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, 1995 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Common Stock, $.50 par value New York Stock Exchange Class B Common Stock, $.50 par value American Stock Exchange 10% Convertible Subordinated American Stock Exchange Debentures Due 1996 Securities Registered Pursuant to Section 12(g) of the Act: None (Title of class) 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 21, 1996 was $183,491,004. The number of shares of Common Stock outstanding as of March 21, 1996 was 7,544,771 shares of Common Stock and 1,442,378 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 Stockholders for the year ended December 31, 1995, 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).
PART I ITEM 1. BUSINESS GENERAL Watsco, Inc. (the "Registrant" or the "Company") is the largest distributor of residential central air conditioners and supplies in the United States, with leading positions in Florida, Texas and California, the three largest air conditioning markets in the country, as well as significant positions in Alabama, Arkansas, Arizona, Louisiana, Nevada, North Carolina, Latin America and South America. In 1989, the Company embarked on a strategy of establishing a network of distribution facilities across the sunbelt where U.S. population growth is greatest, weather patterns are predictably hot and air conditioning is seen as a necessity. Since initiating this strategy, the Company's revenues have increased from $25 million in 1988 to $331 million in 1995. The Company estimates that the market for residential central air conditioners and related supplies in the sunbelt was over $7 billion in 1994 and has grown at an annual rate of 5.6% since 1990. The replacement market has increased substantially in size over the past ten years, surpassing the homebuilding market in significance as a result of the aging of the installed base of residential central air conditioners, the introduction of new energy efficient models and the upgrading of existing homes to central air conditioning. According to the Air Conditioning and Refrigeration Institute (ARI), over 61 million central air conditioner units have been installed in the United States since 1975. Many of the units installed from the mid-1970s to the mid-1980s are reaching the end of their useful lives, thus providing a growing replacement market. The Company focuses on satisfying the needs of the higher margin replacement market, where customers demand immediate, convenient and reliable service. The Company believes that its size and financial resources allow it to provide superior customer service by offering a complete product line of equipment, parts and supplies, multiple warehouse locations and well-stocked inventories. The Company conducts its distribution business through its subsidiaries: Gemaire Distributors, Inc. ("Gemaire"); Heating & Cooling Supply, Inc. ("Heating & Cooling"); Comfort Supply, Inc. ("Comfort Supply"); and Central Air Conditioning Distributors, Inc. ("Central Air Conditioning") (collectively, the "Distribution Operations"). The primary supplier to the Distribution Operations is Rheem Manufacturing Company ("Rheem"), one of the largest manufacturers of residential central air conditioners in the United States, based on the number of units sold. 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 remains below the levels of the mid-1970s to mid-1980s in many of the markets the Company serves. The Company has acquired eight air conditioning distributors since 1989 when the Company began its acquisition strategy to establish a network of distribution branches across the sunbelt. The following is a description of the Company's acquisitions completed in 1995: Airite, Inc. - In February 1995, the Company acquired Airite, Inc., a wholesale distributor of residential central air conditioners with branches in Shreveport and Monroe, Louisiana and Texarkana, Texas. Airite sells to nearly 400 licensed air conditioning and heating contractors and the Company believes that Airite had 1995 revenues of approximately $4 million. 2
