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, 1997
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.50 par value New York Stock Exchange
Class B Common Stock, $.50 par value American Stock Exchange
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, 1998 was approximately $432,385,000.
The number of shares of common stock outstanding as of March 25, 1998 was
15,435,563 shares of Common Stock and 2,163,153 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, 1997, 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, 1997
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PART I PAGE
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 6
MATTERS
ITEM 6. SELECTED FINANCIAL DATA 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 6
RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 7
PART III
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 7
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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 Company's financing plans, and (iv) 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") was incorporated in 1956
and is the largest distributor of air conditioning and heating equipment and
related parts and supplies in the United States. Growth has been enhanced by
acquisitions and by the internal growth of existing businesses of the Company.
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 over 20 distributors of air
conditioning and heating equipment and the Company operates in 22 states, with
leading positions in Florida, Texas and California, the three largest markets in
the country. The Company's revenue from its distribution operations have
increased from $64 million in 1989 to $635 million in 1997.
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.
RESIDENTIAL CENTRAL AIR CONDITIONING INDUSTRY
According to the Air Conditioning and Refrigeration Institute ("ARI"), the
market for residential central air conditioning, heating and refrigeration
equipment and related parts and supplies in the U.S. was approximately $19
billion in 1997 with unitary equipment shipments having grown at an annual rate
of 5.3% since 1990. Residential central air conditioners are manufactured
primarily by seven major companies that together account for approximately 90%
all units shipped in the U.S each year. These companies are: Carrier Corporation
("Carrier") (a subsidiary of United Technologies Corporation), Goodman
Manufacturing Corporation ("Goodman"), Rheem Manufacturing Company ("Rheem"),
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International Comfort Products Corporation ("ICP"), American Standard Companies
Inc. ("American Standard"), York International Corporation ("York") 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 that sell to, and
install the products for, the consumer.
Residential central air conditioning and heating equipment is sold to both
the replacement and the homebuilding markets. The replacement market has
increased substantially in size over the past ten years, surpassing the
homebuilding market in significance as a result of the aging of the installed
base of residential central air conditioners, the introduction of new energy
efficient models and the upgrading of existing homes to central air
conditioning. According to the ARI, over 70 million central air conditioning
units have been installed in the United States in the past 20 years, 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 to 20 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.
The Company also sells products used in the refrigeration industry. Such
products include condensing units, compressors, evaporators, valves, walk-in
coolers and ice machines for industrial and commercial applications. The Company
distributes products manufactured by Copeland Compressor Corporation
("Copeland"), Tecumseh Products Company, The Manitowoc Company, Inc. and
Scotsman Industries, Inc.
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, furnace or
refrigeration system, (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 commit resources to
open additional locations, maintain the same inventory levels and offer the
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.
The Company's acquisition strategy is to establish a network of
distribution facilities and, since 1989, it has acquired over 20 distributors of
air conditioning, heating and refrigeration products. 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'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
locations and opening new locations.
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The Company's distribution operations run 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 actively seeks new or expanded territories of distribution from
the major equipment manufacturers.
The Company also maintains an active acquisition program. The following is
a description of the Company's acquisitions completed in 1997:
COASTLINE DISTRIBUTION, INC. AND ADDITIONAL OPERATIONS. In January 1997,
the Company completed the acquisition of the common stock of Coastline
Distribution, Inc. ("Coastline") and the purchase of substantially all of the
operating assets of four additional operations from ICP. Coastline and the
additional operations are wholesale distributors of residential air conditioning
and heating products manufactured by ICP and had revenue of approximately $93
million in the year prior to acquisition.
COMFORT PRODUCTS DISTRIBUTING AND CENTRAL PLAINS DISTRIBUTING. In March
1997, the Company completed the purchase of substantially all of the operating
assets and assumption of certain liabilities of Comfort Products Distributing
("Comfort Products") and Central Plains Distributing ("Central Plains") from
Carrier. Comfort Products and Central Plains are wholesale distributors of
residential air conditioning and heating products manufactured by Carrier.
Comfort Products and Central Plains had revenue of approximately $65 million in
the year prior to acquisition.
BAKER DISTRIBUTING COMPANY. In September 1997, the Company completed the
purchase of all the issued and outstanding capital stock of Baker Distributing
Company ("Baker"), a wholesale distributor of air conditioning, refrigeration
and heating products. Baker's product offerings include products manufactured by
Goodman, ICP and Copeland. Baker had revenue of approximately $148 million in
the year prior to acquisition.
OTHER. During 1997, the Company completed nine other acquisitions of
wholesale distributors of air conditioning, heating and refrigeration products.
The acquisitions were made either in the form of the purchase of the outstanding
common stock or the purchase of the net assets and business of the respective
sellers. These acquisitions added 37 locations and had combined revenue of $66
million for the most recently completed fiscal year.
RECENT DEVELOPMENTS
In January 1998, three of the leading equipment manufacturers granted the
Company rights to distribute their residential and light commercial equipment in
key U.S. markets: ICP granted the right to distribute "Tempstar" brand-name
products in California, Arizona and Atlanta, Georgia and surrounding areas;
American Standard granted the right to distribute "American Standard" brand-name
products in North Carolina; and Carrier granted the right to distribute "Bryant"
brand-name products in Kansas City and surrounding areas in Missouri and Kansas.
In February and March 1998, the Company completed five acquisitions of
wholesale distributors of air conditioning and heating products. The
acquisitions were made either in the form of the purchase of the outstanding
common stock or the purchase of the net assets and business of the respective
sellers.
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Combined revenue for these distributors for the most recently completed fiscal
year was approximately $32 million.
DESCRIPTION OF BUSINESS
PRODUCTS The Company sells a complete line of products and maintains
sufficient inventory to meet customers' immediate needs. The Company's strategy
is to provide every product a contractor generally would require in order to
install or repair a residential or light commercial central air conditioner,
furnace or refrigeration system. 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 equipment; (ii) parts, including replacement
compressors, evaporator coils, thermostats, motors and other component parts;
(iii) supplies, including insulation material, refrigerants, 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 six
midwestern states.
Sales of air conditioning and heating equipment accounted for approximately
54% of revenue for 1997. Sales of parts and supplies (currently representing
over 1,800 different vendors) comprised the remaining revenue.
DISTRIBUTION AND SALES The Company currently operates from 275 locations,
most of which are located in regions 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 locations daily and either
directly delivering products to customers with the Company's fleet of over 400
trucks or making the products available for pick-up at the location nearest to
the customer. The company has over 300 commissioned salespeople with an average
of more than 10 years of experience in the residential central air conditioning
and heating equipment distribution industry.
MARKETS The Company's network serves 22 states from 275 locations. The
Company's primary markets in the sunbelt include (in order of market size):
Texas, Florida, California, Georgia, North Carolina, Tennessee, Arizona,
Virginia, Alabama, Louisiana, South Carolina, Oklahoma, 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 and the
Caribbean Basin.
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 conditioning, heating and refrigeration systems.
The Company currently serves over 35,000 customers, with no single customer in
1997 accounting for more than 1% of consolidated revenue. 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 locations.
Management believes that the Company successfully competes with other
distributors primarily on the basis of its experienced sales organization,
strong service support, high quality reputation and broad product lines.
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* 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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KEY SUPPLIERS The Company maintains significant relationships with Carrier,
Goodman, Rheem, ICP, American Standard and York, each a leading manufacturer of
residential central air conditioning and heating equipment in the United States.
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 67% 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 made approximately 52% of its total 1997 purchases from these
suppliers. 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.
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 one to ten years. Certain of the distribution
agreements contain certain provisions that restrict or limit the sale of
competitive products in the markets served. Other than the markets where such
restrictions and limitations may apply, the Company may distribute other
manufacturers' lines of air conditioning or heating equipment.
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 several air conditioning and heating equipment manufacturers which
distribute a significant portion of their products through their own
distribution organizations in certain markets. Competition within any given
geographic market is based upon product availability, customer service, price
and quality. 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 distribution operations employed over 2,000 persons as of February 28,
1998. 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 usually highest in the fourth quarter. Demand related to the new
construction sectors throughout most of the sunbelt markets is fairly even
during the year excepting for dependence on housing completions and related
weather and economic conditions.
