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Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] Quarterly Report Pursuant To Section 13 or
15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
or
[ ] Transition Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From
___ to ___
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Commission file number 1-5581
I.R.S. Employer Identification Number 59-0778222
WATSCO, INC.
(a Florida Corporation)
2665 South Bayshore Drive, Suite 901
Coconut Grove, Florida 33133
Telephone: (305) 714-4100
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 23,402,119 shares of the
Company's Common Stock ($.50 par value), excluding treasury shares of 2,901,613
and 3,171,406 shares of the Company's Class B Common Stock ($.50 par value) were
outstanding as of November 14, 2000.
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<PAGE>
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
(In thousands, except per share data)
September 30, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 7,894 $ 7,484
Accounts receivable, net 195,331 167,335
Inventories 245,557 222,853
Other current assets 15,345 17,397
--------- ---------
Total current assets 464,127 415,069
Property, plant and equipment, net 31,400 31,427
Intangible assets, net 129,319 131,556
Other assets 14,816 10,854
--------- ---------
$ 639,662 $ 588,906
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,925 $ 5,915
Accounts payable 108,142 89,997
Accrued liabilities 28,939 26,895
--------- ---------
Total current liabilities 139,006 122,807
--------- ---------
Long-term obligations:
Borrowings under revolving credit agreement 177,500 155,000
Bank and other debt 3,170 4,415
--------- ---------
Total long-term obligations 180,670 159,415
--------- ---------
Deferred income taxes and other liabilities 4,887 4,968
--------- ---------
Shareholders' equity:
Common Stock, $.50 par value 13,119 13,036
Class B Common Stock, $.50 par value 1,613 1,591
Paid-in capital 203,585 202,106
Unearned compensation related to
outstanding restricted stock (5,939) (5,998)
Unrealized loss on investments, net of tax (1,105) (669)
Retained earnings 131,482 105,971
Treasury stock, at cost (27,656) (14,321)
--------- ---------
Total shareholders' equity 315,099 301,716
--------- ---------
$ 639,662 $ 588,906
========= =========
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Quarter and Nine Months Ended September 30, 2000 and 1999
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 360,633 $ 349,355 $1,017,809 $ 955,862
Cost of sales 275,288 268,652 777,217 733,106
---------- ---------- ---------- ----------
Gross profit 85,345 80,703 240,592 222,756
Selling, general and administrative expenses 62,952 58,337 186,848 171,366
---------- ---------- ---------- ----------
Operating income 22,393 22,366 53,744 51,390
Interest expense, net 3,424 3,508 9,818 10,201
---------- ---------- ---------- ----------
Income before income taxes 18,969 18,858 43,926 41,189
Income taxes 7,056 7,056 16,340 15,363
---------- ---------- ---------- ----------
Net income $ 11,913 $ 11,802 $ 27,586 $ 25,826
========== ========== ========== ==========
Basic earnings per share $ 0.45 $ 0.41 $ 1.03 $ 0.90
========== ========== ========== ==========
Diluted earnings per share $ 0.43 $ 0.40 $ 0.99 $ 0.87
========== ========== ========== ==========
Weighted average shares and equivalent shares
used to calculate earnings per share:
Basic 26,426 28,748 26,707 28,684
========== ========== ========== ==========
Diluted 27,748 29,759 27,962 29,785
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,586 $ 25,826
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,129 8,243
Provision for doubtful accounts 2,649 2,240
Deferred income taxes 338 329
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (30,262) (34,454)
Inventories (22,228) (12,834)
Accounts payable and accrued liabilities 20,069 14,053
Other, net (1,519) 559
-------- --------
Net cash provided by operating activities 5,762 3,962
-------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (3,065) (18,321)
Capital expenditures, net (5,858) (4,736)
Purchases of marketable securities -- (1,042)
Proceeds for the sale of marketable securities -- 17,596
-------- --------
Net cash used in investing activities (8,923) (6,503)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 22,500 3,000
Borrowings (repayments) of bank and other debt, net (5,235) 353
Net proceeds from issuances of common stock 1,003 1,135
Common stock dividends (2,055) (2,147)
Repurchase of common stock (12,642) --
-------- --------
Net cash provided by financing activities 3,571 2,341
-------- --------
Net increase (decrease) in cash and cash equivalents 410 (200)
Cash and cash equivalents at beginning of period 7,484 7,249
-------- --------
Cash and cash equivalents at end of period $ 7,894 $ 7,049
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 14
<PAGE>
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(In thousands, except share data)
(Unaudited)
1. The condensed consolidated balance sheet as of December 31, 1999, which
has been derived from the Company's audited financial statements, and
the unaudited interim condensed consolidated financial statements, have
been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures
normally included in the annual financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to those rules and
regulations, although the Company believes the disclosures made are
adequate to make the information presented not misleading. In the
opinion of management, all adjustments necessary for a fair
presentation have been included in the condensed consolidated financial
statements herein. As discussed in Note 6, amounts in the condensed
consolidated statements of income and statements of cash flows have
been restated in 1999 to include Dunhill Staffing Systems Inc.