H.B. Adams, Inc. - In March 1995, the Company acquired certain assets of H.B. Adams, Inc. (now operating as H.B. Adams Distributors, Inc.). H.B. Adams is a wholesale distributor of air conditioning, heating and refrigeration products and operates seven branches in the Tampa, Florida market area, the second largest market for air conditioning equipment in Florida. H.B. Adams had 1995 revenues of approximately $20 million. Environmental Equipment & Supplies, Inc. - In May 1995, the Company acquired certain assets of Environmental Equipment & Supplies, Inc., a wholesale distributor of air conditioning and heating equipment which sells to nearly 300 licensed air conditioning and heating contractors. Environmental Equipment operates from branches in Fort Smith and Jonesboro, Arkansas and had 1995 revenues of approximately $6 million. Central Air Conditioning Distributors, Inc. - In October 1995, the Company acquired certain assets of Central Air Conditioning Distributors, Inc., a wholesale distributor of residential central air conditioners and related products. Central Air Conditioning sells to approximately 1,200 licensed air conditioning and heating contractors from five branches in North Carolina and had 1995 revenues of approximately $21 million. In addition to distributing air conditioning and heating equipment, the Company also produces over 4,000 electronic and mechanical components for air conditioning, heating and refrigeration equipment through its manufacturing subsidiaries: Watsco Components, Inc., Rho Sigma, Inc. and Cam-Stat, Inc. (the "Manufacturing Operations"). These components are sold to over 5,000 wholesale distributors and original equipment manufacturers ("OEMs"). The Company also owns Dunhill Personnel System, Inc. ("Dunhill"), a national provider of permanent and temporary personnel services to business, professional and service organizations, government agencies, health care providers and other employers. The Company's principal executive offices are located at 2665 South Bayshore Drive, Suite 901, Coconut Grove, Florida 33133, and its telephone is (305) 858-0828. RECENT DEVELOPMENTS On March 6, 1996, the Company completed a public offering in which it sold 1,570,000 shares of Common Stock resulting in net proceeds of approximately $32.6 million. The Company intends to use approximately $14 million of the proceeds to fund the pending acquisition of Three States Supply Company, Inc. discussed below. Effective March 19, 1996, the Company and Rheem completed a transaction pursuant to a Stock Exchange Agreement and Plan of Reorganization (the "Exchange Agreement") whereby the Company acquired Rheem's minority interests in three of the Company's distribution subsidiaries. See "Relationship with Rheem Manufacturing Company" for further discussion. The Company has signed a letter of intent for the purchase of the net assets and business of Three States Supply Company, Inc., a Memphis, Tennessee-based distributor of building materials used primarily in the heating and air conditioning industry. The completion of the transaction is subject to certain conditions and is expected to occur during April 1996. The purchase price, estimated at $14 million, is subject to adjustment upon the completion of an audit of the net assets and will be funded from a portion of the proceeds from the sale of Watsco's Common Stock completed on March 6, 1996. 3
Also see "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report to Shareholders for the year ended December 31, 1995 (the "1995 Annual Report"). INDUSTRY SEGMENT INFORMATION The Climate Control segment consists of the Distribution Operations and the Manufacturing Operations. The Distribution Operations distribute residential central air conditioners and related parts and supplies in Florida, California, Texas, Alabama, Arkansas, Arizona, Louisiana, Nevada, North Carolina and Latin America and South America. The Manufacturing Operations make components and equipment which are sold and distributed to the air conditioning, refrigeration and heating industry (see "Climate Control Segment"). In the Personnel Services segment, Dunhill and its subsidiaries provide temporary help and permanent placement services (see "Personnel Services Segment"). The Company also has certain employees and resources which provide services to each of these segments. Note 12 of Notes to Consolidated Financial Statements, included in the Company's 1995 Annual Report, incorporated herein by reference under Item 8, contains a table setting forth the revenues and operating income of the Company's two industry segments during the three years ended December 31, 1995, 1994 and 1993. DESCRIPTION OF BUSINESS DISTRIBUTION OPERATIONS PRODUCTS The Company markets a complete line of residential central air conditioners (primarily under the Rheem brand name) and related parts and supplies and maintains sufficient inventory to meet customers' immediate needs. The Company's strategy is to provide every product a contractor generally would require in order to install or repair a residential or light commercial central air conditioner. Such