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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.
DISCONTINUED OPERATIONS
The Company has historically operated two other businesses distinct from
its distribution operations: Watsco Components, Inc. ("Components"), a
manufacturing operation and Dunhill Staffing Systems, Inc. ("Dunhill"), a
personnel services business. In November 1997, the Company's Board of Directors
approved a plan for the divestment of Components and Dunhill. See Notes to
Consolidated Financial Statements included in the Company's 1997 Annual Report
for further information.
ITEM 2. PROPERTIES
The Company operates 275 locations in the U.S. having approximately 4.5
million square feet of space, of which approximately 4.0 million square feet is
leased. 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, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Page 28 of the 1997 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, 1997, 1996 and 1995 and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Page 8 of the Company's 1997 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 1997 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 25 of the Company's 1997 Annual Report contain the 1997
and 1996 Balance Sheets and other financial statements for the years ended
December 31, 1997, 1996 and 1995, together with the report thereon of Arthur
Andersen LLP dated February 11, 1998, are incorporated herein by reference.
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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
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PAGE NO. IN
ANNUAL REPORT
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(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements (incorporated by reference from the 1997
Annual Report of Watsco, Inc.):
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995 12
Consolidated Balance Sheets as of December 31, 1997 and 1996 13
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 14
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 15
Notes to Consolidated Financial Statements 16-25
Report of Independent Certified Public Accountants 26
Selected Quarterly Financial Data (Unaudited) 27
PAGE NO. IN
FORM 10-K
(2) Financial Statement Schedule:
For the three years ended December 31, 1997:
Report of Independent Certified Public Accountants on Schedule S-1
Schedule II. Valuation and Qualifying Accounts S-2
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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).
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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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
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10.9 Amended and Restated Revolving Credit and Reimbursement Agreement
dated August 8, 1997 by and among Watsco, Inc., NationsBank, N.A.
(Agent) and Barnett Bank, N.A., First Union National Bank, Suntrust
Bank (Co-Agents), and the Lenders Party Hereto from Time to Time
(filed as Exhibit 10.18 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 and incorporated herein by
reference).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 Amendment Agreement No. 1 to Amended and Restated Revolving Credit
and Reimbursement Agreement dated February 20, 1998 by and among
Watsco, Inc., the Lenders hereto and NationsBank National
Association.#
13. 1997 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 1997 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 1997.
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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 30, 1998 By: /S/ ALBERT H. NAHMAD
--------------------------------
Albert H. Nahmad, President
March 30, 1998 By: /S/ BARRY S. LOGAN
--------------------------------
Barry S. Logan, 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.
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SIGNATURE TITLE DATE
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/S/ ALBERT H. NAHMAD Chairman of the Board and March 30, 1998
- ------------------------- President (principal
Albert H. Nahmad executive officer)
/S/ BARRY S. LOGAN Vice President and March 30, 1998
- ------------------------- Secretary (principal
BARRY S. LOGAN accounting officer)
/S/ CESAR L. ALVAREZ Director March 30, 1998
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Cesar L. Alvarez
/S/ DAVID B. FLEEMAN Director March 30, 1998
- -------------------------
David B. Fleeman
/S/ PAUL F. MANLEY Director March 30, 1998
- -------------------------
Paul F. Manley
/S/ BOB L. MOSS Director March 30, 1998
- -------------------------
Bob L. Moss
/S/ ROBERTO MOTTA Director March 30, 1998
- -------------------------
Roberto Motta
/S/ RONALD P. NEWMAN Director March 30, 1998
- -------------------------
Ronald P. Newman
/S/ ALAN H. POTAMKIN Director March 30, 1998
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Alan H. Potamkin
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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 February 11, 1998. 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,
February 11, 1998.
S-1
<PAGE>
WATSCO, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
BALANCE, December 31, 1994 $2,369
Allowance from acquisitions 453
Additions charged to costs and expenses 1,145
Write-offs, net (1,091)
------
BALANCE, December 31, 1995 2,876
Allowances from acquisitions 110
Additions charged to costs and expenses 1,432
Write-offs, net (1,559)
------
BALANCE, December 31, 1996 2,859
Allowances from acquisitions 3,191
Additions charged to costs and expenses 1,329
Write-offs, net (1,827)
------
BALANCE, December 31, 1997 $5,552
======
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.16 Amendment Agreement No. 1 to Amended and Restated Revolving Credit
and Reimbursement Agreement dated February 20, 1998 by and among
Watsco, Inc., the Lenders hereto and NationsBank National
Association.
13. 1997 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 1997 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 10.16
AMENDMENT AGREEMENT NO. 1
TO AMENDED AND RESTATED
REVOLVING CREDIT AND REIMBURSEMENT AGREEMENT
THIS AMENDMENT AGREEMENT NO. 1 TO AMENDED AND RESTATED REVOLVING CREDIT
AND REIMBURSEMENT AGREEMENT (this "Agreement") is made and entered into as of
this 20th day of February, 1998, by and among WATSCO, INC., a Florida
corporation (the "Borrower"), the Lenders signatory hereto (the "Lenders") and
NATIONSBANK, NATIONAL ASSOCIATION, a national banking association and successor
to NationsBank, National Association (South), as Agent (the "Agent") for the
Lenders party to the Credit Agreement described below.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have entered into an
Amended and Restated Revolving Credit Agreement dated August 8, 1997 (the
"Credit Agreement") pursuant to which the Lenders have agreed to make available
to the Borrower a revolving credit facility of up to $260,000,000; and
WHEREAS, as a condition to the making of loans the Lenders have
required that each Subsidiary of Borrower execute a Facility Guaranty whereby it
guarantees payment of the Obligations arising under the Credit Agreement; and
WHEREAS, the Borrower intends to dispose of its non-distribution
businesses consisting of its manufacturing operations (the "Manufacturing
Business") owned by its Manufacturing Subsidiary and its temporary staffing
business, Dunhill Staffing Systems, Inc. and Subsidiaries (the "Staffing
Business") in a single or series of transactions; and
WHEREAS, the Borrower has requested and the Agent and the Lenders have
agreed, subject to the terms and conditions of this Agreement, to amend certain
provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions herein set forth, it is hereby agreed as follows:
1. DEFINITIONS. The term "Credit Agreement" as used herein and in the
Loan Documents shall mean that certain Amended and Restated Revolving Credit and
Reimbursement Agreement dated as of August 8, 1997 by and among the Agent, the
Lenders and the Borrower, as hereby amended and as from time to time further
amended or modified. Unless the context otherwise requires, all capitalized
terms used herein without definition shall have the respective meanings provided
therefor in the Credit Agreement.
<PAGE>
2. AMENDMENTS. Subject to the conditions set forth herein, the Credit
Agreement shall be and hereby is amended, effective as of the date hereof, as
follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by
inserting therein the following new defined terms in alphabetical
order:
"'Manufacturing Subsidiaries' means each of
P.E./Delmar, Inc., Watsco Components, Inc., and Watsco Export,
Inc."
(b) Section 8.4 of the Credit Agreement is hereby amended by
deleting the word "and" at the end of clause (e) thereof, deleting the
"." at the end of clause (f) thereof and inserting the word "; and" in
replacement thereof and by adding a new clause (g) at the end thereof
which shall read in its entirety as follows:
"(g) Liens incurred in any sale, transfer or
disposition of accounts receivable as permitted under SECTION
8.6(G)."
