insurance programs established by Seller, the use of certain financial and
accounting services provided by Seller and certain credit and guaranty
facilities and the like and the financial support provided to customers of the
Business by Seller. Except as otherwise specifically provided for in this
Agreement as between Purchaser and Seller or its Affiliates, all such
intercompany arrangements shall terminate effective upon the Closing Date.
N. GUARANTY. At the Closing, Purchaser's parent company, Watsco, Inc.,
shall execute and deliver to Seller a Guaranty, in a form acceptable to Seller,
pursuant to which Watsco, Inc. shall irrevocably and unconditionally guarantee
to Seller the full and faithful performance by Purchaser or its Affiliates of
any and all liabilities, duties and obligations of Purchaser and its Affiliates
set forth in or contemplated by this Agreement.
O. PUBLIC ANNOUNCEMENTS. Neither the Seller nor the Purchaser, nor any
representative or shareholder of either of them, shall disclose any of the terms
of this
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Agreement or the transaction contemplated hereby to any third party without the
prior written consent of the Purchaser and Seller, unless such disclosure is
required by applicable law; provided, however, that any information that has
been disclosed to any third party in accordance with this Section shall no
longer be deemed confidential and shall not be subject to further restrictions
on disclosure.
P. ACCESS AGREEMENT. For a period of ten (10) years following the
Closing Date, Purchaser and Seller shall each provide the other with access to
the books, records, papers, files and other documents relating to the Business
transferred to Seller pursuant to this Agreement (the "Documents"). The party
desiring such access to Documents in possession of the other party shall provide
the other party with reasonable notice of its need for access to the Documents,
and the parties shall cooperate with respect to the review and copying of the
Documents so as to cause minimal disruption of such other party's ongoing
business operations. In the event that the Purchaser does not desire to maintain
such Documents on the premises of the Business or at another location in which
Seller may obtain access to the Documents, Purchaser shall package the Documents
(or true and complete copies thereof) in a form reasonably requested by Seller
and send the Documents to Seller for storage at Seller's facilities.
Q. LEASED VEHICLES. Purchaser may, subject to the lease agreements and
consent of the lessor where required, purchase the leased vehicles used by
Seller in connection with the Business by paying in full at Closing, or as soon
thereafter as practicable, the amount necessary to purchase the vehicles from
the lessor, including any tax, title, license and other fees imposed in
connection with the sale of such vehicles. To the extent the purchase of the
leased vehicles is not consummated at Closing, Purchaser shall provide Seller
with proof of insurance covering the use of such vehicles at Closing, which
proof shall include a certificate of insurance naming Seller as an additional
insured and showing non-owner coverage as primary coverage.
R. CFC COMPLIANCE. Purchaser represents, covenants, and certifies that
it is aware of and shall comply with the United States Environmental Protection
Agency regulations set forth in 40 CFR ss.82.154, as amended, relating to the
purchase of refrigerants after November 14, 1994, and that any Class I or Class
II substances purchased pursuant to this Agreement shall be purchased only for
eventual resale to certified technicians or to appliance manufacturers or, if
charged into existing appliances, shall only be charged into the appliances by
certified technicians.
VII.
CLOSING
A. CLOSING. A closing of the transactions contemplated by this
Agreement (the "Closing") shall be held on or before March 24, 1997 (or if later
within three (3) Business
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Days of the date that all conditions to the Closing have been satisfied or
waived), at 10:00 am. at the offices of Foley & Lardner located at 111 N. Orange
Avenue, Orlando, Florida 32801 or on or at such other date, time and/or place
mutually agreed upon in writing by the parties hereto (the "Closing Date").
B. CLOSING DELIVERIES. At the Closing,
1. the Seller shall deliver or cause to be delivered to the
Purchaser:
a. the Instruments of Conveyance required by SECTION
1.3;
b. a certificate, certified by an assistant secretary
of Seller, as to the resolutions adopted by the directors of the Seller in
connection with this Agreement and the incumbency of certain authorized
representatives of the Seller who shall be signing the Agreement and related
documents on behalf of the Business;
c. certificates issued by the appropriate
governmental authorities evidencing the good standing, with respect to both the
conduct of business and the payment of all franchise taxes, of the Seller as a
corporation organized under the laws of the State of Delaware; and
d. an opinion of counsel to Seller (addressed to
Purchaser), dated the Closing Date, which may rely on certificates of the
officers or other authorized representatives of Seller, certificates issued by
Authorities, and/or an opinion from Stephen Bullock, Assistant General Counsel
of Seller;
e. the Distributor Agreements required by
SECTION 5.5;
f. the Non-Competition and Transfer Restriction
Agreement required by SECTION 5.2;
g. evidence of any consents to assignment of the
Contracts obtained by Seller; and
h. such other certified resolutions, documents and
certificates as are required to be delivered by the Seller pursuant to the
provisions of this Agreement.
2. The Purchaser shall deliver to the Seller:
a. the Purchase Price specified in SECTION 2.2(b);
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b. the Instruments of Conveyance required by
SECTION 1.3;
c. a certificate, by the secretary of the Purchaser,
as to the resolutions adopted by the directors of the Purchaser in connection
with this Agreement, and the incumbency of certain officers of the Purchaser;
d. certificates issued by the appropriate
governmental authorities evidencing the good standing, with respect to both the
conduct of business and the payment of all franchise taxes, of the Purchaser as
a corporation organized under the laws of the State of Florida; and
e. an opinion of counsel to Purchaser (addressed to
Seller), dated the Closing Date, which may rely on certificates of the officers
of Purchaser and/or certificates issued by Authorities;
f. the Distributor Agreements required by SECTION
5.5;
g. the Non-Competition and Transfer Restriction
Agreement required by SECTION 5.2;
h. the Guaranty of Watsco, Inc. required by SECTION
5.14;
i. evidence of any consents to assignment of the
Contracts obtained by Purchaser;
j. written evidence that all waiting periods
applicable to the consummation of the transactions contemplated hereby under the
HSR Act have expired or terminated;
k. if Purchaser is exercising its right to purchase
the leased vehicles pursuant to SECTION 5.17 hereof, payment in full of the
amount necessary to purchase the vehicles from the lessor, including any tax,
title, license and other fees imposed in connection with the sale, or the
appropriate certificate of insurance covering the use of such vehicles by
Purchaser on and after the Closing Date; and
l. such other certified resolutions, documents and
certificates as are required to be delivered by the Purchaser pursuant to the
provisions of this Agreement.
VIII.
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SURVIVAL OF TERMS; INDEMNIFICATION
A. SURVIVAL. All of the terms and conditions of this Agreement,
together with the representations, warranties and covenants contained herein or
in any instrument or document delivered or to be delivered pursuant to this
Agreement, shall survive the execution of this Agreement and the Closing;
provided, however, that (a) the agreements and covenants (other than the
indemnification provisions set forth in this ARTICLE VII and the representations
and warranties, which shall survive as provided below) set forth in this
Agreement shall survive and continue until all obligations set forth therein
shall have been performed and satisfied; (b) the Tax indemnification agreements
provided in SECTION 7.2 shall survive and continue until the expiration of the
applicable statute of limitations; (c) the environmental indemnification
agreements provided in SECTION 7.2 shall survive and continue with respect to
each property leased by Seller pursuant to the Real Property Leases until the
expiration of the current term specified under each such Real Property Lease;
(d) the representations and warranties with respect to title to the Assets of
the Seller in SECTION 3.9 hereof shall continue and survive without limitation;
and (e) all other representations and warranties, and the agreements of the
Sellers and the Purchaser to indemnify each other set forth in this ARTICLE VII,
shall survive and continue until, and all Claims with respect thereto shall be
made prior to, April 15, 1998, except for representations, warranties and
indemnities for which an indemnification Claim shall be pending as of April 15,
1998, in which event such indemnities shall survive with respect to such Claim
until the final disposition thereof.
B. INDEMNIFICATION BY THE SELLER. Subject to this ARTICLE VII, the
Purchaser and its officers, directors, employees, shareholders, partners,
representatives and agents shall be indemnified and held harmless by the Seller
against and in respect of any and all damage, loss, deficiency, liability,
obligation, commitment, claim, demand, action or cause of action, assessment,
Tax, cost or expense (including, without limitation, all interest penalties and
fees and expenses of counsel) (collectively, the "Losses") resulting from, or in
respect of, any of the following (collectively, the "Indemnifiable Claims"):
1. A material misrepresentation, breach of warranty, or
non-fulfillment of any obligation on the part of the Seller under this
Agreement, any document relating thereto or contained in any schedule or exhibit
to this Agreement or from any material misrepresentation in or omission from any
certificate, schedule, other agreement or instrument by the Seller hereunder;
provided, however, that Purchaser's sole remedy for a material breach of any
representation or warranty hereunder shall be limited to seeking indemnification
hereunder for actual monetary damages sustained by Purchaser as a direct result
of such breach and Purchaser shall have no other remedies, at law or in equity;
2. Liabilities of the Seller existing prior to the Closing
Date which are not (i) reflected and reserved against in the financial
statements of the Business, or (ii) otherwise adequately disclosed in this
Agreement or the schedules or exhibits thereto, or (iii)
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Assumed Liabilities; provided, however, that Seller shall not be required
to indemnify Purchaser for any undisclosed liability if Purchaser has assumed
the benefit of or received value in connection with any such liability;
3. Tax liabilities of Seller, together with any interest or
penalties thereon or related thereto, through the Closing Date which are imposed
on Purchaser under theories of successor liability, excluding any Tax liability
arising out of or in conection with the transaction described in this Agreement;
4. Environmental liabilities imposed by any Authority relating
to any of the properties of the Business leased pursuant to the Real Property
Leases, including any interest or penalties thereon or related thereto, which
liabilities arise out of or relate to occurrences prior to the Closing Date, but
excluding any amount for which there is an adequate accrual and reserve on the
financial statements of the Business; and
5. Any other Claims arising out of or relating to occurrences
in connection with the conduct and operation of the Business prior to the
Closing Date, other than liabilities and obligations of the Business arising in
the ordinary course and relating to the purchase and sale of products, whenever
incurred or accrued.