("Dunhill") as continuing operations.
2. The results of operations for the quarter and nine months ended
September 30, 2000, are not necessarily indicative of the results for
the year ending December 31, 2000. The sale of the Company's products
and services is seasonal with revenue generally increasing during the
months of May through August.
3. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
4. Basic earnings per share is computed by dividing net income by the
total weighted average shares outstanding. Diluted earnings per share
additionally assumes, if dilutive, any added dilution from common stock
equivalents. Shares used to calculate earnings per share are as
follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 26,425,616 28,747,918 26,707,331 28,684,441
Dilutive stock options and
restricted shares of common stock 1,322,073 1,011,554 1,254,773 1,100,830
---------- ---------- ---------- ----------
Shares for diluted earnings per share 27,747,689 29,759,472 27,962,104 29,785,271
========== ========== ========== ==========
Stock options and restricted shares of
common stock outstanding which are not
included in the calculation of diluted
earnings per share because their impact
is antidilutive 2,848,998 1,806,150 2,867,301 1,278,058
========== ========== ========== ==========
</TABLE>
5. The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Comprehensive
income consists of net income and changes in the value of
available-for-sale securities. The components of the Company's
comprehensive income are as follows for the quarter and nine months
ended September 30, 2000 and 1999:
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<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 11,913 $ 11,802 $ 27,586 $ 25,826
Unrealized holding gains (losses) on investments
arising during the period, net of
income tax (expense) benefit of $150,
$243, $258, and ($1,546), respectively (253) (407) (436) 2,598
-------- -------- -------- --------
Comprehensive income $ 11,660 $ 11,395 $ 27,150 $ 28,424
======== ======== ======== ========
</TABLE>
6. In November 1997, the Company's Board of Directors approved a plan to
dispose of its staffing service subsidiary, Dunhill. During the period
in which it was reported as a discontinued operation, the Company did
not receive any acceptable offers for Dunhill. Therefore, in 1999, the
Company decided to retain Dunhill as part of its continuing operations
and has accordingly restated operating results and net cash flows in
1999 to include Dunhill in continuing operations. Unaudited summarized
financial information for the quarter and nine month period that
Dunhill was reported as a discontinued operation is as follows:
Quarter Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Revenue $16,299 $44,418
Operating profit $ 652 $ 1,604
7. During 2000 and 1999, the Company completed the acquisition of various
wholesale distributors and one staffing service franchise. Acquisitions
have been accounted for under the purchase method of accounting and,
accordingly, their results of operations have been included in the
unaudited condensed consolidated statements of income beginning on
their respective dates of acquisition. The Company's unaudited pro
forma consolidated results of operations assuming all significant
acquisitions occurred on January 1, 1999 are as follows:
Quarter Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Revenue $ 360,724 $ 988,194
Net income $ 12,412 $ 28,340
Diluted earnings per share $ 0.41 $ 0.94
The unaudited pro forma consolidated results of operations is not
necessarily indicative of either the results of operations that would
have occurred had the above companies been acquired on January 1, 1999
for the period presented or of future results of operations.
8. In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements. In June 2000, the SEC issued SAB 101B to defer the
effective date of implementation of SAB 101 until the fourth quarter of
2000. The Company does not expect the adoption of SAB 101 to have a
material effect on its financial position or results of operations.
9. In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. SFAS No. 133 also requires that changes in derivatives'
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<PAGE>
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. In June 1999, the FASB issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral
of the effective date of FASB Statement 133 - an amendment to FASB
Statement No. 133," which delayed the implementation date for SFAS 133
for one year to fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which includes additional
guidance on specific transactions. The impact of SFAS No. 133 on the
Company's consolidated financial statements will depend on a variety of
factors, including future interpretive guidance from the FASB, the
extent of the Company's hedging activities, the type of hedging
instruments used and the effectiveness of such instruments. The Company
has not quantified the impact of adopting SFAS No. 133.