(c) Section 8.6 of the Credit Agreement is hereby deleted in
its entirety and the following new Section 8.6 is inserted in
replacement thereof:
"8.6 TRANSFER OF ASSETS. Sell, lease, transfer or
otherwise dispose of any assets of Borrower or any Subsidiary
(including any ownership interest in any Subsidiary) other
than (a) dispositions of inventory in the ordinary course of
business, (b) dispositions of equipment or real property
which, in the aggregate during any Fiscal Year, have a fair
market value or book value, whichever is less, of $5,000,000
or less and is not replaced by equipment having at least
equivalent value, (c) dispositions of property that is
substantially worn, damaged, obsolete or, in the judgment of
the Borrower, no longer best used or useful in its business or
that of any Subsidiary, (d) transfers of assets necessary to
give effect to merger or consolidation transactions permitted
by SECTION 8.8, (e) the disposition of Eligible Securities in
the ordinary course of management of the investment portfolio
of the Borrower and its Subsidiaries, (f) the sale or
disposition of all or substantially all of the capital stock
or assets of Dunhill or any of the Manufacturing Subsidiaries
for no less than fair market value, as determined by the Board
of Directors of the Borrower, (upon which event the Agent
will, at the request and reasonable expense of the Borrower,
execute such documents as shall be acceptable to the Agent and
its special counsel releasing Dunhill and each Manufacturing
Subsidiary from its obligations under any Facility Guaranty to
which it is a party), consideration for which may include
notes of purchasers in an aggregate amount not exceeding
$25,000,000 and a repayment term not exceeding three years,
and (g) the sale, without recourse, other than for
misrepresentation, by Gemaire Distributors, Inc. and Coastline
2
<PAGE>
Distribution, Inc. of accounts receivable having a value, net
on all allowances and discounts, of not to exceed during any
Fiscal Year an aggregate dollar value of $5,000,000 which
receivables shall be payable by Persons who are not United
States citizens or organized and existing under the laws of
the United States or a state or territory thereof."
(d) Section 8.7 of the Credit Agreement is hereby amended by
(i) amending and restating clause (f) in its entirety so that as
amended it reads as follows:
"(f) additional investments in Persons provided that
(i) the aggregate costs incurred in making such investments
(reduced by cash dividends or other cash payments received on
or in consideration of such investments) does not exceed
$20,000,000 in the aggregate at any time and (ii) prior to and
immediately after giving effect to such investment, no Default
or Event of Default shall exist and be continuing;"
(ii) deleting the word "and" at the end of clause (g) thereof, (iii)
replacing the "." at the end of clause (h) thereof with a semicolon and
(iv) inserting new clauses (i) and (j) at the end thereof which shall
read as follows:
"(i) investments consisting of ownership interests in
another Person resulting from dispositions or mergers
permitted under SECTION 8.6(F) and SECTION 8.8 hereof; and
(j) the notes of purchasers described in Section
8.6(f)."
(e) Section 8.8 of the Credit Agreement is hereby deleted in
its entirety and the following new Section 8.8 is inserted in
replacement thereof:
"8.8 MERGER OR CONSOLIDATION. (a) Consolidate with or
merge into any other Person, or (b) permit any other Person to
merge into it, or (c) liquidate, wind-up or dissolve or sell,
transfer or lease or otherwise dispose of all or a substantial
part of its assets; PROVIDED, HOWEVER, (i) any Subsidiary of
the Borrower may merge or transfer all or substantially all of
its assets into or consolidate with the Borrower or any
wholly-owned Subsidiary of the Borrower, and (ii) any other
Person may merge into or consolidate with the Borrower or any
wholly-owned Subsidiary and any Subsidiary may merge into or
consolidate with any other Person in order to consummate an
Acquisition permitted by SECTION 8.2, PROVIDED FURTHER, that
any resulting or surviving entity shall execute and deliver
such agreements and other documents, including a Facility
Guaranty, and take such other action as the Agent may require
to evidence or confirm its express assumption of the
obligations and liabilities of its predecessor entities under
the Loan Documents; and PROVIDED FURTHER that Dunhill and
3
<PAGE>
any Manufacturing Subsidiary may merge with or into or
consolidate with any other Person in connection with the
disposition of Dunhill or such Manufacturing Subsidiary in
accordance with SECTION 8.6(F) so long as a result thereof the
Borrower and/or its Subsidiaries shall not be liable for or
assume any liability or obligation of any Person who was not
immediately prior to such time a Subsidiary."
3. GUARANTORS. Each of the Guarantors has joined into the execution of
this Agreement for the purpose of consenting to the amendment contained herein
and reaffirming its guaranty of the Obligations.
4. BORROWER'S REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents, warrants and certifies that:
(1) The representations and warranties made by it in
Article VI of the Credit Agreement are true on and as of the date
hereof before and after giving effect to this Agreement except that the
financial statements referred to in Section 6.6(a) shall be those most
recently furnished to each Lender pursuant to Section 7.1(a) and (b) of
the Credit Agreement;
(2) The Borrower has the power and authority to
execute and perform this Agreement and has taken all action required
for the lawful execution, delivery and performance thereof.
(3) There has been no material adverse change in the
condition, financial or otherwise, of the Borrower and its Subsidiaries
since the date of the most recent financial reports of the Borrower
received by each Lender under Section 7.1 of the Credit Agreement,
other than changes in the ordinary course of business, none of which
has been a material adverse change;
(4) The business and properties of the Borrower and
its Subsidiaries are not, and since the date of the most recent
financial report of the Borrower and its Subsidiaries received by the
Agent under Section 7.1 of the Credit Agreement have not been,
adversely affected in any substantial way as the result of any fire,
explosion, earthquake, accident, strike, lockout, combination of
workmen, flood, embargo, riot, activities of armed forces, war or acts
of God or the public enemy, or cancellation or loss of any major
contracts; and
(5) No event has occurred and no condition exists
which, upon the consummation of the transaction contemplated hereby,
constituted a Default or an Event of Default on the part of the
Borrower under the Credit Agreement or the Notes either immediately or
with the lapse of time or the giving of notice, or both.
4
<PAGE>
5. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
and agreement of the parties hereto in relation to the subject matter hereof and
supersedes any prior negotiations and agreements among the parties relative to
such subject matter. None of the terms or conditions of this Agreement may be
changed, modified, waived or canceled orally or otherwise, except by writing,
signed by all the parties hereto, specifying such change, modification, waiver
or cancellation of such terms or conditions, or of any proceeding or succeeding
breach thereof.
6. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all of the other
Loan Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and all the counterparts taken together shall be deemed to
constitute one and the same instrument.
[Signature pages follow.]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
BORROWER:
WATSCO, INC.
WITNESS:
/S/ DORIS ZULUETA By: /S/ BARRY S. LOGAN
------------------ ---------------------------------------
Name: Barry S. Logan
/S/ PAUL D. SISAK Title: Vice President Finance and Chief
------------------ Financial Officer
6
<PAGE>
GUARANTORS:
WATSCO COMPONENTS, INC.
P.E./DEL MAR, INC.
CDS HOLDINGS, INC.
COASTLINE DISTRIBUTION, INC.
A&C DISTRIBUTORS, INC.
GEMAIRE DISTRIBUTORS, INC.
H.B. ADAMS DISTRIBUTORS, INC.
GEM CREDIT CORPORATION
THE FLORIDA AD COMPANY
GEMAIRE INTERNATIONAL, INC.
GEMAIRE HOLDINGS, INC.
GEMAIRE CARIBE, INC.
COMFORT SUPPLY, INC.
WATSCO EXPORT, INC.
THE HOUSTON AD COMPANY, INC.
HEATING & COOLING SUPPLY, INC.
THREE STATES SUPPLY COMPANY, INC.
CP DISTRIBUTORS, INC.
COMFORT PRODUCTS DISTRIBUTING, INC.
CENTRAL PLAINS DISTRIBUTING, INC.
CENTRAL AIR CONDITIONING DISTRIBUTORS, INC.
WEATHERTROL SUPPLY COMPANY
AIR SYSTEMS DISTRIBUTORS, INC.
DUNHILL STAFFING SYSTEMS, INC.
DUNHILL TEMPORARY SYSTEMS OF
INDIANAPOLIS, INC.
DUNHILL TEMPORARY SYSTEM OF
INDIANAPOLIS, L.P.
DUNHILL TEMPORARY SYSTEMS, INC.
WITNESS: DUNHILL PERSONNEL SYSTEM OF
NEW JERSEY, INC.