C. LIMITATION. Notwithstanding SECTION 7.2:
1. There shall be no liability of Seller for indemnification
under SECTION 7.2 hereof unless, and solely to the extent that, the aggregate
amount of all Indemnifiable Claims exceed $250,000 (the "Indemnification
Threshold"), and then only to the extent such Indemnifiable Claims exceed the
Indemnification Threshold; provided, however, that the Seller's liability for
indemnification shall not be subject to the Indemnification Threshold in
connection with (i) indemnification liabilities arising out of any material
breach of the representations and warranties made by the Seller in Sections 3.1,
3.2, 3.9 and 3.13 hereof, and (ii) indemnification liabilities arising pursuant
to Sections 7.2(c) and 7.2(d) hereof.
2. In no event shall Seller's obligations and liabilities
under SECTION 7.2 hereof exceed the Purchase Price, as adjusted pursuant to
SECTION 2.3 hereof.
D. INDEMNIFICATION BY THE PURCHASER. Subject to this ARTICLE VII, the
Seller and its officers, directors, employees, shareholders, partners,
representatives and agents shall be indemnified and held harmless by the
Purchaser against and in respect of any and all Losses resulting from, or in
respect of, any of the following (collectively, the "Indemnifiable Claims"):
1. A material misrepresentation, breach of warranty, or
non-fulfillment of any obligation on the part of the Purchaser under this
Agreement, any document
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relating thereto or contained in any schedule or exhibit to this Agreement, or
from any material misrepresentation in or omission from any certificate,
schedule, other agreement or instrument by the Purchaser hereunder;
2. Claims arising out of or relating to the Assumed
Liabilities;
3. Claims arising out of or relating to the operation of the
Business on and after the Closing Date;
4. Changes by Purchaser on and after the Closing Date in the
level of benefits, severance pay plans and level of salary, wages and sundry
compensation practices for employees of the Business hired by Purchaser;
5. Claims against Seller by any person arising out of or
relating to any Claim of discrimination or other wrongful failure to hire of any
employee of the Business on or after the Closing Date;
6. Tax liabilities arising out of or in connection with the
transaction described in this Agreement, including, without limitation, all
sales, use, recordation, documentary taxes and fees and other transfer taxes
imposed by any Authority, and any penalties, fines, additions to tax and/or
interest imposed by any Authority in connection with such Taxes, but excluding
any income taxes of Seller arising out of or in connection with this Agreement;
and
7. Claims arising out of or relating to the leased vehicles
used in connection with the Business on and after the Closing Date.
E. THIRD-PARTY CLAIMS.
1. Except as otherwise provided in this Agreement, the
following procedures shall be applicable with respect to Indemnifiable Claims
asserted by third parties. Promptly after receipt by the party or parties
seeking indemnification hereunder (hereinafter referred to as the "indemnitee")
of notice of the commencement of any (a) Tax audit or proceeding for the
assessment of Tax by any taxing authority or any other proceeding likely to
result in the imposition of a Tax liability or obligation or (b) any action or
the assertion (whether by legal process or otherwise) of any Claim by an
indemnitee against which Claim the other party or parties to this Agreement
(hereinafter referred to as the "indemnitor") is, or may be, required under this
Agreement to indemnify such indemnitee, the indemnitee will, if a Claim thereon
is to be, or may be, made against the indemnitor, notify the indemnitor in
writing of the commencement or assertion thereof and give the indemnitor a copy
of such Claim, process and all legal pleadings. The indemnitor shall have the
right to participate in the defense of such action with counsel of reputable
standing. The indemnitor shall have the
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right to assume the defense of such action unless (w) such action may result in
injunctions or other equitable remedies in respect of the indemnitee or its
business; (x) such action may result in liabilities which, taken with other then
existing Claims under this ARTICLE VII, would not be fully indemnified
hereunder; (y) such action may have an adverse impact on the business or
financial condition of the indemnitee after the Closing Date (including, without
limitation, an effect on the Tax liabilities, earnings or ongoing business
relationships of the indemnitee); or (z) there are defenses available to the
indemnitee which are in conflict with those available to the indemnitor. The
indemnitor and the indemnitee shall cooperate in the defense of such Claims. In
the case that the indemnitor shall assume or participate in the defense of such
audit, assessment or other proceeding as provided herein, the indemnitee shall
make available to the indemnitor all relevant records and take such other action
and sign such documents as are necessary to defend such audit, assessment or
other proceeding in a timely manner. If the indemnitee shall be required by
judgment or a settlement agreement to pay any amount in respect of any
obligation or liability against which the indemnitor has agreed to indemnify the
indemnitee under this Agreement, the indemnitor shall promptly reimburse the
indemnitee in an amount equal to the amount of such payment plus all reasonable
expenses (including, without limitation, legal fees and expenses) incurred by
such indemnitee in connection with such obligation or liability subject to this
ARTICLE VII.
2. Prior to paying or settling any Claim against which an
indemnitor is, or may be, obligated under this Agreement to indemnify an
indemnitee, the indemnitee must first supply the indemnitor with a copy of a
final court judgment or decree holding the indemnitee liable on such claim or
failing such judgment or decree, and must first receive the written approval of
the terms and conditions of such settlement from the indemnitor. An indemnitor
shall have the right to settle any Claim against the indemnitee, subject to the
prior written approval of the indemnitee, which approval shall not be
unreasonably withheld.
3. An indemnitee shall have the right to employ its own
counsel in any case, but the fees and expenses of such counsel shall be at the
expense of the indemnitee unless (a) the employment of such counsel shall have
been authorized in writing by the indemnitor in connection with the defense of
such action or Claim, (b) the indemnitor shall not have employed, or is
prohibited under this SECTION 7.5 from employing, counsel in the defense of such
action or Claim, or (c) such indemnitee shall have reasonably concluded that
there may be defenses available to it which are contrary to, or inconsistent
with, those available to the indemnitor, in any of which events such fees and
expenses of not more than one additional counsel for the indemnified parties
shall be borne by the indemnitor.
F. ASSISTANCE BY PURCHASER. In the event any Claim relating to the
Business or Assets arises after the Closing Date and constitutes a Claim for
which Purchaser is not otherwise obligated to indemnify Seller under this
Agreement, Purchaser shall, on reasonable notice, fully cooperate, assist and
cause its employees to fully cooperate and assist Seller in defending such
Claim. Such cooperation and assistance shall include providing personnel to
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assist in the production of documents and to participate in consultations,
depositions and trial to the same extent as they would if Purchaser was a party
to or responsible for the dispute in question. Seller shall pay Purchaser for
all out-of-pocket expenses incurred by its employees solely for the purposes of
providing the cooperation and assistance required under the foregoing
provisions, such as travel expenses and an allocated amount of the salary of
Purchaser's employees reflecting time spent providing such cooperation and
assistance. Purchaser shall use its best efforts and cause its employees to use
their best efforts to preserve any attorney-client privilege which may exist
with respect to such assistance. Purchaser shall cooperate and timely assist
Seller in obtaining information for various authorities, including such
information needed for accounting and tax workbooks, responses to audit
requests, other filings to tax authorities, and other information necessary to
comply with applicable Regulations. Seller shall reimburse Purchaser for
reasonable out-of-pocket expenses actually incurred by Purchaser solely for
purposes of providing the cooperation and assistance required hereunder.
IX.
MISCELLANEOUS PROVISIONS
A. AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by a written agreement
signed by the Seller and the Purchaser.
B. ENTIRE AMENDMENT. This Agreement, including the schedules and
exhibits hereto and the documents, certificates and instruments referred to
herein, embodies the entire agreement and understanding of the parties hereto in
respect of the transactions contemplated by this Agreement and supersedes all
prior agreements, representations, warranties, promises, covenants,
arrangements, communications and understandings, oral or written, express or
implied, between the parties with respect to such transactions. There are no
agreements, representations, warranties, promises, covenants, arrangements or
understandings between the parties with respect to such transactions, other than
those expressly set forth or referred to herein.
C. CERTAIN DEFINITIONS.
1. As used in this Agreement, the following terms shall have
the meanings set forth below:
"AFFILIATE" means, with regard to any Person, (i) any Person, directly
or indirectly, controlled by, under common control of, or controlling such
Person, (ii) any Person, directly
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or indirectly, in which such Person holds, of record or beneficially, five
percent (5%) or more of the equity or voting securities, or (iii) any Person
that possesses, of record or beneficially, five percent (5%) or more of the
combined voting rights for all classes of equity securities of such Person.
"AUTHORITY" means any governmental, regulatory or administrative body,
agency, arbitrator or authority, any court or judicial authority, any public,
private or industry regulatory agency, arbitrator authority, whether
international, national, federal, state or local.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a
day on which banks in Miami, Florida are authorized or obligated by law or
executive order to close.
"CLAIM" means any written claim, obligation, liability, expense,
lawsuit, demand, suit, inquiry, hearing, notice of a violation, litigation,
proceeding, arbitration, or other dispute, whether civil, criminal,
administrative or otherwise, whether pursuant to contractual obligations or
otherwise.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"LIEN" means any security interest, lien, mortgage, pledge,
hypothecation, encumbrance, easement, restriction or interest of another Person
of any kind or nature.
"MATERIAL ADVERSE EFFECT" means any circumstances, state of facts or
matters which has, or might reasonably be expected to have, a material adverse
effect on the operations, properties, assets, condition (financial or
otherwise), results, plans, strategies or prospects of the Business, in the
aggregate.
"ORDER" means any decree, judgment, award, order, consent decree,
settlement agreement, injunction, rule, or consent of or by an Authority.
"PERSON" means any corporation, partnership, joint venture, company,
syndicate, organization, association, trust, entity, Authority or natural
person.
"REGULATION" means any law, statute, rule, regulation, ordinance,
requirement, announcement or other binding action of or by an Authority.
D. NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or mailed, first class certified mail
with postage paid or by
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overnight receipted courier service:
1. If to the Seller, to:
Carrier Corporation
Carrier Parkway
P.O. Box 4800
Syracuse, New York 13221
Attention: Steve Bullock, Esq.
with a copy to:
Foley & Lardner
111 N. Orange Avenue, Suite 1800
P.O. Box 2193
Orlando, Florida 32802-2193
Attention: John A. Sanders, Esq.
or to such other person or address as the Sellers shall furnish by notice to the
Purchaser in writing.
2. If to the Purchaser to:
CP Distributors Inc.
2665 South Bayshore Drive Suite 901
Miami, Florida 33133
Attention: Mr. Albert H. Nahmad
with a copy to:
Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention: Martin Kalb, Esq.
or to such other person or address as the Purchaser shall furnish by notice to
the Sellers in writing.
E. WAIVER OF COMPLIANCE, CONSENTS. Any failure of any party hereto to
comply with any obligation, covenant, agreement or condition herein may be
waived in writing by the other parties hereto, but such waiver or failure to
insist upon strict compliance
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with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
Whenever this Agreement requires or permits consent by or on behalf of any party
hereto, such consent shall be given in writing.
F. ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except that the Purchaser may assign its rights, interests and obligations
hereunder to any wholly owned Subsidiary, and may grant Liens or security
interests in respect of its rights and interests hereunder without the prior
approval of the Seller.
G. GOVERNING LAW. The Agreement shall be governed by the internal laws
of the State of Florida as to all matters, including but not limited to matters
of validity, construction, effect and performance.
H. CONSENT TO JURISDICTION; SERVICE OF PROCESS. In the event the
Purchaser shall bring a legal action against Seller in connection with any Claim
arising out of or relating to this Agreement and the transactions contemplated
hereby, Purchaser shall file such action in the state or federal courts located
in Onondaga County, New York. In the event the Seller shall bring a legal action
against Purchaser in connection with any Claim arising out of or relating to
this Agreement and the transactions contemplated hereby, Seller shall file such
action in the state or federal courts located in Dade County, Florida. Each
party irrevocably submits to the jurisdictions set forth above and hereby agrees
not to assert, by way of motion, as a defense, or otherwise in any such suit,
action or proceeding that the suit, action or proceeding is brought in an
inconvenient forum, that the venue of the suit, action or proceeding is improper
or that this Agreement or the subject matter hereof may not be enforced by such
courts.
I. INJUNCTIVE RELIEF. The parties hereto agree that in the event of a
breach of any provision of this Agreement, the aggrieved party or parties may be
without an adequate remedy at law. The parties therefore agree that in the event
of a breach of any provision of this Agreement, the aggrieved party or parties
may elect to institute and prosecute proceedings in any court of competent
jurisdiction to enforce specific performance or to enjoin the continuing breach
of such provision, as well as to obtain damages for breach of this Agreement. By
seeking or obtaining any such relief, the aggrieved party shall not be precluded
from seeking or obtaining any other relief to which it may be entitled.
J. 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.
31
<PAGE>
K. HEADINGS. The article and section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
L. BINDING EFFECT. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the signatories to this
Agreement and each of their respective successors and permitted assigns.
M. DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any party hereto, upon any breach or default of any
other party under this Agreement, shall impair any such right, power or remedy
of such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party hereto of any breach or default under this Agreement, or
any waiver on the part of any party of any provisions or conditions of this
Agreement must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall be cumulative and
not alternative.
N. SEVERABILITY. Unless otherwise provided herein, if any provision of
this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
O. EXPENSES. All fees, costs and expenses (including, without
limitation, legal, auditing and accounting fees, costs and expenses) incurred in
connection with considering, pursuing, negotiating, documenting or consummating
this Agreement and the transactions contemplated hereby shall be borne and paid
solely by the party incurring such fees, costs and expenses.
P. ATTORNEYS' FEES. If any legal action is brought for the enforcement
of any of the provisions of this Agreement, the prevailing party or parties
shall be entitled to recover from the other party or parties, upon final
judgment on the merits, reasonable attorneys' fees, court costs and all other
costs and expenses incurred in bringing such action (including, without
limitation, attorneys' fees incurred at trial, during any appeal or during
negotiations).
Q. EXHIBITS AND SCHEDULES. The Exhibits and Schedules referred to in
this Agreement are attached hereto and incorporated herein by this reference and
made a part hereof. Disclosure of a specific item in any one Schedule shall be
deemed to be a disclosure for all purposes to which such disclosure relates,
whether or not disclosed in each and every
32
<PAGE>
Schedule hereto.
R. TRANSFER TAXES. The Purchaser shall bear the expense of, and shall
pay, any and all sales, use, recordation, documentary taxes and fees and other
transfer taxes arising out of or in connection with this transaction and shall
execute and deliver to Seller such certificates of resale or similar
documentation to support available exemptions from tax in the form and substance
reasonable satisfactory to Seller.
S. BULK SALES. The Purchaser and the Seller acknowledge that the Seller
does not intend to comply with the Bulk Sale Acts of Iowa, Kansas, Missouri,
Nebraska or South Dakota in connection with the transaction contemplated by this
Agreement. The Seller hereby agrees to indemnify and hold the Purchaser harmless
from and against any loss, damage, liability or expense resulting from the
Seller's failure to comply with said Acts.
[Signature page follows]
33
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CP DISTRIBUTORS INC., a
Florida corporation
By: /s/ Barry Logan
----------------------
Name: Barry Logan
Title: President
CARRIER CORPORATION, a
Delaware Corporation
By: /s/ Charles Figueroa
----------------------
Name: Charles Figueroa
Title: Vice-President
34
EXHIBIT 11
WATSCO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995 (1) 1994 (1)
------ ----- -----
<S> <C> <C> <C>
Net Income $12,992 $7,250 $5,762
Less subsidiary preferred stock dividend (130) (130) (130)
------- ------ ------
Income applicable to common stock
for primary earnings per share 12,862 7,120 5,632
Add interest expense, net of income
tax effects, attributable to assumed
conversion of convertible debentures 70 108 121
------- ------ ------
Income applicable to common stock
for fully diluted earnings per share $12,932 $7,228 $5,753
======= ====== ======
Weighted average common shares
outstanding 12,861,456 9,295,945 9,160,912
Dilutive stock options and warrant 898,316 577,428 328,280
---------- ------------ ---------
Shares for primary earnings per share 13,759,772 9,873,373 9,489,192
Assumed conversion of debentures 233,485 360,783 401,342
Additional dilution of stock options
and warrant 198,423 221,749 78,858
---------- ---------- ---------
Shares for fully diluted earnings per
share 14,191,680 10,455,905 9,969,392
========== ========== =========
Net income per primary share $.93 $.72 $.59
==== ==== ====
Net income per fully diluted share $.91 $.69 $.58
==== ==== ====
</TABLE>
(1) The share amounts for 1995 and 1994 have been restated to reflect
three-for-two stock splits effected in the form of a 50% dividend paid by the
Company on June 14, 1996 and May 15, 1995.
<TABLE>
<CAPTION>
EXHIBIT 13
WATSCO, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA - FIVE YEAR SUMMARY
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 (1) 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues $ 425,389 $ 331,008 $ 283,731 $ 230,656 $ 194,633
========= ========= ========= ========= =========
Income before income
taxes and minority interests $ 21,218 $ 14,070 $ 12,028 $ 10,147 $ 7,134
Income taxes (8,110) (5,234) (4,630) (3,819) (2,746)
Minority interests (116) (1,586) (1,636) (1,287) (1,470)
--------- --------- --------- --------- ---------
Net income $ 12,992 $ 7,250 $ 5,762 $ 5,041 $ 2,918
========= ========= ========= ========= =========
SHARE DATA
Net income per share (1):
Primary $ .93 $ .72 $ .59 $ .56 $ .47
Fully diluted .91 .69 .58 .54 .42
Cash dividends declared per share:
Common Stock $ .14 $ .13 $ .11 $ .11 $ .10
Class B Common Stock .14 .13 .11 .11 .10
Common stock outstanding (2) 14,032 9,423 9,226 9,127 6,596
========= ========= ========= ========= =========
BALANCE SHEET INFORMATION
Total assets $ 203,581 $ 144,884 $ 119,664 $ 109,685 $ 81,138
========= ========= ========= ========= =========
Long-term obligations:
Borrowings under revolving credit
agreements $ 48,000 $ - $ - $ - $ -
Bank and other debt 3,720 3,818 2,719 3,672 3,979
Subordinated notes and debentures -- 2,500 2,500 2,500 5,500
Convertible subordinated debentures -- -- 1,505 1,676 4,060
$ 51,720 $ 6,318 $ 6,724 $ 7,848 $ 13,539
========= ========= ========= ========= =========
Shareholders' equity $ 119,929 $ 53,756 $ 46,816 $ 41,754 $ 25,272
========= ========= ========= ========= =========
<FN>
- ----------
(1) AMOUNTS FOR 1993 INCLUDE THE NON-RECURRING RECEIPT OF INSURANCE PROCEEDS
FOR BUSINESS INTERRUPTION CLAIMS FOLLOWING HURRICANE ANDREW, WHICH HAD THE
EFFECT OF INCREASING INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS BY
$1,130,000 AND NET INCOME BY $706,000. EXCLUDING THIS ITEM, FULLY DILUTED
EARNINGS PER SHARE WAS $.47 ($.48 PRIMARY).
(2) SHARE DATA INCLUDES THE EFFECTS OF THREE-FOR-TWO SPLITS EFFECTED ON JUNE
14, 1996 AND MAY 15, 1995.