10. In September 1999, a lawsuit was filed in the Circuit Court for the
First Judicial District of Jasper County, Mississippi against the
Company and a group of companies now operating as a subsidiary of the
Company, Kaufman Supply, Inc. ("Kaufman"), and an employee of Kaufman.
The lawsuit pertains to a vehicle accident involving a Kaufman vehicle
and three individuals who sustained injuries resulting from the
accident (the "Robertson Claim"). In the lawsuit, the plaintiffs allege
that Kaufman and its employee are liable for damages resulting from
their injuries and further allege that Kaufman and its employee were
grossly negligent in the operation of the vehicle and seek unspecified
actual and punitive damages. The Company and Kaufman have filed claims
with its insurance carriers seeking coverage under policies in force at
the time of the accident with aggregate combined limits of $32 million.
In September 2000, a lawsuit was filed in the Circuit Court of the
Eleventh Judicial Circuit of Miami-Dade County, Florida by the
Company's excess insurance company, National Union Insurance Company of
Pittsburgh, Pennsylvania ("National Union"), against the Company and
Kaufman. The lawsuit seeks declaratory relief pertaining to a $20
million excess insurance policy issued by National Union (the "Watsco
Umbrella Policy"). The lawsuit is in its early stages of discovery. The
Company intends to vigorously defend itself in order to perfect
additional insurance coverage for the Robertson Claim.
In addition, although the Company and Kaufman have not been served with
a formal lawsuit, the plaintiffs in the Robertson Claim have indicated
that they intend to file a declaratory action against National Union,
the Company and Kaufman in the State of Mississippi seeking a
determination that coverage is available under the Watsco Umbrella
Policy.
Based on discovery performed to date, the Company believes that
plaintiffs in the Robertson Claim may assert a significant claim for
damages during trial. Further discovery in this matter is currently
on-going with a trial date set for January 2001. The Company intends to
vigorously defend itself in the Robertson Claim. At this time, due to
the preliminary nature of the above proceedings, the Company is unable
to predict with any certainty as to whether an adverse judgment will be
less than or exceed the Company's insurable limits.
In the opinion of the Company, based on advice from its litigation
counsel, the ultimate liability associated with the Robertson Claim
described above will not materially affect the Company's financial
position but could be material to the results of operations in any one
accounting period.
11. In October 2000, the Company executed a non-binding letter of intent to
acquire S.W. Anderson Sales Corporation, a $40 million distributor of
heating, air conditioning and insulation products. Closing of the
transaction is subject to the completion of due diligence, the
execution of a definitive agreement and other conditions.
12. Certain reclassifications have been made to the 1999 balances to
conform to the 2000 presentation.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table presents the Company's consolidated financial results for
the quarter and nine months ended September 30, 2000 and 1999, expressed as a
percent of revenue:
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.3 76.9 76.4 76.7
----- ----- ----- -----
Gross profit 23.7 23.1 23.6 23.3
Selling, general and administrative expenses 17.5 16.7 18.3 17.9
----- ----- ----- -----
Operating income 6.2 6.4 5.3 5.4
Interest expense, net 0.9 1.0 1.0 1.1
Income taxes 2.0 2.0 1.6 1.6
----- ----- ----- -----
Net income 3.3% 3.4% 2.7% 2.7%
===== ===== ===== =====
</TABLE>
The above table and the following narratives include the results of
operations acquired during 2000 and 1999. These acquisitions were accounted for
under the purchase method of accounting and, accordingly, their results of
operations have been included in the consolidated results of the Company
beginning on their respective dates of acquisition. Data presented in the
following narratives referring to "same-store basis" excludes the effects of
operations acquired or locations opened and closed during the prior twelve
months. Amounts in 1999 have been restated to include Dunhill in continuing
operations.
QUARTER ENDED SEPTEMBER 30, 2000 VS. QUARTER ENDED SEPTEMBER 30, 1999
Revenue for the three months ended September 30, 2000 increased $11.3
million, or 3%, compared to the same period in 1999. On a same-store basis,
revenue increased $6.7 million, or 2%, driven by a 4% increase in the Company's
residential and commercial air conditioning, refrigeration and heating product
lines offset, in part, by a decrease in sales of manufactured housing products.