/S/ DORIS ZULUETA DUNHILL STAFFING SYSTEMS OF
------------------ MILWAUKEE, INC.
/S/ PAUL D. SISAK DUNHILL ENTERPRISES, INC.
- -------------------
By: /S/ BARRY S. LOGAN
--------------------------
Name: Barry S. Logan
Title: Vice President
7
<PAGE>
AGENT:
NATIONSBANK, NATIONAL ASSOCIATION, as
Agent for the Lenders
By: /S/ ANDREW M. AIRHEART
-----------------------------------
Name: Andrew M. Airheart
Title: Senior Vice President
LENDERS:
NATIONSBANK, NATIONAL ASSOCIATION
By: /S/ ANDREW M. AIRHEART
-----------------------------------
Name: Andrew M. Airheart
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /S/ MARY A. MORGAN
-----------------------------------
Name: MARY A. MORGAN
Title: SENIOR VICE PRESIDENT
BARNETT BANK, N.A.
By: /S/ GUILLERMO G. CASTILLO
-----------------------------------
Name: GUILLERMO G. CASTILLO
Title: VICE PRESIDENT/CORPORATE BANKING
SUNTRUST BANK, MIAMI, N.A.
By: /S/ JONATHAN D. FISHER
-----------------------------------
Name: JONATHAN D. FISHER
Title: SENIOR VICE PRESIDENT
THE BANK OF NEW YORK
By: /S/ DAVID C. SIEGEL
-----------------------------------
Name: DAVID C. SIEGEL
Title: VICE PRESIDENT
8
<PAGE>
THE BANK OF TOKYO-MITSUBISHI, LTD.
By: /S/ R. GLASS
-----------------------------------
Name: R. GLASS
Title: VICE PRESIDENT
COMERICA BANK
By: /S/ MARTIN G. ELLIS
-----------------------------------
Name: MARTIN G. ELLIS
Title: VICE PRESIDENT
WACHOVIA BANK, N.A.
By: /S/ PATRICK A. PHELAN
-----------------------------------
Name: PATRICK A. PHELAN
Title: VICE PRESIDENT
PNC BANK, KENTUCKY, INC.
By: /S/ RALPH M. BOWMAN
-----------------------------------
Name: RALPH M. BOWMAN
Title: VICE PRESIDENT
THE SAKURA BANK, LIMITED
By: /S/ HIROYASU IMANISHI
-----------------------------------
Name: HIROYASU IMANISHI
Title: VICE PRESIDENT & SENIOR MANAGER
THE FUJI BANK AND TRUST COMPANY
By: /S/ RAYMOND VENTURA
-----------------------------------
Name: RAYMOND VENTURA
Title: VICE PRESIDENT & MANAGER
9
EXHIBIT 13
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenue $635,218 $365,356 $276,188 $229,835 $181,765
Income from continuing operations 18,308 11,019 5,627 3,695 3,981
============================================================================================================
SHARE DATA (1)
Diluted earnings per share
from continuing operations $1.02 $0.77 $0.54 $0.37 $0.42
Cash dividends declared per share:
Common Stock $0.14 $0.14 $0.13 $0.11 $0.11
Class B Common Stock 0.14 0.14 0.13 0.11 0.11
Common stock outstanding 17,430 14,032 9,423 9,226 9,127
============================================================================================================
BALANCE SHEET INFORMATION
Total assets $426,040 $197,197 $141,183 $115,991 $ 106,186
Long-term obligations 137,241 50,355 5,419 5,749 6,814
Shareholders' equity 225,598 119,929 53,756 46,816 41,754
============================================================================================================
</TABLE>
(1) SHARE DATA INCLUDES THE EFFECTS OF THREE-FOR-TWO SPLITS EFFECTED ON JUNE 14,
1996 AND MAY 15, 1995.
1
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Watsco, Inc. ("Watsco") and its subsidiaries (the "Company") is the largest
distributor of air conditioning, heating and refrigeration equipment and related
parts and supplies in the United States. The Company operates in 22 states, with
leading positions in Florida, Texas and California, the three largest markets in
the country.
The following table presents the Company's consolidated financial results
from continuing operations for the three years ended December 31, 1997, 1996 and
1995, expressed as a percentage of total revenue:
1997 1996 1995
- ---------------------------------------------------------------------------
Total revenue 100.0% 100.0% 100.0%
Cost of sales 77.5 78.3 78.7
- ---------------------------------------------------------------------------
Gross profit 22.5 21.7 21.3
Selling, general and
administrative expenses 17.3 15.9 15.7
- ---------------------------------------------------------------------------
Operating income 5.2 5.8 5.6
Investment income, net 0.2 0.1 0.1
Interest expense (0.7) (1.0) (1.5)
Income taxes (1.8) (1.9) (1.6)
Minority interests - - (0.6)
- ---------------------------------------------------------------------------
Income from continuing operations 2.9% 3.0% 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 1997, 1996 and 1995. The 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.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997
WITH YEAR ENDED DECEMBER 31, 1996
Revenue in 1997 increased $269.9 million, or 74%, over 1996. Excluding the
effect of acquisitions, revenue increased $24.3 million, or 7%. Such increase
was primarily due to additional sales generated from market share gains and
increased sales generated by expanded product lines of parts and supplies.
Gross profit in 1997 increased $63.5 million, or 80%, over the prior year
primarily as a result of the aforementioned revenue increases. Excluding the
effect of acquisitions, gross profit increased $7.8 million, or 10%. Gross
profit margin increased to 22.5% in 1997 from 21.7% in 1996. Excluding the
effect of acquisitions, gross profit margin increased to 22.4% in 1997 from
21.7% in 1996. Such increase was primarily due to improved pricing disciplines
and the contribution from new national vendor programs.
Selling, general and administrative expenses in 1997 increased $51.5 million,
or 88%, over 1996. Excluding the effect of acquisitions, selling, general and
administrative expenses increased $ 6.9 million, or 12%, primarily due to
increased revenue and the higher costs related to new branches and the expansion
of existing branches. Selling, general and administrative expenses as a percent
of revenue increased to 17.3% in 1997 from 15.9% in 1996, primarily due to the
higher cost structures of acquired companies and start-up costs related to the
opening of new distribution branches. Excluding the effect of acquisitions,
selling, general and administrative expenses
2
<PAGE>
as a percent of revenue increased to 16.8% in 1997 from 15.9% in 1996, primarily
due to existing branch expansions and the comparatively higher cost structure of
new distribution branches.
Interest expense in 1997 increased $1.2 million, or 34%, from 1996 primarily
due to higher average borrowings. Excluding the effects of acquisitions,
interest expense decreased $3.0 million, or 86%, primarily due to a reduction in
average outstanding borrowings following the sale of the Company's Common Stock
in February 1997.
Minority interest expense in 1997 decreased $.1 million compared to the same
period in 1996. This decrease was due to the Company's acquisition of the
minority interests in three of its distribution subsidiaries in March 1996.
Following the acquisition, all of the Company's subsidiaries were wholly-owned.
The effective income tax rate increased to 38.5% in 1997 compared to 38.2% in
the prior year. The increase was primarily due to a lower benefit derived from
tax exempt investments in 1997 as compared to 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996
WITH YEAR ENDED DECEMBER 31, 1995
Revenue in 1996 increased $89.2 million, or 32%, over 1995. Excluding the
effect of acquisitions, revenue increased $23.0 million, or 8%. Such increase
was primarily due to increased sales of replacement air conditioners and higher
sales due to the expansion of product lines for parts and supplies.
Gross profit in 1996 increased $20.5 million, or 35%, over the prior year.
Excluding the effect of acquisitions, gross profit increased $3.6 million, or
6%, primarily as a result of the increase in revenue described above. Gross
profit margin increased to 21.7% in 1996 from 21.3% in 1995. Excluding the
effect of acquisitions, gross profit margin decreased to 20.9% in 1996 from
21.3% 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 $14.9 million,
or 34%, over 1995, primarily due to selling and delivery costs related to
increased sales. Excluding the effect of acquisitions, selling, general and
administrative expenses increased $3.2 million, or 7%, also primarily due to
revenue increases. Selling, general and administrative expenses as a percent of
revenue increased to 15.9% in 1996 from 15.7% in 1995. This increase was due to
higher costs as a percent of revenue from acquisitions. Excluding the effect of
acquisitions, selling, general and administrative expenses as a percent of
revenue decreased to 15.6% in 1996 from 15.7% in 1995.
