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 [X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 or [ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ___ to ___ 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: 25,512,499 shares of the Company's Common Stock ($.50 par value) and 3,193,692 shares of the Company's Class B Common Stock ($.50 par value) were outstanding as of August 13, 1999. 1 of 14
PART I. FINANCIAL INFORMATION WATSCO, INC.CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1999 and December 31, 1998 (In thousands, except per share data) <TABLE> <CAPTION> June 30, December 31, 1999 1998 --------- --------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 7,140 $ 6,689 Accounts receivable, net 182,185 137,745 Inventories 244,703 202,592 Other current assets 10,329 11,984 Net assets of discontinued operation 11,883 11,966 --------- --------- Total current assets 456,240 370,976 Property, plant and equipment, net 31,029 30,496 Other assets 28,242 24,237 Intangible assets, net 117,494 106,309 --------- --------- $ 633,005 $ 532,018 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 1,000 $ 1,007 Accounts payable 85,043 60,742 Accrued liabilities 27,846 19,488 --------- --------- Total current liabilities 113,889 81,237 --------- --------- Long-term obligations: Borrowings under revolving credit agreement 213,700 168,000 Bank and other debt 5,093 4,301 --------- --------- Total long-term obligations 218,793 172,301 Deferred income taxes and credits 2,679 3,912 --------- --------- Shareholders' equity: Common Stock, $.50 par value 12,756 12,420 Class B Common Stock, $.50 par value 1,596 1,596 Paid-in capital 197,175 189,225 Unrealized gains (losses) on investments, net of tax 43 (2,962) Unearned compensation related to outstanding restricted stock (5,862) (5,051) Retained earnings 91,936 79,340 --------- --------- Total shareholders' equity 297,644 274,568 --------- --------- $ 633,005 $ 532,018 ========= ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 2 of 14
WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME Quarter and Six Months Ended June 30, 1999 and 1998 (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenue $ 331,011 $ 270,853 $ 578,388 $ 443,569 Cost of sales 253,862 210,879 443,052 343,194 --------- --------- --------- --------- Gross profit 77,149 59,974 135,336 100,375 Selling, general and administrative expenses 55,988 43,260 107,264 79,120 --------- --------- --------- --------- Operating income 21,161 16,714 28,072 21,255 Interest expense, net 3,387 2,714 6,567 4,436 --------- --------- --------- --------- Income from continuing operations before income taxes 17,774 14,000 21,505 16,819 Income taxes 6,601 5,180 7,989 6,223 --------- --------- --------- --------- Income from continuing operations 11,173 8,820 13,516 10,596 Loss on sale of discontinued operation, net of income taxes -- (398) -- (398) Income (loss) from discontinued operations, net of income taxes 404 (440) 508 (291) --------- --------- --------- --------- Net income 11,577 7,982 14,024 9,907 Basic earnings per share: Income from continuing operations $ 0.39 $ 0.33 $ 0.47 $ 0.40 Loss on sale of discontinued operation -- (0.01) -- (0.02) Income (loss) from discontinued operations 0.01 (0.02) 0.02 (0.01) --------- --------- --------- --------- Net income $ 0.40 $ 0.30 $ 0.49 $ 0.37 ========= ========= ========= ========= Diluted earnings per share: Income from continuing operations $ 0.38 $ 0.31 $ 0.46 $ 0.38 Loss on sale of discontinued operation -- (0.01) -- (0.02) Income (loss) from discontinued operations 0.01 (0.02) 0.02 (0.01) --------- --------- --------- --------- Net income $ 0.39 $ 0.28 $ 0.48 $ 0.35 ========= ========= ========= ========= Weighted average shares and equivalent shares used to calculate earnings per share: Basic 28,704 26,696 28,652 26,459 ========= ========= ========= ========= Diluted 29,580 28,346 29,554 28,053 ========= ========= ========= ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 3 of 14
WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1999 and 1998 (In thousands) (Unaudited) 1999 1998 -------- -------- Cash flows from operating activities: Income from continuing operations $ 13,516 $ 10,596 Adjustments to reconcile income from continuing operations to net cash used in operating activities of continuing operations: Depreciation and amortization 5,132 4,492 Provision for doubtful accounts 1,862 1,252 Deferred income tax benefit (33) 515 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (36,687) (47,167) Inventories (35,298) (20,099) Accounts payable and accrued liabilities 27,314 31,281 Other, net 943 (2,414) -------- -------- Net cash used in operating activities of continuing operations (23,251) (21,544) -------- -------- Cash flows from investing activities: Business acquisitions, net of cash acquired (18,009) (6,163) Capital expenditures, net (3,240) (5,713) Purchases of marketable securities (1,042) -- -------- -------- Net cash used in investing activities of continuing operations (22,291) (11,876) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit agreement 45,700 35,700 Borrowings (repayments) of bank and other debt 486 (710) Net proceeds from issuances of common stock 644 1,060 Common stock dividends (1,428) (1,224) -------- -------- Net cash provided by financing activities of continuing operations 45,402 34,826 -------- -------- Net cash provided by (used in) discontinued operations 591 (2,548) -------- -------- Net increase (decrease) in cash and cash equivalents 451 (1,142) Cash and cash equivalents at beginning of period 6,689 7,880 -------- -------- Cash and cash equivalents at end of period $ 7,140 $ 6,738 ======== ======== See accompanying notes to condensed consolidated financial statements. 4 of 14
WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (In thousands, except share data) (Unaudited) 1. The condensed consolidated balance sheet as of December 31, 1998, 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 generally accepted accounting principles 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. 2. The results of operations for the quarter and six month period ended June 30, 1999 are not necessarily indicative of the results for the year ending December 31, 1999. The sale of the Company's products is seasonal with revenue generally increasing during the months of May through August. 3. 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 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 of the weighted shares outstanding. Diluted earnings per share additionally assumes any added dilution from common stock equivalents. Shares used to calculate earnings per share are as follows: <TABLE> <CAPTION> Quarter Ended June 30, Six Months Ended June 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Weighted average shares outstanding 28,703,641 26,695,515 28,652,176 26,459,065 Dilutive stock options 876,074 1,650,582 901,806 1,593,453 ---------- ---------- ---------- ---------- Shares for diluted earnings per share 29,579,715 28,346,097 29,553,982 28,052,518 ========== ========== ========== ========== Options outstanding which are not included in the calculation of diluted earnings per share because their impact is antidilutive 291,025 29,063 676,513 87,938 ========== ========== ========== ========== </TABLE> Shares used to calculate earnings per share for the quarter and the six months ended June 30, 1998 have been restated to include the effect of a 3-for-2 stock split paid on August 14, 1998 to shareholders of record as of July 31, 1998. 5 of 14
5. In 1998, the Company 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. The components of the Company's comprehensive income are as follows: <TABLE> <CAPTION> Quarter Ended June 30, Six Months Ended June 30, ------------------------ ----------------------- 1999 1998 1999 1998 ------- ------- ------- ------- <S> <C> <C> <C> <C> Net income $11,577 $ 7,982 $14,024 $ 9,907 Unrealized gain on investments, net of tax 3,612 879 3,005 879 ------- ------- ------- ------- Comprehensive income $15,189 $ 8,861 $17,029 $10,786 ======= ======= ======= ======= </TABLE> 6. Discontinued operations include a personnel staffing business, Dunhill Staffing Systems, Inc., and, until May 1998, a manufacturing operation, Watsco Components, Inc. ("Components"). In May 1998, the Company sold substantially all the operating assets of Components. Summarized results for the discontinued operations are as follows: <TABLE> <CAPTION> Quarter Ended June 30, Six Months Ended June 30, ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenue $ 15,113 $ 16,104 $ 28,119 $ 32,522 ======== ======== ======== ======== Income (loss) before income taxes $ 660 $ (698) $ 826 $ (462) Income tax (expense) benefit (256) 258 (318) 171 -------- -------- -------- -------- Income (loss) from discontinued operations $ 404 $ (440) $ 508 $ (291) ======== ======== ======== ======== </TABLE> 7. During January 1999, the Company completed the acquisitions of two 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. Aggregate consideration for these acquisitions consisted of cash payments of $18,009 including the repayment of debt totaling $4,592 and the issuance of 507,224 shares of Common Stock having a fair value of $6,433 and is subject to adjustment upon the completion of audits of the assets purchased and the liabilities assumed. 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 statement of income beginning on their respective dates of acquisition. The excess of the aggregate purchase prices over the net assets acquired of $12,279 is being amortized on a straight-line basis over 40 years. The Company's unaudited pro forma consolidated results of operations assuming all significant acquisitions occurred on January 1, 1998 are as follows: Quarter Ended Six Months Ended June 30, 1998 June 30, 1998 ------------- ------------- Revenue $319,416 $537,391 Income from continuing operations $ 10,059 $ 11,489 Diluted earnings per share from continuing operations $ 0.34 $ 0.39 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, 1998 for the periods presented or of future results of operations. 6 of 14
8. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes criteria for determining which costs of developing or obtaining internal-use computer software should be charged to expense and which should be capitalized. The Company adopted SOP 98-1 on January 1, 1999. The adoption of SOP 98-1 was not material to the Company's consolidated financial position or results of operations. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 establishes standards for the reporting and disclosure of start-up costs, including organization costs. The Company adopted SOP 98-5 on January 1, 1999. Adoption of SOP 98-5 was not material to the Company's consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. 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' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. 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. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No.133--an amendment of FASB Statement No. 133," which delayed the implementation date for SFAS 133 for one year to fiscal years beginning after June 15, 2000. 9. In June 1999, the Company executed an amended and restated bank-syndicated credit agreement, which provides for borrowings up to $315 million, expiring on August 8, 2002. The unsecured agreement will be used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions. Borrowings under the revolving credit agreement bear interest at primarily LIBOR based rates plus a spread that is dependent upon the Company's financial performance (LIBOR plus .7% at June 30, 1999). The credit agreement contains financial covenants with respect to the Company's consolidated net worth, interest and debt coverage ratios and limits capital expenditures and dividends in addition to other restrictions. 7 of 14
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 from continuing operations for the quarter and six months ended June 30, 1999 and 1998, expressed as a percentage of revenue: <TABLE> <CAPTION> Quarter Six Months Ended June 30, Ended June 30, ---------------- ---------------- 1999 1998 1999 1998 ----- ----- ----- ----- <S> <C> <C> <C> <C> Revenue 100.0% 100.0% 100.0% 100.0% Cost of sales 76.7 77.9 76.6 77.4 ----- ----- ----- ----- Gross profit 23.3 22.1 23.4 22.6 Selling, general and administrative expenses 16.9 15.9 18.5 17.8 ----- ----- ----- ----- Operating income 6.4 6.2 4.9 4.8 Interest expense, net 1.0 1.0 1.2 1.0 Income taxes 2.0 1.9 1.4 1.4 ----- ----- ----- ----- Income from continuing operations 3.4% 3.3% 2.3% 2.4% ===== ===== ===== ===== </TABLE> The above table and the following narrative includes the results of operations of wholesale distributors of air conditioning, heating and refrigeration equipment and related parts and supplies acquired during 1999 and 1998. 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 during the prior twelve months. QUARTER ENDED JUNE 30, 1999 VS. QUARTER ENDED JUNE 30, 1998 Revenue for the three months ended June 30, 1999 increased $60.2 million, or 22%, compared to the same period in 1998. Excluding the effect of acquisitions, revenue increased $7.5 million, or 3%. Such increase was primarily due to additional sales generated by expanded product lines of parts and supplies. Gross profit for the three months ended June 30, 1999 increased $17.2 million, or 29%, as compared to the same period in 1998, primarily as a result of the aforementioned revenue increases. Excluding the effect of acquisitions, gross profit increased $4.2 million, or 7%. Gross profit margin in the second quarter increased to 23.3% in 1999 from 22.1% in 1998. Excluding the effect of acquisitions, gross profit margin increased to 23.1% in 1999 from 22.1% in 1998. Increases in gross profit margin on a same store basis are primarily attributable to improved pricing disciplines, enhanced focus on margins at certain subsidiaries of the Company and contribution from expanded vendor programs. Selling, general and administrative expenses for the three months ended June 30, 1999 increased $12.7 million, or 29%, compared to the same period in 1998, primarily due to higher selling and delivery costs related to acquired companies and increased sales. Excluding the effect of acquisitions, selling, general and administrative expenses increased $3.0 million, or 7%, primarily due to revenue increases, higher costs related to new locations and the expansion of existing locations. Selling, general and administrative expenses as a percent of revenue increased to 16.9% in 1999 from 15.9% in 1998, primarily due to the higher cost structures of acquired companies and startup costs related to the opening of new distribution locations. Excluding the effect of acquisitions, selling, general and administrative expenses as a percent of revenue increased to 16.6% in 1999 from 15.9% in 1998. 8 of 14