</FN>
</TABLE>
4
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain items of the Company's consolidated
financial statements for the three years ended December 31, 1996, 1995 and 1994,
expressed as a percentage of total revenues:
1996 1995 1994
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
Cost of sales and direct
service expenses 77.5 77.9 77.7
----- ----- -----
Gross profit 22.5 22.1 22.3
Selling, general and
administrative expenses 16.8 16.7 17.0
----- ----- -----
Operating income 5.7 5.4 5.3
Investment income, net .2 .1 --
Interest expense .9 1.2 1.1
Income taxes 1.9 1.6 1.6
Minority interests -- .5 .6
----- ----- -----
Net income 3.1% 2.2% 2.0%
===== ===== =====
The following narratives include the results of operations of wholesale
distributors of air conditioning and heating equipment and related parts and
supplies acquired during 1995 and 1996: Airite, Inc., acquired in February 1995;
H.B. Adams , Inc., acquired in March 1995; Environmental Equipment & Supplies,
Inc., acquired in May 1995; Central Air Conditioning Distributors, Inc.,
acquired in October 1995; Three States Supply Company, Inc., acquired in April
1996; Serviceman Supplies, Inc., acquired in October 1996 and Coastal Supply
Company, Inc., acquired in December 1996. These acquisitions were accounted for
under the purchase method of accounting and, accordingly, their results of
operations have been included in the consolidated results of the Company
beginning on their respective dates of acquisition. The Company operates
principally in two industry segments: climate control and personnel services.
The climate control segment includes the Company's distribution and
manufacturing subsidiaries.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996
WITH YEAR ENDED DECEMBER 31, 1995
Revenues in 1996 increased $94.4 million, or 29%, over 1995. In the climate
control segment, revenues increased $91.8 million, or 31%. Excluding the effect
of acquisitions, revenues in the climate control segment increased $25.6
million, or 9%. Such increase was primarily due to increased sales of
replacement air conditioners, increased homebuilding activity and higher sales
due to the expansion of product lines for parts and supplies.
Gross profit in 1996 increased $22.3 million, or 30%, over the prior year.
Excluding the effect of acquisitions, gross profit increased $5.4 million, or
7%, primarily as a result of the increase in revenues described above. Gross
profit margin increased to 22.5% in 1996 from 22.1% in 1995. Excluding the
effect of acquisitions, gross profit margin decreased to 21.9% in 1996 from
22.1% in 1995. This decrease was primarily due to certain vendor price increases
in late 1995, which the Company did not begin passing on to customers until late
in the first quarter of 1996, and additional price increases in mid-1996, which
were not fully passed on to customers in the second and third quarters.
Selling, general and administrative expenses in 1996 increased $16.1
million, or 29%, over 1995 primarily due to selling and delivery costs related
to increased sales. Excluding the effect of acquisitions, selling, general and
administrative expenses increased $4.4 million, or 8%, also due to revenue
increases. Selling, general and administrative expenses as a percent of revenues
increased to 16.8% in 1996 from 16.7% in 1995.
5
<PAGE>
This increase was due to higher costs as a percent of revenues from
acquisitions. Excluding the effect of acquisitions, selling, general and
administrative expenses as a percent of revenues decreased to 16.6% in 1996 from
16.7% in 1995. This decrease was the result of a larger revenue base over which
to spread fixed costs.
Interest expense in 1996 decreased $565,000, or 13%, from 1995 due to lower
average interest rates on borrowings. Excluding the effects of acquisitions,
interest expense decreased $1.1 million, or 26%. This decrease was due to lower
average interest rates on borrowings, interest management activities and
repayment of long-term obligations having higher rates of interest.
Minority interest expense in 1996 decreased $1.5 million compared to the
same period in 1995. This decrease was due to the acquisition by the Company of
the minority common equity interests in certain distribution subsidiaries in
March 1996.
The effective income tax rate increased to 38.2% in 1996 compared to 37.2%
in the prior year. The increase was primarily the result of the proportionately
larger share of taxable income generated in higher tax rate states in 1996
compared to 1995.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995
WITH YEAR ENDED DECEMBER 31, 1994
Revenues in 1995 increased $47.3 million, or 17%, over 1994. The
distribution operations' revenues increased $46.4 million, or 20%. Excluding the
effect of acquisitions, revenues for the distribution operations' increased
$18.8 million, or 8%. This increase in sales was mainly due to increased sales
of replacement air conditioners in Florida and Texas. Revenues in the Company's
manufacturing operations decreased $874,000, or 4%, primarily due to lower sales
to OEMs caused by higher levels of inventory held by customers during the year.
Revenues in the personnel services operations increased $1.8 million, or 6%,
reflecting higher demand for temporary help services and greater customer
acceptance of new product offerings such as professional staffing and technical
temporaries.
Gross profit in 1995 increased $10.1 million, or 16%, over the prior year.
Excluding the effect of acquisitions, gross profit increased $3.7 million, or
6%, primarily as a result of the increase in revenues described above. Gross
profit margin decreased from 22.3% in 1994 to 22.1% in 1995 with acquisitions
having no impact on gross profit margin. These decreases were primarily due to
the increased sale of lower margin products by the distribution operations and
new product start-up costs in the manufacturing operations.
Selling, general and administrative expenses in 1995 increased $7.1 million,
or 15%, over 1994 primarily due to selling and delivery costs related to
increased sales. Excluding the effect of acquisitions, selling, general and
administrative expenses increased $2.5 million, or 5%, also due to revenue
increases. Selling, general and administrative expenses as a percent of revenues
decreased to 16.7% in 1995 from 17.0% in 1994, with 1995 acquisitions have no
effect on such percentage. This decrease was the result of a larger revenue base
over which to spread fixed costs.
Interest expense in 1995 increased $1.1 million, or 34%, over 1994 due to
higher interest rates and additional borrowings used to finance acquisitions and
increased inventory levels required by sales growth and sticking requirements in
new branch locations. Excluding the effects of acquisitions, interest expense
increased $471,000, or 15%, primarily due to higher average monthly borrowings
and higher interest rates.
The effective income tax rate decreased to 37.2% in 1995 compared to 38.5%
in the prior year. The decrease was primarily the result of the proportionately
larger share of taxable income generated in lower tax rate states in 1995
compared to 1994.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company executed a bank-syndicated revolving credit
agreement which provides for borrowings of up to $130 million, expiring on
September 30, 2001. The unsecured agreement replaced the Company's previous
revolving credit facilities and will be used to fund acquisitions and seasonal
working capital needs and for other general corporate purposes. Borrowings under
the revolving credit agreement, which totaled $48 million at December 31, 1996,
bear interest at primarily LIBOR-based rates plus a spread that is dependent
upon the Company's financial performance (LIBOR plus .375% at December 31,
1996). The revolving credit agreement contains financial covenants with respect
to the Company's consolidated net worth, interest and debt coverage ratios, and
limits capital expenditures and dividends in addition to other restrictions.
Working capital increased to $130.0 million in 1996 from $41.2 million in
1995. In March 1996, the Company completed a public offering of 2,355,000 shares
(adjusted for a three-for-two stock split) of Common Stock that yielded net
proceeds of $32.1 million. In April 1996, the Company used approximately $14.7
million of the net proceeds to fund the acquisition of Three States Supply
Company, Inc. ("Three States"), a Memphis, Tennessee-based distributor of
supplies used primarily in air conditioning and heating systems, and $2.5
million to repay a 12% subordinated note. In September 1996, the Company used
approximately $14.9 million of the remaining offering proceeds to reduce
borrowings under its revolving credit agreements.
Cash and cash equivalents increased $1.3 million in 1996. Principal
sources of cash were net proceeds from the issuance of common stock, borrowings
under the revolving credit agreements and profitable operations. The principal
uses of cash were to fund working capital needs, acquire Three States, repay
long-term obligations and fund capital expenditures. Inventory purchases are
substantially funded by borrowings under revolving credit agreements. The
increase in inventory in 1996 was higher than 1995 primarily due to higher
levels of inventory carried by the distribution operations to meet increased
demand caused by growth and broaden product offerings to better serve customer
needs.
In January 1997, the Company completed the acquisition of the common stock
of Coastline Distribution, Inc. and substantially all of the operating assets of
four branch operations from Inter-City Products Corporation (USA) for a cash
payment of approximately $22.4 million and is subject to adjustment upon the
completion of an audit of the assets purchased and liabilities assumed.
In February 1997, the Company completed a public offering of 3,000,000
shares of Common Stock resulting in net proceeds of $85.5 million, a significant
portion of which was used to repay outstanding borrowings under its revolving
credit agreement. The Company anticipates using the remainder of the proceeds to
fund its growth strategy and for general corporate purposes.
In March 1997, the Company completed the purchase of substantially all of
the operating assets and assumption of certain liabilities of Carrier
Corporation's Comfort Products Distributing and Central Plains Distributing
distribution operations. Comfort Products and Central Plains sell heating and
air conditioning equipment from eight branches serving Missouri, Kansas,
Nebraska, Iowa, North Dakota and South Dakota. Cash consideration paid by the
Company totaled $26.4 million and is subject to adjustment upon the completion
of an audit of the assets purchased.
The Company has adequate availability of capital from operations and its
revolving credit agreement to fund present operations and anticipated growth,
including expansion in the Company's current and targeted market areas. The
Company continually evaluates additional acquisitions and has held discussions
with a number of acquisition candidates; however, the Company currently has no
agreement with respect to any potential significant acquisition. Should suitable
acquisition opportunities or working capital needs arise that would require
additional financing, the Company believes that its current financial position,
earnings history and increase of its capital base from a recent public offering
provide a solid base for expanding its existing capacity for debt capital at
competitive rates and terms.
7
<PAGE>
NEW ACCOUNTING STANDARDS
During 1996, the Company adopted Statement of Financial Accounting
Standards -("SFAS") No. 121, "Accounting for Long-Lived Assets and for
Long-Lived Assets to be Disposed of". The adoption of SFAS No. 121 did not have
a material effect on the Company's consolidated financial position or results of
operations.
During 1996, the Company adopted the SFAS No. 123, "Accounting for
Stock-Based Compensation", which requires new disclosures and provides guidance
for new accounting methods related to employee stock-based compensation plans.