Interest expense in 1996 decreased $.6 million, or 15%, from 1995, primarily
due to lower average interest rates on borrowings. Excluding the effects of
acquisitions, interest expense decreased $1.3 million, or 31%. This decrease was
primarily 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 Company's acquisition of the
minority interests in three of its distribution subsidiaries in March 1996.
Following the acquisition, all of the Company's subsidiaries were wholly-owned.
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.
3
<PAGE>
DISCONTINUED OPERATIONS
In November 1997, the Company's Board of Directors approved a plan to divest
of its manufacturing operation, Watsco Components, Inc., and its temporary
staffing business, Dunhill Staffing Systems, Inc. Income from these discontinued
operations, net of income taxes, decreased $1.9 million or 98%, in 1997 as
compared to 1996, primarily due to lower shipments in the manufacturing
operation. Income from discontinued operations, net of income taxes increased
$350,000 or 22%, in 1996 as compared to 1995, primarily due to a 9% increase in
revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a bank-syndicated revolving credit agreement that
provides for borrowings of up to $260 million, expiring on August 8, 2002.
Borrowings under the unsecured agreement are used to fund seasonal working
capital needs and for other general corporate purposes, including acquisitions.
Borrowings under the agreement, which totaled $134.7 million at December 31,
1997, 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, 1997). 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, 1997, the Company had various interest rate swap agreements
with an aggregate notional amount of $100 million to manage its net exposure to
interest rate changes related to a portion of the borrowings under the revolving
credit agreement. The interest rate swap agreements effectively convert a
portion of the Company's LIBOR-based variable rate borrowings into fixed rate
borrowings. The Company continuously monitors developments in the capital
markets and only enters into swap transactions with established counterparties
having investment-grade ratings. See Note 10 in the Notes to Consolidated
Financial Statements for futher information.
Working capital increased to $257.8 million at December 31, 1997 from $137.9
million at December 31, 1996. This increase was funded primarily by the receipt
of net proceeds of approximately $85.2 million from the sale of 3,000,000 shares
of the Company's Common Stock in February 1997 and borrowings under the
Company's revolving credit agreement.
Cash and cash equivalents increased $5.0 million in 1997. Principal sources
of cash were net proceeds from the issuance of common stock, borrowings under
the revolving credit agreement and profitable operations. The principal uses of
cash were to fund working capital needs, including the addition of inventory to
expand the product offerings of both existing and newly acquired locations,
finance acquisitions and capital expenditures and repay bank and other debt.
The Company has adequate availability of capital from operations and its
revolving credit agreement to fund present operations and anticipated growth,
including expansion in its current and targeted market areas. The Company
continually evaluates potential acquisitions and has held discussions with a
number of acquisition candidates; however, the Company currently has no binding
agreement with respect to any acquisition candidates. Should suitable
acquisition opportunities or working capital needs arise that would require
additional financing, the Company believes that its financial position and
earnings history provide a solid base for obtaining additional financing
resources at competitive rates and terms.
NEW ACCOUNTING STANDARDS
The Company does not expect the future adoption of Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
to have a material effect upon the financial position and results of operations
in subsequent periods.
4
<PAGE>
YEAR 2000
The Company continues to assess its exposure related to the impact of the
Year 2000 date issue. The Year 2000 date issue arises from the fact that many
computer programs use only two digits to identify a year in a date field. The
Company's key financial and operational systems have been reviewed and, where
required, detailed plans have been developed to permit the Company's computer
systems to continue to function properly. Management does not expect
implementation costs will have a material adverse impact on the Company's
financial position, results of operations or cash flows. However, the Company
could be adversely impacted by the Year 2000 date issue if suppliers, customers
and other businesses do not address this issue successfully. Management
continues to assess these risks in order to reduce the impact on the Company.
SAFE HARBOR STATEMENT
This annual report contains statements which, to the extent they are not
historical fact, constitute "forward looking statements" under the securities
laws. All forward looking statements involve risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company to differ materially from those contemplated or projected, forecasted,
estimated, budgeted, expressed or implied by or in such forward looking
statements. The forward looking statements in this document are intended to be
subject to the safe harbor protection provided under the securities laws.
For additional information identifying some other important factors which may
affect the Company's operations and markets and could cause actual results to
vary materially from those anticipated in the forward looking statements, see
the Company's Securities and Exchange Commission filings, including but not
limited to, the discussion included in the Business section of the Company's
Form 10-K under the heading "Other Information".
5
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $635,218 $365,356 $276,188
Cost of sales 492,252 285,939 217,306
- -------------------------------------------------------------------------------------------------
Gross profit 142,966 79,417 58,882
Selling, general and administrative expenses 109,932 58,396 43,489
- -------------------------------------------------------------------------------------------------
Operating income 33,034 21,021 15,393
- -------------------------------------------------------------------------------------------------
Other income (expense):
Investment income, net 1,432 517 216
Interest expense (4,698) (3,513) (4,124)
- -------------------------------------------------------------------------------------------------
Total other income (expense) (3,266) (2,996) (3,908)
- -------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interests 29,768 18,025 11,485
Income taxes (11,460) (6,890) (4,272)
Minority interests - (116) (1,586)
- -------------------------------------------------------------------------------------------------
Income from continuing operations 18,308 11,019 5,627
Income from discontinued operations, net
of income taxes 49 1,973 1,623
- -------------------------------------------------------------------------------------------------
Net income $18,357 $12,992 $7,250
=================================================================================================
Basic earnings per share:
Income from continuing operations $1.09 $0.85 $0.61
Income from discontinued operations - 0.15 0.17
- -------------------------------------------------------------------------------------------------
Net income $1.09 $1.00 $0.78
=================================================================================================
Diluted earnings per share:
Income from continuing operations $1.02 $0.77 $0.54
Income from discontinued operations - 0.14 0.15
- -------------------------------------------------------------------------------------------------
Net income $1.02 $0.91 $0.69
=================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
6
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,880 $ 2,882
Accounts receivable, net 101,727 51,024
Inventories 173,319 80,309
Other current assets 9,263 5,013
Net assets of discontinued operations 25,892 22,512
- ----------------------------------------------------------------------------------------------------------
Total current assets 318,081 161,740
- ----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 21,870 8,767
Intangible assets, net 77,388 22,174
Other assets 8,701 4,516
- ----------------------------------------------------------------------------------------------------------
$ 426,040 $ 197,197
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 958 $ 592
Accounts payable 43,802 15,374
Accrued liabilities 15,562 7,914
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 60,322 23,880
- ----------------------------------------------------------------------------------------------------------
Long-term obligations:
Borrowings under revolving credit agreement 134,700 48,000
Bank and other debt 2,541 2,355
- ----------------------------------------------------------------------------------------------------------
Total long-term obligations 137,241 50,355
- ----------------------------------------------------------------------------------------------------------
Deferred income taxes and credits 2,879 1,033
- ----------------------------------------------------------------------------------------------------------
Preferred stock of subsidiary - 2,000
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Common Stock, $.50 par value, 15,262,827 and 11,853,738 shares
issued and outstanding in 1997 and 1996, respectively 7,631 5,927
Class B Common Stock, $.50 par value, 2,166,454 and 2,178,100 shares
issued and outstanding in 1997 and 1996, respectively 1,083 1,089
Paid-in capital 163,996 72,129
Unearned compensation related to outstanding restricted stock (3,836) -
Retained earnings 56,724 40,784
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 225,598 119,929
- ----------------------------------------------------------------------------------------------------------
$ 426,040 $ 197,197
==========================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
7
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OUTSTANDING
COMMON STOCK PAID-IN RESTRICTED RETAINED