products include residential central air conditioners ranging from 1-1/2 to 5 tons*, light commercial air conditioners ranging up to 20 tons, insulation, grills, sheet metal and other ductwork, copper tubing, concrete pads and tape. In addition, the Company also sells products such as electric and gas heating units, air-to-air heat pumps and rooftop equipment. Sales of air conditioning and heating equipment accounted for approximately 63% of the distribution operations' revenues for 1995. Sales of parts and supplies (currently numbering approximately 28,000 different inventory items) comprised the remaining portions of revenues. In 1995, purchases of Rheem products represented approximately 58% of the aggregate purchases of the distribution operations. Any significant interruption in the delivery of Rheem's products would inhibit the Company's ability to continue to maintain its current inventory levels and could adversely affect the Company's business. The Company's future results of operations are also materially dependent upon the continued market acceptance of Rheem's products and the ability of Rheem to continue to manufacture products that comply with laws relating to environmental and efficiency standards. * 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. DISTRIBUTION AND SALES The Company operates from 70 branch warehouses located in regions of the sunbelt which the Company believes have favorable demographic trends. The Company maintains well-stocked inventories at each warehouse location to meet the immediate need of its customers. This is accomplished by transporting inventory between warehouses daily and either directly delivering products to customers with the Company's fleet of 137 trucks or making the products available for pick-up at the branch nearest to the customer. The company has 111 commissioned salespeople who average 16 years of experience in the residential central air conditioning distribution industry. 4
MARKETS The Company has been granted exclusive rights under distribution agreements for Rheem brand-name products in each of the most significant market areas and many of the major metropolitan areas in the United States sunbelt including: Florida; the eastern half of Texas (including the Dallas, Houston, San Antonio and Austin metropolitan areas), southern and central California; Arizona; Nevada; western North Carolina (including the Charlotte metropolitan area) and additional territories in Louisiana; Alabama and Arkansas. The Company also has distribution rights for the Rheem brand name or Weatherking brand name (manufactured by Rheem) in substantially all of Central America, South America and the Caribbean. CUSTOMERS AND CUSTOMER SERVICE The Company sells to contractors and dealers who service the new construction and replacement markets for residential and light commercial central air conditioners. In 1995, the Company served over 13,600 customers, with no single customer accounting for more than 2% of consolidated revenues. The Company focuses on providing products where and when the customer needs them, technical support by phone or on site as required, and quick and efficient service at the distribution branches. Management believes that the Company successfully competes with other distributors in the residential and light commercial central air conditioning market primarily on the basis of its experienced sales organization, strong service support, high quality reputation and broad product lines. RELATIONSHIP WITH RHEEM MANUFACTURING COMPANY The Company is Rheem's largest distributor and believes that it maintains a unique and mutually beneficial relationship with Rheem, one of the largest manufacturers of residential central air conditioning equipment in the United States. Rheem has a well-established reputation of producing high-quality, competitively priced products. The Company believes that Rheem's current product offerings, quality, serviceability and brand-name recognition allow the Company to operate favorably against its competitors. To maintain brand-name recognition, Rheem provides national advertising and participates with the Company in cooperative advertising programs and promotional incentives that are targeted to both contractors and homeowners. The Company estimates the replacement market currently accounts for approximately 65% of industry sales in the United States and expects this percentage to increase as units installed in the 1970s and 1980s wear out and get replaced or updated to more energy-efficient models. The Company believes Rheem's products have wide acceptance in the replacement