The Company continues to account for its stock-based compensation plan in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees",
as allowed under SFAS No. 123. The disclosures required by SFAS No. 123 are
shown in Note 6 of the Company's 1996 consolidated financial statements.
8
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
--------- --------- ---------
Revenues:
Net sales $ 390,775 $ 298,939 $ 253,433
Service fees and royalties 34,614 32,069 30,298
--------- --------- ---------
Total revenues 425,389 331,008 283,731
--------- --------- ---------
Costs and expenses:
Cost of sales 303,076 233,089 197,397
Direct service expenses 26,714 24,621 23,122
Selling, general and
administrative expenses 71,353 55,288 48,169
--------- --------- ---------
Total costs and expenses 401,143 312,998 268,688
--------- --------- ---------
Operating income 24,246 18,010 15,043
--------- --------- ---------
Other income (expense):
Investment income, net 628 281 140
Interest expense (3,656) (4,221) (3,155)
--------- --------- ---------
Total other income (expense) (3,028) (3,940) (3,015)
--------- --------- ---------
Income before income taxes
and minority interests 21,218 14,070 12,028
Income taxes (8,110) (5,234) (4,630)
Minority interests (116) (1,586) (1,636)
--------- --------- ---------
Net income $ 12,992 $ 7,250 $ 5,762
========= ========= =========
Earnings per share:
Primary $ .93 $ .72 $ .59
Fully diluted .91 .69 .58
========= ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
9
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995
ASSETS -------- --------
Current Assets:
Cash and cash equivalents $ 5,020 $ 3,751
Marketable securities 334 267
Accounts receivable, net 59,523 43,564
Inventories 87,637 59,724
Prepaid expenses and other current assets 6,502 5,073
-------- --------
Total current assets 159,016 112,379
-------- --------
Property, plant and equipment, net 16,174 11,286
Intangible assets, net 23,596 16,995
Other assets 4,795 4,224
-------- --------
$203,581 $144,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 794 $ 2,455
Short-term promissory notes - 4,250
Borrowings of subsidiaries
under revolving credit agreements - 40,185
Accounts payable 17,343 17,229
Accrued liabilities 10,884 7,091
-------- --------
Total current liabilities 29,021 71,210
-------- --------
Long-term Obligations:
Borrowings under revolving credit agreement 48,000 -
Bank and other debt 3,720 3,818
Subordinated note - 2,500
-------- --------
Total long-term obligations 51,720 6,318
Deferred income taxes 911 978
-------- --------
Preferred stock of subsidiary 2,000 2,000
-------- --------
Minority interests - 10,622
-------- --------
Commitments and contingencies (Notes 2, 9 and 10)
Shareholders' Equity:
Common Stock, $.50 par value, 11,853,738 and
7,202,304 shares issued and outstanding in 1996
and 1995, respectively 5,927 3,601
Class B Common Stock, $.50 par value, 2,178,100
and 2,221,021 shares issued and outstanding in
1996 and 1995, respectively 1,089 1,111
Paid-in capital 72,129 19,396
Retained earnings 40,784 29,648
-------- --------
Total shareholders' equity 119,929 53,756
-------- --------
$203,581 $144,884
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
10
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK PAID-IN RETAINED
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT CAPITAL EARNINGS
---------- ------ -------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 9,126,864 $4,563 $18,098 $19,093
Conversion of debentures 42,495 21 171
Contribution to 401(k) plan 19,020 10 127
Issuances from exercise of stock options 37,723 19 119
Common stock cash dividends,
$.11 per share of Common Stock and
$.11 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 9,226,102 4,613 18,515 23,688
Conversion of debentures 36,604 18 146
Contribution to 401(k) plan 13,563 7 142
Issuances from exercise of stock options
and warrant 147,056 74 593
Common stock cash dividends,
$.13 per share of Common Stock and
$.13 per Class B share (1,160)
Dividends on 6.5% Series A
preferred stock of subsidiary (130)
Net income 7,250
--------- ----- ------ ------
BALANCE AT DECEMBER 31, 1995 9,423,325 4,712 19,396 29,648
Conversion of debentures 336,249 168 1,339
Issuance from public offering 2,355,000 1,177 30,935
Contribution to 401(k) plan 11,373 6 282
Issuances from exercise of stock options
and employee stock purchase plan 425,850 213 2,908
Tax benefit from exercise of stock options 1,296
Issuances for acquisitions 1,480,041 740 15,973
Common stock cash dividends,
$.14 per share of Common Stock and
$.14 per Class B share (1,726)
Dividends on 6.5% Series A
preferred stock of subsidiary (130)
Net income 12,992
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1996 14,031,838 $7,016 $72,129 $40,784
========== ====== ======= =======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
11
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $12,992 $ 7,250 $ 5,762
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,170 2,994 2,345
Provision for doubtful accounts 1,541 1,197 597
Net investment gains (35) (27) (6)
Deferred income tax benefit (379) (25) (237)
Noncash stock contribution to 40l(k) plan 288 149 137
Minority interests, net of dividends paid 116 765 304
Changes in operating assets and liabilities,
net of effects of acquisitions in 1996 and 1995:
Accounts receivable (9,304) (3,207) (5,151)
Inventories (16,026) 644 (300)
Accounts payable and accrued liabilities (644) 1,505 (797)
Other, net (1,614) (198) (229)
------- ------- -------
Net cash provided by (used in) operating activities (8,895) 11,047 2,425
------- ------- -------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired (15,310) (12,987) -
Capital expenditures, net (5,449) (4,248) (4,148)
Net proceeds from sales (purchases) of
marketable securities 58 3,012 (2,258)
------- ------- -------
Net cash used in investing activities (20,701) (14,223) (6,406)
------- ------- -------
Cash flows from financing activities:
Repayments of long-term obligations (5,856) (555) (222)
Repayments of short-term promissory notes (4,471) - -
Net borrowings under revolving credit agreements 7,815 6,361 5,883
Net proceeds from issuances of common stock 35,233 667 138
Cash dividends (1,856) (1,290) (1,167)
------- ------- -------
Net cash provided by financing activities 30,865 5,183 4,632
------- ------- -------
Net increase in cash and cash equivalents 1,269 2,007 651
Cash and cash equivalents at beginning of year 3,751 1,744 1,093
------- ------- -------
Cash and cash equivalents at end of year $ 5,020 $ 3,751 $ 1,744
======= ======= =======
Supplemental disclosures:
Income taxes paid $ 6,023 $ 4,999 $ 4,709
Interest paid 4,204 4,186 3,149
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
12
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Watsco, Inc. ("Watsco") and its subsidiaries (the "Company") is the largest
distributor of residential central air conditioning and heating equipment and
related parts and supplies in the United States. The Company has strong market
positions in 14 sunbelt states, including leading positions in Florida, Texas
and California, the three largest air conditioning markets in the country. The
Company also manufactures electronic and mechanical components for air
conditioning, heating and refrigeration equipment that are sold to wholesale
distributors and original equipment manufacturers. In addition, the Company
operates Dunhill Staffing Systems, Inc., a nationwide provider of temporary
staffing and permanent placement services.
Basis of Consolidation
The consolidated financial statements include the accounts of Watsco, Inc.
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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
The Company's inventories are stated at the lower of cost (first-in,
first-out method) or market.
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.
Intangible Assets
Intangible assets, net of accumulated amortization of $2,644,000 and
$2,040,000 at December 31, 1996 and 1995, respectively, consists of goodwill
arising from the excess of the cost of acquired businesses over the fair value
of their net assets. Goodwill is amortized on a straight-line basis over 40
years. The Company periodically reviews goodwill based on expectations of
undiscounted cash flows and operating income to assess whether recorded amounts
are fully recoverable. Amortization expense related to goodwill amounted to
$604,000, $401,000 and $364,000 in 1996, 1995 and 1994, respectively.
Income Taxes
Deferred tax assets and liabilities reflect the temporary differences
between the financial statement and income tax bases of assets and liabilities.
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, 1996 and 1995, marketable securities consists primarily of
tax exempt municipal bonds and equity securities and have been classified as
"available for sale" securities by the Company. At December 31, 1996 and 1995,
the difference between the cost of such securities and the fair market value of
such securities is not material.
13
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for Long-Lived Assets and for Long-Lived
Assets to be Disposed of". The adoption of SFAS No. 121 did not have a material
effect on the Company's consolidated financial position or results of
operations.
Stock-Based Compensation
As described in Note 6, the Company has elected to follow the accounting
provisions of Accounting Principles Board ("APB") Opinion No. 25 for stock-based
compensation and to furnish the pro forma disclosures required under SFAS No.
123, "Accounting for Stock-Based Compensation".
Earnings Per Share
Primary earnings per share is computed by dividing net income, less
subsidiary preferred stock dividends, 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
convertible subordinated debentures which matured in September 1996, 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
and any added dilution from common stock equivalents.
Shares used to calculate earnings per share (restated in 1995 and 1994 to
reflect three-for-two stock splits effected on June 14, 1996 and May 15, 1995,
see Note 8) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding 12,861,456 9,295,945 9,160,912
Dilutive stock options and warrants 898,316 577,428 328,280
---------- --------- ---------
Shares for primary earnings per share 13,759,772 9,873,373 9,489,192
Assumed conversion of debentures 233,485 360,783 401,342
Additional dilution of stock options
and warrants 198,423 221,749 78,858
---------- ---------- ---------
Shares for fully diluted earnings per share 14,191,680 10,455,905 9,969,392
========== ========== =========
</TABLE>
2. INVENTORIES
Inventories consists of (in thousands):
DECEMBER 31, 1996 1995
------- -------
Raw materials $ 4,208 $ 3,637
Work-in-process 1,502 1,359
Finished goods 81,927 54,728
------- -------
$87,637 $59,724
======= =======
Rheem Manufacturing Company ("Rheem") is a major supplier to the Company
under long-term distribution agreements. Net purchases under these agreements
were $153,814,000, $130,752,000 and $113,117,000, or 48%, 55% and 57% of the
Company's aggregate purchases in 1996, 1995 and 1994, respectively. Included in
accounts payable in the consolidated balance sheets are amounts owed to Rheem
totaling $3,317,000 and $7,224,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had non-cancelable purchase commitments to
Rheem of approximately $17,727,000.