Interest expense, net for the second quarter in 1999 increased approximately $0.7 million, or 25%, compared to the same period in 1998, primarily due to higher average borrowings incurred from acquisitions completed in the first quarter of 1999. The effective tax rate for the three months ended June 30, 1999 was 37.2% compared to 37.0% for the same period in 1998. This increase was primarily due to higher state income taxes resulting from acquisitions. SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998 Revenue for the six months ended June 30, 1999 increased $134.8 million, or 30%, compared to the same period in 1998. Excluding the effect of acquisitions, revenue increased $26.0 million, or 6%. 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 for the six months ended June 30, 1999 increased $35.0 million, or 35%, as compared to the same period in 1998, primarily as a result of the aforementioned revenue increases. Excluding the effect of acquisitions, gross profit increased $8.6 million, or 9%. Gross profit margin for the six month period increased to 23.4% in 1999 from 22.6% in 1998. Excluding the effect of acquisitions, gross profit margin increased to 23.2% in 1999 from 22.6% in 1998. Increases in gross profit margin on a same store basis are attributable to improved pricing disciplines, enhanced focus on margins at certain subsidiaries of the Company and contribution from expanded vendor programs. Selling, general and administrative expenses for the six months ended June 30, 1999 increased $28.1 million, or 36%, compared to the same period in 1998, primarily due to higher selling and delivery costs related to acquired companies and increased sales. Excluding the effect of acquisitions, selling, general and administrative expenses increased $6.4 million, or 8%, primarily due to revenue increases, higher costs related to new locations and the expansion of existing locations. Selling, general and administrative expenses as a percent of revenue increased to 18.5% in 1999 from 17.8% in 1998, primarily due to the higher cost structures of acquired companies and startup costs related to the opening of new distribution locations. Excluding the effect of acquisitions, selling, general and administrative expenses as a percent of revenue increased to 18.2% in 1999 from 17.8% in 1998. Interest expense, net for the six months ended June 30, 1999 increased approximately $2.1 million, or 48%, compared to the same period in 1998, primarily due to higher average borrowings that were used to complete business acquisitions. The effective tax rate for the six months ended June 30, 1999 was 37.2% compared to 37.0% for the same period in 1998. This increase was primarily due to higher state income taxes resulting from acquisitions completed in the first quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES The Company maintains a bank-syndicated revolving credit agreement that provides for borrowings of up to $315 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 $213.7 million at June 30, 1999, bear interest at primarily LIBOR-based rates plus a spread that is dependent upon the Company's financial performance (LIBOR plus .7% at June 30, 1999). 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. Working capital increased to $342.4 million at June 30, 1999 from $289.7 million at December 31, 1998. This increase was funded primarily by borrowings under the Company's revolving credit agreement. Cash and cash equivalents increased $.5 million during the six month period ended June 30, 1999. Principal sources of cash during the quarter were borrowings under the revolving credit agreement. The principal uses of cash were to fund working capital needs and finance acquisitions and capital expenditures. 9 of 14
The Company has adequate availability of capital 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. During July 1999, the Company executed a letter of intent to acquire a distributor of air conditioning equipment based in Texas; however, the Company currently has no binding agreement with respect to this or any other 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. 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 net exposure to interest rate changes to its borrowings. The Company continuously monitors developments in the capital markets and has only entered into swaps 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 June 30, 1999, 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 with a weighted average pay rate of 6.3%. YEAR 2000 Many computer systems in use in the world today may be unable to correctly process data or may not operate at all after December 31, 1999 because those systems recognize the year within a date only by the last two digits. Some computer programs may interpret the year "00" as 1900, instead of as 2000, causing errors in calculations, or the value "00" may be considered invalid by the computer program causing the system to fail. The Year 2000 issue affects (1) information technology utilized by the Company ("IT systems"); (2) other systems utilized by the Company ("Non-IT systems"), such as communications, facilities management and service equipment containing embedded computer chips; and (3) systems of key business partners (primarily the Company's customers and suppliers). Watsco, Inc. and its subsidiaries could be adversely affected if Year 2000 issues are not resolved by the Company or its significant business partners before the Year 2000. Possible adverse consequences include, but are not limited to: (1) the inability to obtain products or services used in the business operations, (2) the inability to transact business with key customers or suppliers, or (3) the inability to deliver goods or services sold to customers. The Company's activities to manage the Year 2000 issue with respect to its systems can be segregated into four phases. Phase I and II consisted of identifying the systems that are non-compliant and formulating strategies to remedy the problems identified. Phase