market based on their high efficiency and low noise level -- two key homeowner considerations. Additionally, Rheem has demonstrated the flexibility to manufacture products to international specifications to meet export demands. Rheem acquired minority ownership interests in Gemaire (20%), Comfort Supply (20%) and Heating & Cooling (50%) as a joint venture partner with the Company in the acquisition of each of these subsidiaries. In March 1996, the Company and Rheem restructured their relationship upon completing a transaction pursuant to a Stock Exchange Agreement and Plan of Reorganization (the "Exchange Agreement") whereby the Company acquired Rheem's minority ownership interests of these three subsidiaries in exchange for 964,361 shares of the Company's unregistered Common Stock. Following completion of this transaction, Gemaire, Comfort Supply and Heating & Cooling became wholly owned subsidiaries of the Company. Also, Rheem's Chief Executive Officer will become a member of the Company's Board of Directors. The Exchange Agreement modified certain other agreements with respect to each of the distribution subsidiaries on terms that are favorable to the Company. Previous agreements between the Company and Rheem provided Rheem with the right to "call" from the Company and the Company with the right to "put" to Rheem the Company's ownership interests in Gemaire, Comfort Supply and Heating & Cooling during specified periods according to prescribed valuation formulas. Under the terms of the Exchange Agreement, the put/call provisions are effectively eliminated because the rights to "put" or "call" become exercisable primarily upon the occurrence of certain insolvency events. 5
The Company also has distribution agreements with Rheem. The distribution agreements of Gemaire, Comfort Supply and Heating & Cooling extend through 2006 with annual renewals thereafter. These distribution agreements contain provisions limiting the sale of products that are directly competitive with Rheem products. Based on the acceptance of other complimentary, non-competitive equipment products and the Company's additional focus on the sale of parts and supplies, the Company does not believe that such limitations have a material effect on its operations. Except for the limitations set forth in the distribution agreements of Gemaire, Comfort Supply and Heating & Cooling, the Company may distribute other manufacturers' lines of air conditioning equipment. MANUFACTURING OPERATIONS The Company's manufacturing operations are highly self-sufficient and include facilities for die-casting, stamping, screw machining, secondary metal working operations and a fully equipped tool room. The Company has not encountered significant problems in obtaining manufacturing materials, consisting primarily of metals and other raw materials, which are readily available from many suppliers. PRODUCTS The Company produces over 4,000 electronic and mechanical components for air conditioning, heating and refrigeration equipment. Products include: components, such as line tap and specialty valves, motor compressor protectors, liquid sight glasses and warm air controls; and equipment, such as vacuum pumps and refrigerant recovery systems. Many of the Company's products are patented and compete in the market place based on uniqueness as well as quality and price. CUSTOMERS The Company's OEM customers include most of the major residential air conditioning manufacturers such as Rheem, Carrier Air Conditioning, Inc., Inter-City Products Corporation and York International (through its Evcon subsidiary). Another significant OEM customer, RV Products, Inc., is the nation's largest manufacturer of air conditioning for recreational vehicles. The Company also sells to wholesale distributors who distribute the Company's products to the aftermarket. In 1995, the Company served over 5,000 domestic and international customers, with no single customer accounting for more than 1% of consolidated revenues. RESEARCH AND DEVELOPMENT The Company conducts research and development to improve the quality and performance of its manufactured products and to develop new products and product line improvements. The Company performs research and development both in-house and by extensive field testing of products. The Company's engineering staff, consisting of 11 employees, develops new customized products to end-user specification and continuously improves, supplements and enhances product lines with newly developed products. PERSONNEL SERVICES SEGMENT Dunhill, founded in 1952, is one of the nation's best known personnel service