Gross profit for the three months ended September 30, 2000 increased
$4.6 million, or 6%, as compared to the same period in 1999, primarily as a
result of the aforementioned revenue increases. Gross profit margin in the third
quarter increased to 23.7% in 2000 from 23.1% in 1999. Increases in gross profit
margin are primarily attributable to enhanced focus on margins in certain
markets and contribution from expanded vendor programs. On a same-store basis,
gross profit increased $2.5 million, or 3%, and gross profit margin increased to
23.5% in 2000 from 23.2% in 1999.
Selling, general and administrative expenses for the three months ended
September 30, 2000 increased $4.6 million, or 8%, compared to the same period in
1999, primarily due to selling, general and administrative expenses added by
acquired companies and from increased sales. Selling, general and administrative
expenses as a percent of revenue increased to 17.5% in 2000 from 16.7% in 1999.
Such increase was primarily due to the inability to leverage the fixed cost
structures against the lower than expected sale demand during the quarter in the
manufacturing housing segment and due to additional costs incurred to support
expanded product lines and to close or integrate unprofitable locations. On a
same-store basis, selling, general and administrative expenses increased $3.9
million, or 7%, and as a percent of revenue increased to 17.4% in 2000 from
16.6% in 1999.
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<PAGE>
Interest expense, net for the third quarter in 2000 decreased $0.1
million, or 2%, compared to the same period in 1999, primarily due to lower
average borrowings during the quarter, offset by a rise in interest rates.
The effective tax rate for the three months ended September 30, 2000
and 1999 was 37.2% and 37.4%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenue for the nine months ended September 30, 2000 increased $61.9
million, or 7%, compared to the same period in 1999. On a same-store basis,
revenue increased $41.2 million, or 4% driven by a 7% increase in the Company's
residential and commercial air conditioning, refrigeration and heating product
lines offset, in part, by a decrease in sales of manufactured housing products.
Gross profit for the nine months ended September 30, 2000 increased
$17.8 million, or 8%, as compared to the same period in 1999, primarily as a
result of the aforementioned revenue increases. Gross profit margin for the
nine-month period increased to 23.6% in 2000 from 23.3% in 1999. Increases in
gross profit margin are primarily attributable to enhanced focus on margins in
certain markets and contribution from expanded vendor programs. On same-store
basis, gross profit increased $10.9 million, or 5%, while gross profit margin
increased to 23.5% in 2000 from 23.4% in 1999.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 increased $15.5 million, or 9%, compared to the same period
in 1999, primarily due to higher selling, general and administrative expenses
added by acquired companies and from increased sales. Selling, general and
administrative expenses as a percent of revenue increased to 18.3% in 2000 from
17.9% in 1999. Such increase was primarily due to the inability to leverage the
fixed cost structures against the lower than expected sale demand during the
nine-months ended September 30, 2000 in the manufacturing housing segment and
due to additional costs incurred to support expanded product lines and to close
or integrate unprofitable locations. On a same-store basis, selling, general and
administrative expenses increased $11.8 million, or 7% and as a percent of
revenues increased to 18.3% from 17.8% in 1999.
Interest expense, net for the nine months ended September 30, 2000
decreased $0.4 million, or 4%, compared to the same period in 1999, primarily
due to lower average borrowings during the period, offset by a rise in interest
rates.
The effective tax rate for the nine months ended September 30, 2000 and
1999 was 37.2% and 37.3%, respectively.
Liquidity and Capital Resources
The Company maintains a bank-syndicated revolving credit agreement that
provides for borrowings of up to $315.0 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 aggregated $177.5 million at September 30,
2000, bear interest at primarily LIBOR-based rates plus a spread that is
dependent upon the Company's financial performance (LIBOR plus .6% at September
30, 2000). The revolving credit agreement contains customary affirmative and
negative covenants including certain 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. The
Company was in compliance with all covenants at September 30, 2000.
On January 31, 2000, the Company entered into a $125.0 million private
placement shelf facility. The uncommitted loan facility provides the Company a
source of long-term, fixed-rate financing as a complement to the variable rate
borrowings available under its existing revolving credit facility. There were no
outstanding borrowings under the agreement as of September 30, 2000.
The Company's Board of Directors has authorized the repurchase of
shares of the Company's stock, at management's discretion, in the open market or
via private transactions. In September 2000, the Board of
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Directors authorized the repurchase of an additional 1.5 million shares bringing
the total authorization to 4.5 million shares. As of September 30, 2000, the
Company had repurchased approximately 2.7 million shares at a cost of $27.7
million.