III consisted of executing the changes necessary through purchasing new or modifying existing systems. As of July 30, 1999, the Company and its subsidiaries have completed Phase I, II and III. Phase IV consists of testing the changes made to ascertain compliance. The Company's operating subsidiaries are currently testing their IT systems for compliance or have completed testing and are currently Year 2000 compliant. The Company's operating subsidiaries currently in Phase IV expect testing for Year 2000 compliance to be completed by August 31, 1999. Non-IT systems of most of the Company's operating subsidiaries are Year 2000 compliant. The Company has contacted a large number of its business partners to obtain information regarding their progress on Year 2000 issues. While such entities have not fully completed their own Year 2000 projects, the Company is not aware of any significant business partners whose Year 2000 issues will not be resolved in a timely manner. However, there can be no assurance that significant Year 2000 related problems will not ultimately arise with such business partners. 10 of 14
Based on the Company's assessment to date, management estimates the implementation costs related to the identification, remediation and testing of the Year 2000 issue to be approximately $1.1 million, of which $.8 million has been expended through June 30, 1999. However, this estimate could change as the Company's activities to address the Year 2000 issue progress. The Company believes that effective contingency plans can be developed given that the Company is not reliant on a single enterprise-wide computer system. The Company presently operates through a diverse group of 16 operating subsidiaries that maintain independently managed computer systems, substantially all of which have been purchased from and are supported by third parties. The Company's contingency planning includes the identification of back-up systems among the Company's operating subsidiaries in the event one or more operating systems fail to operate following the Year 2000. The Company continues to evaluate contingency plans to mitigate business risks in the event remediation efforts are unsuccessful. While management believes that it has undertaken reasonable steps to address the Year 2000 issue, there can be no assurance that a failure to convert the Company's systems or the inability of its key business partners to adequately address the Year 2000 issue would not have a material adverse impact on the Company. 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. 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". 11 of 14
PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no significant changes from the information reported in the Annual Report on Form 10-K for the period ended December 31, 1998, filed on March 31, 1999. Item 2. Changes in the Rights of the Company's Security Holders None Item 3. Defaults by the Company on its Senior Securities None Item 4. Results of Votes of Securities Holders (a) The Company's 1999 Annual Meeting of Shareholders was held on June 3, 1999. (b) The Company's management solicited proxies pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to the management's nominees as listed in the proxy statement. The following nominees were elected as indicated in the proxy statement pursuant to the vote of the shareholders as follows: FOR WITHHELD COMMON STOCK ---------- -------- ------------ Cesar L. Alvarez 15,956,173 570,519 Paul F. Manley 15,958,061 568,631 CLASS B COMMON STOCK -------------------- Albert H. Nahmad 27,857,690 11,000 Ira Harris 27,856,520 12,170 (c) Two additional proposals were voted upon at the Annual Meeting of Shareholders as follows: (1) To ratify the action of the Board of Directors amending the Company's Second Amended and Restated 1991 Stock Option Plan and (2) To ratify the reappointment of Arthur Andersen LLP as the Company's independent certified public accountants for the year ended December 31, 1999. The combined vote of the Company's Common Stock and Class B Common Stock was as follows: PROPOSAL 1 ----------- For 32,377,951 Against 3,500,854 Withheld 151,162 Non-Vote 8,365,415 PROPOSAL 2 ----------- For 43,596,519 Against 464,427 Withheld 334,436 Non-Vote - 12 of 14
As of April 9, 1999, the record date for the Annual Meeting of Shareholders, the total number of shares of the Company's Common Stock, $.50 par value, and Class B Common Stock, $.50 par value, outstanding was 25,417,739 and 3,204,126, respectively, representing 57,458,999 combined votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.10 Amendment Agreement No. 2 to Amended and Restated Revolving Credit and Reimbursement Agreement dated June 30, 1999, by and among Watsco Inc., the Lenders and NationsBank, National Association, as Agent. 27. Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K None 13 of 14
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) August 13, 1999 14 of 14
EXHIBIT INDEX Exhibit Description - ------- ----------- 10.10 Amendment Agreement No. 2 to Amended and Restated Revolving Credit and Reimbursement Agreement dated June 30, 1999, by and among Watsco Inc., the Lenders and NatikonsBank, National Assoication, as Agent. 27 Financial Data Schedule