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT CAPITAL STOCK EARNINGS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 74 502
Tax benefit from exercise of stock options 91
Common stock dividends,
$.13 per share (1,160)
Dividends on 6.5% 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 dividends,
$.14 per share (1,726)
Dividends on 6.5% preferred stock
of subsidiary (130)
Net income 12,992
- ----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 14,031,838 7,016 72,129 40,784
Issuance from public offering 3,000,000 1,500 83,665
Contribution to 401(k) plan 16,979 8 433
Issuances from exercise of stock options
and employee stock purchase plan 145,477 73 1,738
Tax benefit from exercise of stock options 713
Issuances for acquisitions 74,987 37 1,390
Issuances of restricted shares of
Common stock 160,000 80 3,928 (4,008)
Amortization of unearned compensation 172
Common stock dividends,
$.14 per share (2,292)
Dividends on 6.5% preferred stock
of subsidiary (125)
Net income 18,357
- ----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 17,429,281 $8,714 $163,996 $(3,836) $56,724
==========================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
8
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 18,308 $ 11,019 $ 5,627
Adjustments to reconcile income from
continuing operations to net cash
provided by (used in) operating activities
of continuing operations:
Depreciation and amortization 4,799 2,544 1,675
Provision for doubtful accounts 1,329 1,432 1,145
Net investment gains (1,294) (35) (27)
Deferred income tax benefit (provision) (740) (371) 118
Noncash stock contribution to 40l(k) plan 441 288 149
Minority interests, net of dividends paid - 116 765
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (9,523) (8,471) (3,508)
Inventories (30,402) (15,323) 142
Accounts payable and accrued liabilities 1,820 (2,520) 1,286
Other, net (2,813) (669) (500)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities
of continuing operations (18,075) (11,990) 6,872
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (119,450) (14,886) (12,987)
Capital expenditures, net (6,644) (964) (1,933)
Net proceeds from sales of marketable securities 2,135 58 3,012
Other investment (2,750) - -
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities
of continuing operations (126,709) (15,792) (11,908)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 86,700 7,815 6,361
Repayments of bank and other debt (13,733) (5,686) (364)
Repayments of short-term promissory notes - (4,471) -
Net proceeds from issuances of common stock 86,976 35,233 667
Payments to redeem preferred stock of subsidiaries (4,413) - -
Common stock dividends (2,292) (1,726) (1,160)
Subsidiary preferred stock dividends (125) (130) (130)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities
of continuing operations 153,113 31,035 5,374
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations (3,331) (1,767) 588
Net increase in cash and cash equivalents 4,998 1,486 926
Cash and cash equivalents at beginning of year 2,882 1,396 470
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,880 $ 2,882 $ 1,396
==========================================================================================================
Supplemental disclosures:
Income taxes paid $ 12,325 $ 6,023 $ 4,999
Interest paid 4,787 4,204 4,186
==========================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
9
<PAGE>
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Watsco, Inc. ("Watsco") and its subsidiaries (the "Company") is the largest
distributor of air conditioning and heating equipment and related parts and
supplies in the United States. The Company operates in 22 states, with leading
positions in Florida, Texas and California, the three largest markets in the
country.
Basis of Consolidation
The consolidated financial statements include the accounts of Watsco and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue upon shipment of products.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
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 2-40
years. Estimated useful lives for other depreciable assets range from 3-12
years.
Intangible Assets
Intangible assets, net of accumulated amortization of $3,463 and $2,216 at
December 31, 1997 and 1996, 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 $1,247, $564
and $366 in 1997, 1996 and 1995, respectively.
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 in 1996.
Income Taxes
Deferred tax assets and liabilities reflect the temporary differences between
the financial statement and income tax bases of assets and liabilities.
10
<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.
Stock-Based Compensation
As described in Note 7, 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
In February 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS No. 128
replaces the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic 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. Subsidiary preferred stock
dividends were $125, $130 and $130, for 1997, 1996 and 1995, respectively.
Diluted earnings per share additionally assumes, if dilutive, conversion of the
Company's convertible subordinated debentures which matured in September 1996,
and any added dilution from common stock equivalents. Interest expense
attributable to assumed conversion of convertible debentures was $70 and $108 in
1996 and 1995, respectively. SFAS No. 128 became effective beginning with the
fourth quarter of 1997 and requires restatement of all prior periods presented.
Accordingly, all earnings per share data presented have been restated to conform
with SFAS No. 128.
Shares used to calculate earnings per share (restated in 1995 to reflect a
three-for-two stock split effected on June 14, 1996, see Note 9) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 16,798,695 12,861,456 9,295,945
Dilutive stock options and warrants 1,054,765 1,096,739 799,177
Assumed conversion of debentures - 233,485 360,783
- ---------------------------------------------------------------------------------------------
Shares for diluted earnings per share 17,853,460 14,191,680 10,455,905
=============================================================================================
</TABLE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components. In June 1997,
the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which establishes standards for reporting information
about a company's operating segments and related disclosures about its products,
services, geographic areas of operations and major customers. The statements are
required to be adopted in 1998. The Company believes that the adoption of these
statements will not be material to the Company's consolidated financial
position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. INVENTORIES
Inventories primarily consist of air conditioning and heating equipment and
related parts and supplies. Purchases from one of the Company's suppliers
comprised 32% of all purchases in 1997, while purchases from the Company's top
three suppliers comprised 50% of all purchases in 1997.
11
<PAGE>
3. DISCONTINUED OPERATIONS
In November 1997, the Company's Board of Directors approved a plan to dispose
of its manufacturing operation, Watsco Components, Inc. ("Components"), and its
temporary staffing business, Dunhill Staffing Systems, Inc. ("Dunhill").
Accordingly, the results of Components and Dunhill have been accounted for as
discontinued operations and the accompanying consolidated financial statements
presented herein have been restated to report separately the net assets, net
cash flows and operating results of these discontinued operations.
Unaudited summarized results for the discontinued operations are as follows:
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Revenue $67,231 $60,033 $54,820
- -------------------------------------------------------------------------------
Income before income taxes $ 80 $ 3,193 $ 2,585
Income taxes (31) (1,220) (962)
- --------------------------------------------------------------------------------
Net income $ 49 $ 1,973 $ 1,623
===============================================================================
Income before income taxes includes allocated interest expense of $429 and
$140 in 1997 and 1996, respectively. Interest expense was allocated to
discontinued operations based on a ratio of net assets of discontinued
operations to the total Company's consolidated net assets.
Net assets for the discontinued operations are presented below:
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
Accounts receivable, net $ 8,952 $ 8,499
Inventories 8,761 7,328
Other current assets 2,411 3,438
Property, plant and equipment, net 7,197 7,407
Other assets 3,667 1,680
Current liabilities (4,491) (5,042)
Bank and other debt (605) (798)
- -------------------------------------------------------------------------------
Net assets of discontinued operations $25,892 $22,512
===============================================================================
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consists of :
DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------
Land, buildings and improvements $10,569 $ 3,134
Machinery and equipment 13,615 5,734
Furniture and fixtures 11,905 5,308
- -----------------------------------------------------------------------
36,089 14,176
Less: accumulated depreciation
and amortization (14,219) (5,409)
- -----------------------------------------------------------------------
$21,870 $8,767
=======================================================================
12
<PAGE>
5. LONG-TERM OBLIGATIONS
Revolving Credit Agreements
In August 1997, the Company amended and restated its existing revolving
credit agreement with a syndicate of banks to provide for borrowings of up to
$260 million, expiring on August 8, 2002. Borrowings under the revolving credit
agreement are unsecured and 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, 1997). 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, 1997 and 1996, the weighted average interest rates
for the borrowings under the revolving credit agreements were 6.9% and 6.2%,
respectively.
Bank and Other Debt
Bank and other debt (net of current portion) of $2,541 and $2,355 at December
31, 1997 and 1996, respectively, primarily consists of promissory notes issued
for acquisitions. Interest rates on bank and other debt range from 6.5% to 8.0%
and mature at varying dates through 2002.