14
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consists of (in thousands):
DECEMBER 31, 1996 1995
-------- -------
Land and buildings $ 5,852 $ 4,097
Machinery and equipment 14,669 10,947
Furniture and fixtures 10,681 7,547
-------- -------
31,202 22,591
Less: accumulated depreciation
and amortization (15,028) (11,305)
-------- -------
$ 16,174 $11,286
======== =======
4. LONG-TERM OBLIGATIONS
Revolving Credit Agreements
Prior to September 25, 1996, the Company maintained separate revolving
credit agreements with banks for four of its distribution subsidiaries.
Borrowings under the subsidiaries' revolving credit agreements bore interest at
primarily LIBOR-based rates for a fixed duration plus a spread ranging between
.75% and .90% and were secured by substantially all of the subsidiaries' assets.
Additional terms under these agreements restricted the transfer of their net
assets and limited the payment of dividends to their shareholders.
On September 25, 1996, the Company executed a new revolving credit agreement
with a syndicate of banks which provides for borrowings of up to $130,000,000,
expiring in 2001. The subsidiaries' previous revolving credit agreements were
terminated and all outstanding borrowings were repaid. Borrowings under the new
revolving credit agreement are unsecured and bear interest at primarily
LIBOR-based rates for a fixed duration plus a spread that is dependent upon the
Company's financial performance (LIBOR plus .375% at December 31, 1996). The
agreement contains financial covenants with respect to the Company's
consolidated net worth, interest and debt coverage ratios, and limits capital
expenditures and dividends in addition to other restrictions.
At December 31, 1996 and 1995, the weighted average interest rate for the
borrowings under revolving credit agreements was 6.2% and 6.7%, respectively.
During the years ended December 31, 1996, 1995 and 1994, the weighted average
rates were 6.4%, 7.3% and 6.7%, respectively.
Bank and Other Debt
Bank and other debt (net of current portion) consists of (in thousands):
DECEMBER 31, 1996 1995
------ ------
Mortgage note $ 729 $ 888
Variable-rate term note of subsidiary - 900
Promissory notes of subsidiary 1,913 727
Other 1,078 1,303
------ ------
$3,720 $3,818
====== ======
The mortgage note is payable in monthly installments of approximately
$13,000 plus interest at a fixed rate of 8.25% and matures in 2002. The
mortgage note is secured by land and buildings with a net carrying value of
$1,044,000 at December 31, 1996.
The promissory notes of subsidiary bear interest at 6.5% to 8.0%, payable
semi-annually or annually, and mature at varying dates through 2001.
15
<PAGE>
Convertible Subordinated Debentures
The Company had convertible subordinated debentures outstanding at December
31, 1995 that bore interest at 10% per year and were convertible into the
Company's Class B Common Stock at $4.49 per share. At December 31, 1995,
debentures in the aggregate principal amount of $1,507,000 (included in current
portion of long-term obligations in the accompanying consolidated balance sheet)
were outstanding, of which $1,414,500 were owned by directors and an affiliate.
In September 1996, the Company redeemed all outstanding debentures. During 1996,
1995 and 1994, convertible subordinated debentures of $1,507,000, $164,000 and
$192,000, respectively, were converted into common stock.
Annual maturities of long-term obligations for the years subsequent to
December 31, 1996 are as follows: $794,000 in 1997; $689,000 in 1998; $616,000
in 1999; $1,104,000 in 2000; $48,506,000 in 2001 and $805,000 thereafter.
5. INCOME TAXES
The income tax provision consists of (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994
------ ------ ------
Federal $6,982 $4,612 $3,991
State 1,128 622 639
------ ------ ------
$8,110 $5,234 $4,630
====== ====== ======
Current $8,489 $5,259 $4,867
Deferred (379) (25) (237)
------ ------ ------
$8,110 $5,234 $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:
YEARS ENDED DECEMBER 31, 1996 1995 1994
------ ------ ------
Federal statutory rate 35.0% 34.0% 34.0%
State income taxes,
net of federal benefit 3.5 2.9 3.5
Other, net (.3) .3 1.0
------ ------ ------
38.2% 37.2% 38.5%
====== ====== ======
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities (in thousands):
DECEMBER 31, 1996 1995
------ ------
Deferred tax assets:
Included in other current assets -
Accounts receivable reserves $ 715 $1,052
Capitalized inventory costs
and inventory reserves 2,640 2,023
Other 154 155
------ ------
3,509 3,230
------ ------
Included in other noncurrent assets -
Net operating loss carryforwards of subsidiary 721 789
Other 297 225
------ ------
1,018 1,014
------ ------
16
<PAGE>
Deferred tax liabilities:
Included in accrued liabilities -
Inventory (99) (128)
------ ------
Included in noncurrent liabilities -
Depreciation and amortization (468) (614)
Other (443) (364)
------ ------
(911) (978)
------ ------
Total net deferred tax assets $3,517 $3,138
====== ======
A subsidiary of the Company has available net operating loss carryforwards
(NOLs) of approximately $2.1 million which are available to offset future
taxable income in equal annual amounts of approximately $232,000 through 2005.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", 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
taxable income and expectations for the future, that taxable income of the
subsidiary will be sufficient to fully utilize the available NOLs.
6. STOCK OPTION AND BENEFIT PLANS
Stock Option Plans
At December 31, 1996, the Company has two stock option plans for its
directors, officers and key employees. Under the 1991 Stock Option Plan (the
"1991 Plan"), options for an aggregate of 2,808,750 shares of Common Stock and
Class B Common Stock may be granted. Options as to 1,570,596 shares of Common
Stock and 732,581 shares of Class B Common Stock have been granted through
December 31, 1996. The terms of the 1991 Plan require the option price per share
be equivalent to the fair market value of the underlying common stock on the
date of grant. Options under the 1991 Plan are for a term of ten years and are
exercisable as determined by the Option Committee of the Board of Directors. The
1983 Executive Stock Option Plan (the "1983 Plan") expired in February 1993;
therefore, no additional options may be granted. Options as to 56,392 shares of
Common Stock and 6,960 shares of Class B Common Stock are outstanding under the
1983 Plan at December 31, 1996. Options under the 1983 Plan are for a term of
ten years and, generally, may be exercised in annual 20% installments beginning
one year after grant. Under either plan, the Option Committee may waive the
vesting period and permit options to be exercised immediately.
Under the stock option plans, there were 505,573 shares of common stock
reserved for future grants as of December 31, 1996. Transactions are summarized
as follows:
<TABLE>
<CAPTION>
STOCK WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
------------- --------------
<S> <C> <C>
December 31, 1995 1,583,994 $ 5.88
Granted 293,500 18.78
Exercised (366,894) 5.61
Canceled (12,069) 11.07
------------- --------------
December 31, 1996 1,498,531 $ 7.60
============= ==============
Shares exercisable at end of year 1,071,605 $ 6.02
------------- --------------
STOCK OPTIONS PRICE RANGE
------------- --------------
Shares exercised during the year ended December 31, 1995 46,106 $3.33 - 7.33
------------- --------------
Shares exercised during the year ended December 31, 1994 69,639 $2.80 - 5.67
------------- --------------
</TABLE>
17
<PAGE>
Exercise prices for options outstanding at December 31, 1996 ranged from
$3.33 to $28.13. The following sets forth certain information with respect to
those stock options at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
STOCK AVERAGE AVERAGE
OPTIONS EXERCISE REMAINING
RANGE OF EXERCISE PRICES OUTSTANDING PRICE CONTRACTUAL LIFE
----------- -------- ----------------
<S> <C> <C> <C>
Under $5.00 53,222 $ 3.70 4.5
$5.00 - $7.49 1,112,809 5.93 6.3
$7.50 - $11.25 216,000 10.68 9.0
Over $11.25 116,500 19.60 9.5
----------- -------- ----------------
1,498,531 $ 7.60 6.9
=========== ======== ================
</TABLE>
The following sets forth certain information with respect to those stock
options exercisable at December 31, 1996:
<TABLE>
<CAPTION>
STOCK WEIGHTED
OPTIONS AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
------------ ---------------
<S> <C> <C>
Under $5.00 49,360 $ 3.68
$5.00 - $7.49 956,620 5.81
$7.50 - $11.25 65,625 10.79
OVER $11.25 - -
------------ ---------------
1,071,605 $ 6.02
============ ===============
</TABLE>
Employee Stock Purchase Plan
Effective July 1, 1996, the Company adopted the Watsco, Inc. Qualified
Employee Stock Purchase Plan under which full-time employees with at least 90
days of service may purchase up to an aggregate of 200,000 shares of the
Company's Common Stock. The plan allows participating employees to purchase,
through payroll deductions or lump-sum contribution, shares of the Company's
Common Stock at 85% of the fair market value at specified times subject to
certain restrictions. During 1996, employees purchased 89,367 shares of Common
Stock at an average price of $17.46 per share. At December 31, 1996, 110,633
shares remained available for purchase under the plan.
The Company accounts for its stock option plans and employee stock purchase
plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, no compensation cost has
been recognized in the consolidated statements of income. Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair market value at the grant dates for awards under the stock option plans and
purchases under the employee stock purchase plan consistent with the method of
SFAS No. 123, the Company's pro forma net earnings and earnings per share would
be as follows (in thousands, except per share data):
YEARS ENDED DECEMBER 31, 1996 1995
------- ------
Net earnings $12,504 $7,207
Primary earnings per share $.91 $.72
Fully diluted earnings per share $.89 $.69
The Company's pro forma information above is not representative of the pro
forma effect of the fair value provisions of SFAS No. 123 on the Company's net
income in future years because pro forma compensation expense related to grants
made prior to 1995 may not be taken into consideration.