networks. Through franchised, licensed, and company-owned offices in 38 states, Puerto Rico and Canada, Dunhill provides permanent placement and temporary help services to businesses, professional and service organizations, government agencies, health care providers, and other employers. Dunhill's operations consist of 114 franchised permanent placement offices and 19 franchised, 5 licensed and 14 company-owned temporary personnel service offices. Dunhill's franchisees operate their businesses autonomously within the framework of the Company's policies and standards, and recruit, employ, and pay their own employees, including temporary employees. Dunhill's permanent placement division recruits primarily middle-management, sales, technical, administrative and support personnel for permanent employment in a wide variety of industries and positions. The fees paid by employers to Dunhill for its permanent placement services are typically contingent upon the successful placement of an employee and are generally a percentage of the annual compensation to be paid to the new employee. 6
Dunhill receives an initial fee from all licensees and franchisees, and on-going revenues in the form of royalty fees and commissions from temporary help licensees and franchisees and permanent placement operations. Licenses and franchises are generally granted for 5 and 10 year terms, respectively, and are typically renewable at the option of the licensee or franchisee for additional terms of 5 and 10 years, respectively. OTHER INFORMATION COMPETITION All of the Company's businesses operate in highly competitive environments. The Company's distribution business competes with a number of distributors and also with air conditioner manufacturers who distribute a significant portion of their products through factory-owned distribution organizations. Many of the manufacturers which have distribution organizations are larger than the Company and have substantial financial resources. Competition within any given geographic market is based upon product availability, customer service, price and quality. The Company's manufacturing business has several major competitors, a few of which are larger and have substantial financial resources. Dunhill competes with numerous other large and small national, regional, and local personnel service providers. Competitive pressures or other factors could cause the Company's products or services to lose market acceptance or result in significant price erosion, all of which would have a material adverse effect on the Company's profitability. EMPLOYEES The Climate Control segment employed 929 persons and the Personnel Services segment employed 91 persons as of March 21, 1996. 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 replacement market generally peaks in the third quarter for air conditioners (the Company's principal distribution product) and in the fourth quarter for heating equipment. Demand related to the new construction market varies according to the season, with increased demand generally from March through October. 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. 7
ITEM 2. PROPERTIES The Company's significant facilities are currently in the following locations: <TABLE> <CAPTION> SQUARE OWNED/ LOCATION USE FOOTAGE LEASED -------- --- ------- ------ <S> <C> <C> <C> Watsco: Coconut Grove, FL Headquarters 3,137 Leased Manufacturing Operations: Hialeah, FL Manufacturing 90,000 Owned Hialeah, FL Manufacturing 36,000 Owned Hialeah, FL Manufacturing 12,000 Owned Gemaire: Deerfield Beach, FL Headquarters 10,768 Leased Tampa, FL Warehouse 50,000 Leased Deerfield Beach, FL Warehouse 48,500 Leased Orlando, FL Warehouse 30,000 Leased Miami, FL Warehouse 28,306 Leased Clearwater, FL Warehouse 22,000 Leased Lakeland, FL Warehouse 15,000 Leased Mobile, AL Warehouse 15,000 Leased Perrine, FL Warehouse 13,234 Leased Riviera Beach, FL Warehouse 12,800 Leased Lakeland, FL Warehouse 12,000 Leased Pensacola, FL Warehouse 12,000 Leased Hollywood, FL Warehouse 11,400 Leased Tampa, FL Warehouse 11,000 Leased Daytona Beach, FL Warehouse 10,000 Leased Ft. Myers, FL Warehouse 10,000 Leased Melbourne, FL Warehouse 10,000 Leased New Port Richey, FL Warehouse 10,000 Leased Ocala, FL Warehouse 10,000 Leased St. Petersburg, FL Warehouse 10,000 Leased Vero Beach, FL Warehouse 10,000 Leased Jacksonville, FL Warehouse 9,790 Leased Sarasota, FL Warehouse 8,578 Leased Ft. Walton Beach, FL Warehouse 8,000 Leased Tallahassee, FL Warehouse 8,000 Leased Panama City, FL Warehouse 7,500 Leased Lakeland, FL Warehouse 7,200 Leased Sebring, FL Warehouse 7,000 Leased Winter Haven, FL Warehouse 7,000 Leased Murdock, FL Warehouse 6,300 Leased St. Petersburg, FL Warehouse 5,000 Leased Heating & Cooling: San Diego, CA Headquarters 7,200 Leased Modesto, CA Warehouse 60,000 Leased Phoenix, AZ Warehouse 30,000 Leased Fresno, CA Warehouse 25,079 Leased Orange, CA Warehouse 25,050 Leased San Diego, CA Warehouse 25,000 Leased 8