Annual maturities of long-term obligations for the years subsequent to
December 31, 1997 are as follows: $958 in 1998; $757 in 1999; $455 in 2000; $347
in 2001 and $982 in 2002.
6. INCOME TAXES
The income tax provision consists of :
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Federal $ 9,697 $5,864 $3,733
State 1,763 1,026 539
- --------------------------------------------------------------------------------
$11,460 $6,890 $4,272
================================================================================
Current $12,200 $7,261 $4,154
Deferred (740) (371) 118
- --------------------------------------------------------------------------------
$11,460 $6,890 $4,272
================================================================================
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, 1997 1996 1995
- -------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 34.0%
State income taxes,
net of federal benefit 3.8 3.5 2.9
Other, net (.3) (.3) .3
- -------------------------------------------------------------------------------
38.5% 38.2% 37.2%
===============================================================================
13
<PAGE>
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Included in other current assets -
Accounts receivable reserves $ 1,238 $ 618
Capitalized inventory costs
and inventory reserves 4,334 2,213
Other 203 121
- --------------------------------------------------------------------------------
5,775 2,952
- --------------------------------------------------------------------------------
Included in other noncurrent assets -
Net operating loss carryforwards of subsidiary 569 721
Other 231 276
- --------------------------------------------------------------------------------
800 997
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Included in noncurrent liabilities -
Depreciation and amortization (461) (86)
Deductible goodwill (555) (141)
Other (1,336) (239)
- --------------------------------------------------------------------------------
(2,352) (466)
- --------------------------------------------------------------------------------
Total net deferred tax assets $ 4,223 $3,483
================================================================================
A subsidiary of the Company has available net operating loss carryforwards
(NOLs) of approximately $1,857 which are available to offset future taxable
income in equal annual amounts of approximately $232 through 2005. SFAS 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.
7. STOCK OPTION AND BENEFIT PLANS
Stock Option Plans
At December 31, 1997, the Company has two stock option plans. Under the 1991
Stock Option Plan (the "1991 Plan"), options for an aggregate of 3,500,000
shares of Common Stock and Class B Common Stock may be granted. Options as to
1,923,396 shares of Common Stock and 932,581 shares of Class B Common Stock have
been granted through December 31, 1997. 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
52,773 shares of Common Stock and 4,598 shares of Class B Common Stock are
outstanding under the 1983 Plan at December 31, 1997. 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 644,023 shares of common stock
reserved for future grants as of December 31, 1997. A summary of option
transactions is shown below:
14
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding on January 1, 1,498,531 $ 7.60 1,583,994 $ 5.88 1,599,429 $5.73
Granted 571,500 24.67 293,500 18.78 61,500 8.76
Exercised (95,387) 8.14 (366,894) 5.61 (46,106) 4.39
Forfeited (5,141) 14.69 (12,069) 11.07 (30,829) 5.99
- -------------------------------------------------------------------------------------------------------------
At December 31, 1,969,503 $18.20 1,498,531 $ 7.60 1,583,994 $5.88
=============================================================================================================
Options exercisable at end of year 1,214,739 $10.09 1,071,605 $ 6.02 805,353 $5.65
=============================================================================================================
</TABLE>
The following sets forth certain information with respect to those stock options
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING AT EXERCISE REMAINING OUTSTANDING AT EXERCISE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 PRICE CONTRACTUAL LIFE DECEMBER 31, 1997 PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.49 - $4.99 47,244 $ 3.71 3.7 years 47,244 $ 3.71
$5.00 - $9.99 1,053,020 6.02 5.4 years 960,440 5.90
$10.00 - $19.99 230,239 13.30 8.2 years 126,489 11.90
$20.00 - $30.38 639,000 24.30 9.3 years 80,566 22.38
- -----------------------------------------------------------------------------------------------------------------------------------
1,969,503 $18.20 7.5 years 1,214,739 $10.09
===================================================================================================================================
</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 400,000 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 1997 and 1996, employees purchased 53,258 and
89,367 shares of Common Stock at an average price of $21.47 and $17.46 per
share, respectively. At December 31, 1997, 257,375 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:
15
<PAGE>
YEARS ENDED DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------
Net income As reported $18,357 $12,992
Pro forma 17,369 12,564
Basic earnings per share As reported $1.09 $1.00
Pro forma $1.03 $0.97
Diluted earnings per share As reported $1.02 $0.91
Pro forma $0.98 $0.89
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 1997 and 1996 was $11.50 and $5.72, respectively, and was estimated using
the Black-Scholes option valuation model with the following weighted-average
assumptions:
YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
Expected life in years 6.0 6.0
Risk-free interest rate 5.5% 6.3%
Expected volatility 42.0% 30.0%
Dividend yield .5% .7%
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-Scholes 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.
Restricted Stock
During 1997, certain employees were granted an aggregate of 160,000 shares of
the Company's Common Stock, subject to certain significant restrictions. The
restrictions lapse upon attainment of retirement age or under other
circumstances. The unearned compensation resulting from the grant of restricted
shares is reported as a reduction to shareholders' equity in the consolidated
balance sheet and is being amortized to earnings over the period from date of
issuance to the respective retirement age of each employee. Total amortization
expense related to the restricted shares amounted to $172 for the year ended
December 31, 1997.
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, 1997, 1996 and 1995, the aggregate contribution to the plan
was $457, $295 and $265 respectively.
16
<PAGE>
8. ACQUISITIONS
The Company has completed various acqusitions of wholesale distributors of
residential air conditioning, heating and refrigeration products. All
acquisitions have been accounted for under the purchase method of accounting
and, accordingly, their results of operations have been included in the
consolidated statements of income beginning on their respective dates of
acquisition.
In January 1997, the Company completed the acquisition of the common stock of
Coastline Distribution, Inc. and the purchase of substantially all of the
operating assets of four additional operations from Inter-City Products
Corporation (USA) for cash consideration of approximately $21.7 million.
In March 1997, the Company completed the purchase of substantially all of the
operating assets and assumption of certain liabilities of two distribution
operations from Carrier Corporation, Comfort Products Distributing and Central
Plains Distributing, for cash consideration of approximately $26.3 million.
In September 1997, the Company completed the purchase of all the issued and
outstanding capital stock of Baker Distributing Company for cash consideration
(net of cash acquired) of approximately $59.1 million, which is subject to
adjustment upon the completion of an audit.
During 1997, the Company completed nine other acquisitions for aggregate
consideration of approximately $13.8 million. The acquisitions were made either
in the form of the purchase of the outstanding common stock or the purchase of
the net assets and business of the respective sellers. Consideration consisted
of cash payments of approximately $12.4 million and the issuance 74,987 shares
of Common Stock having a fair value of $1.4 million.
The unaudited pro forma information of the Company as if the above
acquisitions had occurred on January 1, 1996 is as follows:
YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
Revenue $805,505 $755,170
Income from continuing operations $ 20,888 $ 15,162
Diluted earnings per share from
continuing operations $ 1.16 $ 0.87
The unaudited pro forma information is not necessarily indicative of
either the results of operations that would have occurred had the above
companies been acquired on January 1, 1996 for the years presented or of future
results of operations.
In March 1996, the Company and Rheem Manufacturing Company ("Rheem")
completed a transaction pursuant to a Stock Exchange Agreement and Plan of
Reorganization whereby the Company acquired Rheem's minority ownership interests
in three of the Company's distribution subsidiaries in exchange for 1,446,542
unregistered shares of the Company's Common Stock having an estimated fair value
of $16.1 million. Following this transaction, these subsidiaries became
wholly-owned by the Company.
Also during 1996, the Company completed three other acquisitions of wholesale
distrbutors of air conditioners and related parts and supplies for aggregate
consideration of $17.1 million. 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 $14.9 million, the issuance
of 33,499 shares of Common Stock having a fair value of $.7 million, and the
issuance of a long-term promissory note of $1.5 million.
Cash payments for the acquisitions were funded from existing cash or from
borrowings under revolving credit agreements. The excess of the aggregate
purchase price over the net assets acquired is being amortized on a
straight-line basis over 40 years.