The weighted-average fair value at date of grant for stock options granted
during 1996 and 1995 was $5.72 and $3.39, respectively, and was estimated using
the Black-Sholes option valuation model with the following weighted-average
assumptions:
18
<PAGE>
YEARS ENDED DECEMBER 31, 1996 1995
------- ------
Expected life in years 6.0 7.0
Interest rate 6.3% 6.3%
Volatility 30.0% 25.0%
Dividend yield .70% 1.30%
The weighted-average fair value of shares purchased under the employee
stock purchase plan was determined using the per share quoted market value of
the Common Stock used in determining the purchase price to plan participants,
excluding any discount.
The Black-Sholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including expected stock price volatility. The
Company's stock-based compensation arrangements have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions used in valuation models can materially affect the
fair value estimate. As a result, the existing models may not necessarily
provide a reliable single measure of the fair value of its stock-based
compensation.
401(k) Plan
The Company has a profit sharing retirement plan for its employees which is
qualified under Section 401(k) of the Internal Revenue Code. The Company makes
an annual matching contribution based on a percentage of eligible employee
compensation deferrals. The contribution is made in cash or by the issuance of
the Company's Common Stock to the plan on behalf of its employees. For the years
ended December 31, 1996, 1995 and 1994, the aggregate contribution to the plan
was $295,000, $265,000 and $268,000, respectively.
Other Plans
Watsco has implemented a reverse split-dollar insurance program for two of
its officers which provides the Company 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, 1996, 1995 and 1994, the Company recorded expense of
$58,000, $53,000 and $49,000, respectively, related to this program.
The Company also has a Key Executive Non-Qualified Deferred Compensation
Plan. At December 31, 1996, there were two individuals participating in this
plan. The Company recorded no expense related to this plan for the year ended
December 31, 1996. For the years ended December 31, 1995 and 1994, the Company
recorded expense of $65,000 and $158,000, respectively, related to this plan.
7. ACQUISITIONS
1996 Acquisitions
In March 1996, the Company and Rheem completed a transaction pursuant to a
Stock Exchange Agreement and Plan of Reorganization (the "Exchange Agreement")
whereby the Company acquired Rheem's minority ownership interests in Gemaire
Distributors, Inc. ("Gemaire"), Comfort Supply, Inc. ("Comfort Supply") and
Heating & Cooling Supply, Inc. ("Heating & Cooling") in exchange for 1,446,542
unregistered shares of the Company's Common Stock having an estimated fair value
of $16,100,000. Following this transaction, Gemaire, Comfort Supply and Heating
& Cooling became wholly-owned subsidiaries of the Company.
Also during 1996, the Company completed three other acquisitions of
wholesale distributors of air conditioners and/or related parts and supplies for
aggregate consideration of $17,090,000. The acquisitions were made either in the
form of the purchase of all of the outstanding common stock or the purchase of
the net assets and business of the respective sellers. Consideration for these
acquisitions consisted of cash payments aggregating $14,886,000, the issuance of
33,499 shares of Common Stock, and the issuance of a long-term promissory note
of $1,551,000. Cash payments were funded from existing cash or from borrowings
under revolving credit agreements. The long-term promissory note bears interest
at 6.5%, payable annually, and matures in 2001 (see Note 4).
19
<PAGE>
1995 Acquisitions
During 1995, the Company completed four acquisitions for aggregate
consideration of $18,116,000. The acquisitions were made either in the form of
the purchase of all of the outstanding common stock or the purchase of the net
assets and business of the respective sellers. Consideration for these
acquisitions consisted of cash payments aggregating $13,008,000, the issuance of
short-term promissory notes of $4,250,000 and the issuance of long-term
promissory notes of $858,000. Cash payments were funded from existing cash or
from borrowings under revolving credit agreements. The short-term promissory
notes bore interest at 7% and matured during 1996. The long-term promissory
notes bear interest at 8% and mature at varying dates through 2000 (see Note 4).
All acquisitions have been accounted for under the purchase method of
accounting and, accordingly, their results of operations have been included in
the respective consolidated statements of income beginning on their dates of
acquisition. The excess of the aggregate purchase price over the net assets
acquired of $6,845,000 in 1996 and $4,232,000 in 1995 is being amortized on a
straight-line basis over 40 years. In connection with these acquisitions, the
Company assumed liabilities of $6,806,000 in 1996 and $4,891,000 in 1995,
respectively.
8. SHAREHOLDERS' EQUITY
The authorized capital stock of the Company is 40,000,000 shares of Common
Stock 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 March 1996, the Company completed the sale of 2,355,000 shares of Common
Stock resulting in net proceeds of approximately $32,100,000.
On May 20, 1996 and April 18, 1995, the Company's Board of Directors
authorized a three-for-two stock split for both classes of the Company's common
stock effected in the form of a 50% stock dividend payable on June 14, 1996 to
shareholders of record as of May 31, 1996 and on May 15, 1995 to shareholders of
record as of April 28, 1995, respectively. Shareholders' equity has been
restated to give retroactive effect to the stock splits for all periods
presented by reclassifying from retained earnings or paid-in capital to the
common stock accounts the par value of the additional shares arising from the
splits. In addition, all references in the consolidated financial statements and
notes thereto 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.
20
<PAGE>
9. FINANCIAL INSTRUMENTS
Recorded Financial Instruments
The Company's recorded financial instruments consist of cash and cash
equivalents, accounts receivable, marketable securities, accounts payable,
short-term promissory notes, the current portion of long-term obligations, the
convertible subordinated debentures, borrowings under revolving credit
agreements, debt instruments included in other long-term obligations and the
preferred stock of a subsidiary. At December 31, 1996 and 1995, the fair values
of financial instruments other than those described below approximated their
carrying values due to the short term nature of these instruments and based on
available quoted market prices. The estimated fair value of the other recorded
financial instruments and their related carrying amounts are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
-------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Borrowings under revolving credit
agreements $48,000 $48,000 $40,185 $40,185
Convertible subordinated debentures - - 1,505 3,908
Debt instruments included in long-term
obligations 3,266 3,266 5,643 6,125
Preferred stock of subsidiary 2,000 * 2,000 *
======== ======= ======== =======
<FN>
- ----------
* Not determinable
</FN>
</TABLE>
The fair values of borrowings under revolving credit agreements and debt
instruments included in long-term obligations are based upon interest rates
available to the Company for similar instruments with consistent terms and
remaining maturities. The fair value of the convertible subordinated debentures
in 1995 is based on the year end market price of the underlying shares of the
Company's Class B Common Stock. The fair value of the preferred stock of
subsidiary is not determinable as the security has no quoted market price and,
because the security contains certain unique terms, conditions, covenants and
restrictions, there are no identical securities that have quoted market prices.
Off-Balance Sheet Financial Instruments
At December 31, 1995, the Company had an interest rate swap agreement
related to borrowings of $10 million to manage the net exposure to interest rate
changes related to a portion of its borrowings under revolving credit
agreements. The interest rate swap agreement, which was terminated by the
Company during 1996, effectively converted a portion of the Company's
LIBOR-based variable rate borrowings into fixed rate borrowings. The impact of
interest rate management activities on the Company's financial position or
results of operations for 1996 and 1995 was not material.
At December 31, 1996, the Company is contingently liable under standby
letters of credit aggregating $2,240,000 that were used as collateral for
promissory notes issued in connection with certain acquisitions made during 1996
(see Note 7). The Company does not expect any material losses to result from the
issuance of the standby letters of credit because performance is not expected to
be required; accordingly, the estimated fair value of these instruments is zero.
21
<PAGE>
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, 1996 and 1995, the
allowance for doubtful accounts was $3,096,000 and $3,101,000, respectively.
Although the Company believes its allowance is sufficient, the amount the
Company ultimately realizes could differ materially in the near-term from the
amount reported above.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company is obligated under non-cancelable
operating leases of real property and equipment used in its operations for
minimum annual rentals as follows: $6,329,000 in 1997; $5,165,000 in 1998;
$4,128,000 in 1999; $2,930,000 in 2000; $1,906,000 in 2001 and $3,620,000
thereafter. Rental expense for the years ended December 31, 1996, 1995 and 1994
was $6,216,000, $4,861,000 and $4,026,000, respectively.
The Company is from time to time involved in routine litigation. Based on
the advice of legal 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.
11. INDUSTRY SEGMENT INFORMATION
The Company operates principally in two industry segments. At December 31,
1996, operations in the Climate Control segment are conducted through five
primary distribution subsidiaries -- Gemaire, Heating & Cooling, Comfort Supply,
Central Air Conditioning Distributors, Inc. and Three States Supply Company,
Inc. -- which distribute residential central air conditioning and heating
equipment and related parts and supplies 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
Staffing Systems, Inc., which provides temporary staffing and permanent
placement services throughout the United States and Canada. There are no sales
between industry segments. Operating income 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, real property and deferred income tax assets. Export sales
totaled approximately $13,339,000, $8,944,000 and $6,606,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
22
<PAGE>
<TABLE>
<CAPTION>
CLIMATE PERSONNEL
(IN THOUSANDS) CONTROL SERVICES OTHER CONSOLIDATED
--------- --------- ----- ------------
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Revenues $ 390,775 $ 34,614 $ 425,389
========= ========= ============
Operating income $ 26,604 $ 1,565 $ 28,169
========= =========
Interest expense (3,656)
Unallocated corporate expenses (3,923)
Investment income, net 628
------------
Income before income taxes and minority interests $ 21,218
============
Identifiable assets $189,019 $ 9,943 $ 198,962
========= =========
Corporate assets 4,619
------------
Total assets $ 203,581
============
Depreciation and amortization $ 3,324 $ 278 $ 568 $ 4,170
========= ========= ===== ============
Capital expenditures, net $ 4,649 $ 300 $ 500 $ 5,449
========= ========= ===== ============
YEAR ENDED DECEMBER 31, 1995
Revenues $ 298,939 $ 32,069 $ 331,008
========= ========= ============
Operating income $ 18,401 $ 1,370 $ 19,771
========= =========
Interest expense (4,221)
Unallocated corporate expenses (1,761)
Investment income, net 281
------------
Income before income taxes and minority interests $ 14,070
============
Identifiable assets $ 133,001 $ 9,025 $ 142,026
========= =========
Corporate assets 2,858
------------
Total assets $ 144,884
============
Depreciation and amortization $ 2,446 $ 210 $ 338 $ 2,994
========= ========= ===== ============
Capital expenditures, net $ 3,493 $ 395 $ 360 $ 4,248
========= ========= ===== ============
YEAR ENDED DECEMBER 31, 1994
Revenues $ 253,433 $ 30,298 $ 283,731
========= ========= ============
Operating income $ 16,401 $ 1,216 $ 17,617
========= =========
Interest expense (3,155)
Unallocated corporate expenses (2,574)
Investment income, net 140
------------
Income before income taxes and minority interests $ 12,028
============
Identifiable assets $ 106,415 $ 7,952 $ 114,367
========= =========
Corporate assets 5,297
------------
Total assets $ 119,664
============
Depreciation and amortization $ 1,851 $ 270 $ 224 $ 2,345
========= ========= ===== ============
Capital expenditures, net $ 3,455 $ 316 $ 377 $ 4,148
========= ========= ===== ============
</TABLE>
12. SUBSEQUENT EVENTS
In January 1997, the Company completed the acquisition of the common stock
of Coastline Distribution, Inc. ("Coastline") and purchase of substantially all
of the operating assets of four branch operations from Inter-City Products
Corporation (USA). Coastline and the branches operate as wholesale distributors
of residential air conditioning and heating products in Florida, Georgia,
southern Alabama, North Carolina, South Carolina, southern California, northern
Virginia and Maryland. Cash consideration paid by the Company totaled
$22,354,000 and is subject to adjustment upon the completion of an audit of the
assets purchased and liabilities assumed.