SQUARE OWNED/ LOCATION USE FOOTAGE LEASED -------- --- ------- ------ Heating & Cooling (cont.): Riverside, CA Warehouse 24,940 Leased Sacramento, CA Warehouse 24,000 Leased Van Nuys, CA Warehouse 22,100 Leased Santa Clara, CA Warehouse 20,000 Leased Las Vegas, NV Warehouse 19,600 Leased Escondido, CA Warehouse 15,000 Leased Long Beach, CA Warehouse 15,000 Leased Tucson, AZ Warehouse 14,500 Leased Oxnard, CA Warehouse 14,344 Leased El Monte, CA Warehouse 11,200 Leased Yuma, AZ Warehouse 3,800 Leased Comfort Supply: Houston, TX Headquarters/Warehouse 38,780 Leased Carrollton, TX Warehouse 35,000 Leased North Little Rock, AR Warehouse 25,000 Leased Bryan, TX Warehouse 21,750 Leased Harlingen, TX Warehouse 17,000 Leased Killeen, TX Warehouse 17,000 Leased Shreveport, LA Warehouse 16,000 Leased Austin, TX Warehouse 15,700 Leased Haltom City, TX Warehouse 15,000 Leased Houston, TX Warehouse 15,000 Leased Longview, TX Warehouse 15,000 Owned Houston, TX Warehouse 14,800 Leased San Antonio, TX Warehouse 14,000 Leased Houston, TX Warehouse 12,000 Leased Dallas, TX Warehouse 11,250 Leased Stafford, TX Warehouse 5,500 Leased Jonesboro, AR Warehouse 5,000 Leased Texarkana, TX Warehouse 3,800 Leased Monroe, LA Warehouse 3,500 Leased Central Air Conditioning: Winston-Salem, NC Headquarters/Warehouse 12,500 Leased Hickory, NC Warehouse 22,806 Leased Greensboro, NC Warehouse 20,000 Leased Charlotte, NC Warehouse 19,000 Leased Winston-Salem, NC Warehouse 14,500 Leased Asheville, NC Warehouse 10,000 Leased Dunhill: Woodbury, NY Headquarters 8,500 Leased </TABLE> The Company believes that its facilities are well maintained and adequate to meet its needs. 9
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, 1995. 10
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Page 28 of the 1995 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, 1995, 1994 and 1993 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Page 8 of the Company's 1995 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 1995 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 1995 Annual Report contain the Consolidated Financial Statements of the Company at December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 and is incorporated herein by reference. The Company's unaudited quarterly financial data for the years ended December 31, 1995, 1994 and 1993 is included in the 1995 Annual Report on page 27. The Report of Independent Certified Public Accountants for the years ended December 31, 1995, 1994 and 1993 is included in the Company's 1995 Annual Report on page 26. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11
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 Financial Statements (a) (i) Data incorporated by reference from the attached 1995 Annual Report of Watsco, Inc.: Report of Independent Certified Public Accountants Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheets as of December 31, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements <TABLE> <CAPTION> PAGE NO. <S> <C> Financial Statement Schedules (a) (ii) Data included herein: Report of Independent Certified Public Accountants on Schedules 16 Consolidated financial statement schedules for the years ended December 31, 1995, 1994 and 1993 I. Condensed financial information of Registrant 17-19 II. Valuation and qualifying accounts 20 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 Consolidated Financial Statements or notes thereto. </TABLE> 12
(a) (iii) Exhibits: 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 dated June 30, 1995 and incorporated herein by reference). 3.2 Company's Amended Bylaws (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1985 and incorporated herein by reference). 4.1 Indenture dated as of September 12, 1986 between the Company and Southeast Bank, N.A. (filed as Exhibit 4 to the Company's Registration Statement on Form S-3 (No. 33-7758) and incorporated herein by reference). 4.2 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). 4.3 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 Preferred Stock Purchase Agreement between Heating & Cooling Supply, Inc. and Rheem Manufacturing Company dated June 10, 1993 (filed as Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q dated September 30, 1993 and incorporated herein by reference). 10.6 Line of Credit Agreement by and between Comfort Supply, Inc. and NationsBank of Florida, N.A. dated September 23, 1993 (filed as Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q dated September 30, 1993 and incorporated herein by reference). 10.7 Amended and Restated Revolving Credit and Term Loan Agreement by and between NationsBank of Florida, N.A. and Gemaire Distributors, Inc. dated March 10, 1995 (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 13