The preliminary price allocations for business combinations for the years
ended December 31 were as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Accounts receivable, net $42,509 $ 7,882 $ 6,743
Inventories 62,608 11,887 11,109
Property, plant and equipment, net 9,959 2,908 632
Intangible assets 56,457 6,643 4,225
Other assets 2,082 306 588
Minority interests - 10,701 -
Accounts payable and accrued expenses (36,641) (5,503) (3,296)
Long-term debt assumed (13,684) (3,225) (7,014)
Preferred stock (2,413) - -
Fair value of common stock issued (1,427) (16,713) -
- -------------------------------------------------------------------------------
Cash used in acquisitions, net of
cash acquired $119,450 $14,886 $12,987
================================================================================
9. 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
17
<PAGE>
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 February 1997, the Company completed the sale of 3,000,000 shares of
Common Stock resulting in net proceeds of approximately $85.2 million.
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.
10. FINANCIAL INSTRUMENTS
Recorded Financial Instruments
The Company's recorded financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, the current portion of
long-term obligations, borrowings under revolving credit agreement, debt
instruments included in other long-term obligations and the preferred stock of
subsidiary.
At December 31, 1997 and 1996, the fair values of cash and cash equivalents,
accounts receivable, accounts payable and the current portion of long-term
obligations approximated their carrying values due to the short term nature of
these instruments.
The fair values of borrowings under the revolving credit agreement and debt
instruments included in long-term obligations also approximate their carrying
value based upon interest rates available to the Company for similar instruments
with consistent terms and remaining maturities. 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
The Company uses interest rate swaps to alter the interest rate risk profile
related to outstanding borrowings under its revovling credit agreement, thereby
altering the Company's exposure to changes in interest rates. The Company does
not hold or issue such financial instruments for trading purposes. Under the
swap agreements, the Company agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference
to a notional principal amount. Any differences paid or received on interest
rate swap agreements are recognized as adjustments to interest expense over the
life of each swap, thereby adjusting the effective interest rate on the
underlying obligation.
At December 31, 1997, the Company had interest rate swap agreements
with an aggregate notional amount of $100 million effectively converting a
portion of the Company's LIBOR-based variable rate borrowings into fixed rate
borrowings at rates ranging from 6.3% to 6.5%. At December 31, 1997, the
Company's interest rate swap portfolio had a negative fair value of $1.6
million.
At December 31, 1997, the Company is contingently liable under standby
letters of credit aggregating approximately $1.6 million that were primarily
used as collateral for promissory notes issued in connection with certain
acquisitions made during 1996. 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.
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, 1997 and 1996, the
allowance for doubtful accounts for continuing operations was approximately $5.6
million and
18
<PAGE>
$2.9 million, 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.
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company is obligated under non-cancelable operating
leases of real property and equipment used in its continuing operations for
minimum annual rentals as follows: $16,457 in 1998; $13,122 in 1999; $10,391 in
2000; $7,839 in 2001; $5,704 in 2002 and $12,661 thereafter. Rental expense for
continuing operations for the years ended December 31, 1997, 1996 and 1995 was
$12,102, $6,216 and $4,861, 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.
19
<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, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 11, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
WATSCO, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
1ST 2ND 3RD 4TH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Revenue $96,271 $164,703 $189,462 $184,782 $635,218
Gross profit 22,057 35,810 41,575 43,524 142,966
Income from continuing operations 2,061 5,988 6,845 3,414 18,308
Income from discontinued operations, net
of income taxes 221 376 140 (688) 49
- ----------------------------------------------------------------------------------------------------------
Net income $ 2,282 $ 6,364 $ 6,985 $ 2,726 $ 18,357
==========================================================================================================
Diluted earnings per share from
continuing operations(2) $0.12 $0.33 $0.37 $0.18 $1.02
==========================================================================================================
YEAR ENDED DECEMBER 31, 1996:
Revenue $65,200 $103,872 $108,469 $ 87,815 $365,356
Gross profit 14,205 22,255 23,666 19,291 79,417
Income from continuing operations 987 3,740 4,322 1,970 11,019
Income from discontinued operations, net
of income taxes 316 508 688 461 1,973
- ----------------------------------------------------------------------------------------------------------
Net income $ 1,303 $ 4,248 $ 5,010 $ 2,431 $ 12,992
==========================================================================================================
Diluted earnings per share from
continuing operations(1)(2) $0.08 $0.25 $0.29 $0.13 $0.77
==========================================================================================================
<FN>
(1) EARNINGS PER SHARE INFORMATION HAS BEEN RESTATED TO GIVE EFFECT TO THE
THREE-FOR-TWO STOCK SPLIT EFFECTED ON JUNE 14, 1996.
(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>
21
<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, 1997, 1996 and 1995.
At March 25, 1998, excluding shareholders with stock in street name, the Company
had approximately 600 Common Stock shareholders of record and 340 Class B
shareholders of record.
<TABLE>
<CAPTION>
COMMON CLASS B CASH DIVIDENDS
HIGH LOW HIGH LOW COMMON CLASS B
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Fourth quarter $31-7/16 $22-1/2 $29-7/8 $24 $.035 $.035
Third quarter 31-3/8 24-1/2 31 24-1/2 .035 .035
Second quarter 29 22-11/16 28-1/4 23-1/2 .035 .035
First quarter 34-3/8 22-3/4 34 25 .035 .035
==================================================================================================
YEAR ENDED DECEMBER 31, 1996:
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
==================================================================================================
</TABLE>
22
EXHIBIT 21
REGISTRANT'S SUBSIDIARIES
The following table sets forth, at March 30, 1998, the Registrant's
significant subsidiaries and other associated companies and their respective
incorporation jurisdictions. The Registrant owns 100% of the voting securities
of each of the subsidiaries listed below. There are no subsidiaries not listed
in the table, which would, in the aggregate, be considered significant.
STATE OF
ACTIVE SUBSIDIARIES: INCORPORATION
- -------------------- -------------
Distribution:
A&C Distributors, Inc. (d/b/a Comfortmaker Distribution) Florida
Air Systems Distributors, Inc. Florida
Baker Distributing Co. Florida
Central Air Conditioning Distributors, Inc. North Carolina
Central Plains Distributing, Inc. Nebraska
Coastline Distribution, Inc. Florida
Comfort Products Distributing, Inc. Missouri
Comfort Supply, Inc. Delaware
Gemaire Distributors, Inc. Florida
H.B. Adams Distributors, Inc. Florida
Heating & Cooling Supply, Inc. California
Nevada Supply, Inc. Nevada
Three States Supply Company, Inc. Tennessee
Weathertrol Supply Company Texas
William Wurzbach Co. Inc. California
Other:
Dunhill Personnel System of New Jersey, Inc. New Jersey
Dunhill Staffing Systems, Inc. Delaware
Dunhill Staffing Systems of Milwaukee, Inc. Wisconsin
Dunhill Temporary Systems, Inc. New York
Dunhill Temporary Systems of Indianapolis, Inc. Indiana
P.E./Del Mar, Inc. Florida
Watsco Components, Inc. Florida
EXHIBIT 23
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 30, 1998.
<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, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,880
<SECURITIES> 0
<RECEIVABLES> 107,279
<ALLOWANCES> 5,552
<INVENTORY> 173,319
<CURRENT-ASSETS> 318,081
<PP&E> 36,089
<DEPRECIATION> 14,219
<TOTAL-ASSETS> 426,040
<CURRENT-LIABILITIES> 60,322
<BONDS> 2,541
0
0
<COMMON> 8,714
<OTHER-SE> 216,884
<TOTAL-LIABILITY-AND-EQUITY> 426,040
<SALES> 635,218
<TOTAL-REVENUES> 635,218
<CGS> 492,252
<TOTAL-COSTS> 492,252
<OTHER-EXPENSES> 108,603
<LOSS-PROVISION> 1,329
<INTEREST-EXPENSE> 3,266
<INCOME-PRETAX> 29,768
<INCOME-TAX> 11,460
<INCOME-CONTINUING> 18,308
<DISCONTINUED> 49
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,357
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.02
</TABLE>