23
<PAGE>
In February 1997, the Company completed the sale of 3,000,000 shares of
Common Stock resulting in net proceeds of $85.5 million. The Company used a
significant portion of the proceeds to reduce borrowings under its revolving
credit agreement. The Company anticipates using the remainder of the proceeds
for general corporate purposes, including acquisitions. Following the sale of
Common Stock, the unaudited pro forma shareholders' equity of the Company as if
the transaction had occurred on December 31, 1996 in comparison to the
historical amount reported is as follows (in thousands):
YEAR ENDED DECEMBER 31 1996, PRO FORMA HISTORICAL
--------- ----------
Common Stock, $.50 par value,
14,853,738 shares issued and
outstanding, pro forma (11,853,738
shares, historical) $ 7,427 $ 5,927
Common Stock, $.50 par value,
2,178,100 shares issued and
outstanding (pro forma and
historical) 1,089 1,089
Paid-in-capital 156,129 72,129
Retained earnings 40,784 40,784
--------- ---------
$ 205,429 $ 119,929
========= =========
In March 1997, the Company completed the purchase of substantially all of
the operating assets and assumption of certain liabilities of Carrier
Corporation's Comfort Products Distributing and Central Plains Distributing
distribution operations. Comfort Products and Central Plains sell heating and
air conditioning products from eight branches serving markets in Missouri,
Kansas, Nebraska, Iowa, North Dakota and South Dakota. Cash consideration paid
by the Company totaled $26,448,000 and is subject to adjustment upon the
completion of an audit of the assets purchased.
24
<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, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 24, 1997.
25
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH
(UNAUDITED) QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1996:
<S> <C> <C> <C> <C> <C>
Revenues $77,789 $118,497 $125,338 $103,765 $425,389
Gross profit 17,635 26,219 28,328 23,417 95,599
Net income 1,306 4,256 5,002 2,428 12,992
======== ======== ======== ======== ========
Earnings per share (1)(2):
Primary $.11 $.29 $.34 $.16 $.93
Fully diluted .11 .29 .34 .16 .91
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995:
Revenues $60,321 $91,062 $98,807 $80,818 $331,008
Gross profit 14,735 20,144 21,668 16,751 73,298
Net income 901 2,301 2,831 1,217 7,250
======== ======== ======== ======== ========
Earnings per share (1)(2):
Primary $.09 $.23 $.28 $.12 $.72
Fully diluted .09 .22 .27 .11 .69
======== ======== ======== ======== ========
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 (1)(2):
Primary $.07 $.20 $.24 $.09 $.59
Fully diluted .07 .19 .23 .09 .58
======== ======== ======== ======== ========
<FN>
- ----------
(1) EARNINGS PER SHARE INFORMATION HAS BEEN RESTATED TO GIVE EFFECT TO
THREE-FOR-TWO STOCK SPLITS EFFECTED ON JUNE 14, 1996 AND MAY 15, 1995.
(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 SUMMATION OF EACH QUARTER MAY NOT EQUAL THE AMOUNT
CALCULATED FOR THE YEAR AS A WHOLE.
</FN>
</TABLE>
26
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
INFORMATION ON COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol WSO and its Class B Common Stock is traded on the American Stock
Exchange under the symbol WSOB. The following table indicates the high and low
prices of the Company's Common Stock and Class B Common Stock, as reported by
the New York Stock Exchange and American Stock Exchange, respectively, and
dividends paid per share for each quarter during the years ended December 31,
1996, 1995 and 1994. At March 24, 1997, excluding shareholders with stock in
street name, the Company had approximately 600 Common Stock shareholders of
record and 400 Class B shareholders of record.
<TABLE>
<CAPTION>
COMMON CLASS B CASH DIVIDENDS
HIGH LOW HIGH LOW COMMON CLASS B
----------------- ----------------- ---------------
YEAR ENDED DECEMBER 31, 1996:
<S> <C> <C> <C> <C> <C>
Fourth quarter $29-1/8 $18-3/8 $29-1/2 $18-7/8 $.035 $.035
Third quarter 22-1/4 16-1/8 21-7/8 15-3/4 .035 .035
Second quarter 21 17-1/8 20-1/4 17-7/8 .033 .033
First quarter 17-3/8 11-1/4 16-7/8 11 .033 .033
======= ======= ======= ======= ===== =====
YEAR ENDED DECEMBER 31, 1995:
Fourth quarter $11-7/8 $10-7/8 $11-5/8 $10-5/8 $.033 $.033
Third quarter 11-5/8 8-7/8 11-1/8 9 .033 .033
Second quarter 9-1/8 7-7/8 9 7-3/4 .033 .033
First quarter 8 7 7-3/4 7 .029 .029
======= ======= ======= ======= ===== =====
YEAR ENDED DECEMBER 31, 1994:
Fourth quarter $ 7-3/8 $ 6-7/8 $ 7-3/8 $ 6-7/8 $.029 $.029
Third quarter 7-1/2 6-3/4 7-3/8 7 .029 .029
Second quarter 7-1/2 6-3/8 7-1/2 6-1/2 .029 .029
First quarter 6-5/8 5-3/4 6-3/4 6 .027 .027
======= ======= ======= ======= ===== =====
</TABLE>
27
EXHIBIT 21
REGISTRANT'S SUBSIDIARIES
The following table sets forth, at March 24, 1997, the Registrant's
significant subsidiaries and other associated companies, the jurisdiction of
incorporation of each and the percentage of voting securities of each owned by
the Registrant. There are no subsidiaries not listed in the table which would,
in the aggregate, be considered significant.
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
ACTIVE SUBSIDIARIES: INCORPORATION OWNED
- ------------------- ------------- ----------
<S> <C> <C>
Gemaire Distributors, Inc. Florida 100%
Heating & Cooling Supply, Inc. California 100%
Comfort Supply, Inc. Delaware 100%
Central Air Conditioning Distributors, Inc. North Carolina 100%
Three States Supply Company, Inc. Tennessee 100%
Coastline Distribution, Inc. Florida 100%
A&C Distributors, Inc. Florida 100%
Serviceman Supplies, Inc. Texas 100%
Comfort Products Distributing, Inc. Florida 100%
Central Plains Distributing, Inc. Florida 100%
Coastal Supply Company, Inc. Georgia 100%
H.B. Adams Distributors, Inc. Florida 100%
Airite, Inc. Louisiana 100%
Watsco Components, Inc. Florida 100%
Rho Sigma, Inc. Florida 100%
Cam-Stat, Inc. Florida 100%
P.E./Del Mar, Inc. Florida 100%
Dunhill Staffing Systems, Inc. Delaware 100%
Dunhill Temporary Systems, Inc. New York 100%
Dunhill Temporary Systems of Indianapolis, Inc. Indiana 100%
Dunhill Personnel System of New Jersey, Inc. New Jersey 100%
Dunhill Staffing Systems of Milwaukee, Inc. Wisconsin 100%
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form l0-K, into the Company's
previously filed Registration Statements on Form S-3 (Nos. 33-7758, 33-37982,
333-00371, 333-01441 and 333-19803) and in the Registration Statements on Form
S-8 (Nos. 33-6229, 33-72798 and 333-10363).
ARTHUR ANDERSEN LLP
Miami, Florida,
March 24, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE WATSCO, INC. FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,020
<SECURITIES> 334
<RECEIVABLES> 62,619
<ALLOWANCES> 3,096
<INVENTORY> 87,637
<CURRENT-ASSETS> 159,016
<PP&E> 31,202
<DEPRECIATION> 15,028
<TOTAL-ASSETS> 203,581
<CURRENT-LIABILITIES> 29,021
<BONDS> 3,720
0
0
<COMMON> 7,016
<OTHER-SE> 112,913
<TOTAL-LIABILITY-AND-EQUITY> 203,581
<SALES> 390,775
<TOTAL-REVENUES> 425,389
<CGS> 303,076
<TOTAL-COSTS> 429,790
<OTHER-EXPENSES> 69,812
<LOSS-PROVISION> 1,541
<INTEREST-EXPENSE> 3,656
<INCOME-PRETAX> 21,218
<INCOME-TAX> 8,110
<INCOME-CONTINUING> 12,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,992
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.91
</TABLE>