10.8 Line of Credit Agreement between Heating & Cooling Supply, Inc. and Bank of America National Trust and Savings Association dated September 28, 1995 (filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q dated September 30, 1995 and incorporated herein by reference). 10.9 Revolving Credit Agreement dated October 26, 1995 by and between CAC Acquisition, Inc. and NationsBank of Florida, N.A. (filed as Exhibit 10.27 to the Company's Registration Statement on Form S-3 (No. 333-00371) and incorporated herein by reference). 10.10 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). <TABLE> <CAPTION> PAGE NO. <S> <C> <C> 10.11 Amendment dated February 6, 1996 to Distributor Agreement 22-24 dated December 30, 1998 between Rheem Manufacturing Company and Gemaire Distributors, Inc. 10.12 Amendment dated February 6, 1996 to Distributor Agreement 25-27 dated May 25, 1993 (and as amended by Supplemental Agreement dated as of June 1, 1995) between Rheem Manufacturing Company and Comfort Supply, Inc. 10.13 Amendment dated February 6, 1996 to Distributor Agreement 28-30 dated October 15, 1990 between Rheem Manufacturing Company and Heating & Cooling Supply, Inc. 11. Computation of Earnings Per Share for the years ended 31 December 31, 1995, 1994 and 1993 13. 1995 Annual Report to Shareholders. With the exception 32-55 of the information incorporated by reference into Items 1, 5, 6, 7 and 8 of this Form 10-K, the 1995 Annual Report to Shareholders is not deemed filed as part of this Form 10-K. 22. Subsidiaries of the Registrant 56 23. Consent of Independent Certified Public Accountants 57 Management Contracts and Compensatory Plans or Arrangements: 27. Financial Data Schedule (for SEC use only) 58 10.14 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). 10.15 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). </TABLE> 14
10.16 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). 10.17 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). (b) Reports on Form 8-K None. 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES To the Board of Directors and Shareholders of Watsco, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Watsco, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 29, 1996. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The accompanying Schedules I and II are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Miami, Florida, March 29, 1996. 16
WATSCO, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In thousands of dollars) <TABLE> <CAPTION> (a) Balance Sheets December 31, - ------------------ 1995 1994 -------- ------ <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 811 $ 259 Marketable securities 267 3,227 Other current assets 520 415 ------- ------- Total current assets 1,598 3,901 Investments in and net advances to subsidiaries 51,301 45,139 Property, plant and equipment, at cost less accumulated depreciation 2,084 1,743 Other assets 3,154 3,214 ------- ------- $58,137 $53,997 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Current portion of bank and other debt $ 1,666 $ 1,174 Accounts payable and accrued liabilities 1,002 3,509 ------- ------- Total current liabilities 2,668 4,683 Bank and other debt 1,495 837 Subordinated debentures - 1,505 Deferred income taxes 218 156 Shareholders' equity: Common stock 3,141 3,075 Paid-in capital 19,479 18,565 Retained earnings 31,136 25,176 ------- ------- Total shareholders' equity 53,756 46,816 ------- ------- $58,137 $53,997 ======= ======= </TABLE> (Continued) 17
WATSCO, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For the Years Ended December 31, (In thousands of dollars) (Continued) <TABLE> <CAPTION> (b) Statements of Income - ------------------------ 1995 1994 1993 ------- --------- ------ <S> <C> <C> <C> Equity in net income of subsidiaries $ 8,641 $ 7,721 $ 6,169 Investment income, net 185 127 361 General and administrative expenses (1,761) (2,574) (1,621) Interest expense (258) (299) (425) ------- ------- ------- Income before taxes 6,807 4,975 4,484 Income tax benefit (A) 443 787 557 ------- ------- ------- Net income $ 7,250 $ 5,762 $ 5,041 ======= ======= ======= </TABLE> (A) Income taxes are recorded at statutory rates receiving benefit for the dividends received deduction and tax free interest. (Continued) 18