Working capital increased to $325.1 million at September 30, 2000 from
$292.3 million at December 31, 1999 primarily due to the Company's seasonal
build-up of inventory in preparation for the summer selling season. This
increase was funded primarily by borrowings under the Company's revolving credit
agreement.
Cash and cash equivalents increased $0.4 million during the nine month
period ended September 30, 2000. The revolving credit agreement provided the
principal source of cash during the period. The principal uses of cash were
seasonal working capital needs, acquisition of the Company's common stock,
capital expenditures and repayments of 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; the Company currently has no binding
agreement with respect to any acquisition candidate. 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.
In October 2000, the Company executed a non-binding letter of intent to
acquire S.W. Anderson Sales Corporation, a $40 million distributor of heating,
air conditioning and insulation products. Closing of the transaction is subject
to the completion of due diligence, the execution of a definitive agreement and
other conditions.
Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure consists of interest rate
risk. The Company's objective in managing the exposure to interest rate changes
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the Company
uses interest rate swaps to manage its net exposure to interest rate changes to
its borrowings. These swaps are entered into with a group of financial
institutions with investment grade credit ratings, thereby minimizing the risk
of credit loss. All items described below are non-trading.
At September 30, 2000, the Company had various interest rate swap
agreements with an aggregate notional amount of $60.0 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 with a weighted average pay rate of 6.4%.
Safe Harbor Statement
This quarterly report contains statements which, to the extent they are
not historical fact, constitute "forward looking statements" under the
securities laws, including statements regarding acquisitions, financing
agreements and industry, demographic and other trends affecting the Company. 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.
The Company's shareholders should also be aware that while the Company
does, at various times, communicate with securities analysts, it is against the
Company's policies to disclose to such analysts any material non-public
information or other confidential information. Accordingly, our shareholders
should not assume that the Company agrees with all statements or reports issued
by such analysts. To the extent statements or reports issued by analysts contain
projections, forecasts or opinions by such analysts about our Company, such
reports are not the responsibility of the Company.
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<PAGE>
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."
11 of 14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In September 1999, a lawsuit was filed in the Circuit Court for the
First Judicial District of Jasper County, Mississippi against the
Company and a group of companies now operating as a subsidiary of the
Company, Kaufman Supply, Inc. ("Kaufman"), and an employee of Kaufman.
The lawsuit pertains to a vehicle accident involving a Kaufman vehicle
and three individuals who sustained injuries resulting from the
accident (the "Robertson Claim"). In the lawsuit, the plaintiffs allege
that Kaufman and its employee are liable for damages resulting from
their injuries and further allege that Kaufman and its employee were
grossly negligent in the operation of the vehicle and seek unspecified
actual and punitive damages. The Company and Kaufman have filed claims
with its insurance carriers seeking coverage under policies in force at
the time of the accident with aggregate combined limits of $32 million.
In September 2000, a lawsuit was filed in the Circuit Court of the
Eleventh Judicial Circuit of Miami-Dade County, Florida by the
Company's excess insurance company, National Union Insurance Company of
Pittsburgh, Pennsylvania ("National Union"), against the Company and
Kaufman. The lawsuit seeks declaratory relief pertaining to a $20
million excess insurance policy issued by National Union (the "Watsco
Umbrella Policy"). The lawsuit is in its early stages of discovery. The
Company intends to vigorously defend itself in order to perfect
additional insurance coverage for the Robertson Claim.
In addition, although the Company and Kaufman have not been served with
a formal lawsuit, the plaintiffs in the Robertson Claim have indicated
that they intend to file a declaratory action against National Union,
the Company and Kaufman in the State of Mississippi seeking a
determination that coverage is available under the Watsco Umbrella
Policy.
Based on discovery performed to date, the Company believes that
plaintiffs in the Robertson Claim may assert a significant claim for
damages during trial. Further discovery in this matter is currently
on-going with a trial date set for January 2001. The Company intends to
vigorously defend itself in the Robertson Claim. At this time, due to
the preliminary nature of the above proceedings, the Company is unable
to predict with any certainty as to whether an adverse judgment will be
less than or exceed the Company's insurable limits.
In the opinion of the Company, based on advice from its litigation
counsel, the ultimate liability associated with the Robertson Claim
described above will not materially affect the Company's financial
position but could be material to the results of operations in any one
accounting period.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATSCO, INC.
--------------------------
(Registrant)
By: /s/ Barry S. Logan
--------------------------
Barry S. Logan
Vice President and Secretary
(Chief Financial Officer)
November 14, 2000
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<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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27 Financial Data Schedule