WATSCO, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For the Years Ended December 31, (In thousands of dollars) (Continued) <TABLE> <CAPTION> (c) Statements of Cash Flows - ---------------------------- 1995 1994 1993 ---------- ------- ------- <S> <C> <C> <C> Cash flows from operating activities: Net Income $ 7,250 $ 5,762 $ 5,041 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Equity in net income of subsidiaries, net of cash dividends of $2,599 in 1995, $4,678 in 1994 and $1,587 in 1993 (6,042) (3,043) (4,582) Depreciation and amortization 39 32 58 Net investment gains (27) (6) (161) Deferred tax provision (benefit) 62 (486) (508) Noncash stock contribution to 40l(k) plan 149 137 111 Changes in operating assets and liabilities: Other current assets (105) 115 (151) Accounts payable and accrued liabilities (2,507) 1,329 (369) Other, net 67 (460) (256) -------- --------- --------- Net cash provided by (used in) operating activities (1,114) 3,380 (817) -------- --------- --------- Cash flows from investing activities: Cash used in acquisition in 1995 and 1993 (1) - (3,418) Net proceeds from sales (purchases) of marketable securities 2,960 (2,258) (906) Net advances from (to) subsidiaries (119) 659 (2,989) Other, net (360) (510) (318) -------- --------- --------- Net cash provided by (used in) investing activities 2,480 (2,109) (7,631) -------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) of long-term obligations (191) 17 (303) Net proceeds from issuances of common stock 667 138 9,680 Cash dividends paid on common stock (1,160) (1,037) (887) Other, net (130) (130) (70) -------- --------- --------- Net cash provided by (used in) financing activities (814) (1,012) 8,420 -------- --------- --------- Net increase (decrease) in cash and cash equivalents 552 259 (28) Cash and cash equivalents at beginning of year 259 - 28 -------- --------- --------- Cash and cash equivalents at end of year $ 811 $ 259 $ - ======== ========= ========= Supplemental disclosures: Net income tax payments $ 4,522 $ 3,493 $ 4,350 Interest paid 264 285 432 </TABLE> In 1995, 1994 and 1993, $164,000, $192,000 and $2,607,000, respectively, of 10% Convertible Subordinated Debentures due 1996 were converted into Common Stock. In May 1995, the Company effected a three-for-two stock split in the form of a 50% stock dividend for both classes of its common stock which had the effect of increasing the Company's common stock account by $1,024,000 and reducing paid-in capital and retained earnings by $371,000 and $653,000, respectively. 19
WATSCO, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1995, 1994 and 1993 (In thousands of dollars) ALLOWANCE FOR DOUBTFUL ACCOUNTS: BALANCE, December 31, 1992 $2,767 Allowances from acquisitions 583 Additions charged to costs and expenses 315 Recoveries 73 Write-offs (726) -------- BALANCE, December 31, 1993 3,012 Additions charged to costs and expenses 597 Recoveries 44 Write-offs (972) -------- BALANCE, December 31, 1994 2,681 Allowances from acquisitions 453 Additions charged to costs and expenses 1,197 Recoveries 89 Write-offs (1,319) -------- BALANCE, December 31, 1995 $3,101 ======== 20
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 29, 1996 By: /s/ Albert H. Nahmad -------------------------------- Albert H. Nahmad, President March 29, 1996 By: /s/ Ronald P. Newman -------------------------------- Ronald P. Newman, Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ Albert H. Nahmad Chairman of the Board and March 29, 1996 - -------------------------------- President (principal Albert H. Nahmad executive officer) /s/ Ronald P. Newman Vice President of Finance, March 29, 1996 - -------------------------------- Secretary and Treasurer Ronald P. Newman (principal financial and accounting officer) /s/ D.A. Coape-Arnold Director March 29, 1996 - -------------------------------- D.A. Coape-Arnold /s/ David B. Fleeman Director March 29, 1996 - -------------------------------- David B. Fleeman /s/ James S. Grien Director March 29, 1996 - -------------------------------- James S. Grien /s/ Paul F. Manley Director March 29, 1996 - -------------------------------- Paul F. Manley /s/ Bob L. Moss Director March 29, 1996 - -------------------------------- Bob L. Moss /s/ Roberto Motta Director March 29, 1996 - -------------------------------- Roberto Motta /s/ Alan H. Potamkin Director March 29, 1996 - -------------------------------- Alan H. Potamkin </TABLE> 21