Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
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) 714-4100
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.50 par value New York Stock Exchange
Class B Common Stock, $.50 par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None.
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. ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2002 was approximately $412 million.
The number of shares of common stock outstanding as of March 20, 2003 was
22,296,748 shares of Common Stock, excluding treasury shares of 5,127,750, and
3,576,913 shares of Class B Common Stock, excluding treasury shares of 48,263.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Parts I and II is incorporated by reference from
the Annual Report to Shareholders for the year ended December 31, 2002, 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).
1
WATSCO, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 10
Item 8. Consolidated Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 10
PART III 10
PART IV
Item 14. Controls and Procedures 11
Item 15. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K 11
2
PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding, among other items, (i) the Company's
business and acquisition strategies, (ii) potential acquisitions by the Company,
(iii) the Company's financing plans and (iv) industry, demographic and other
trends affecting the Company's financial condition or results of operations.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially from these
forward-looking statements as a result of several factors, including general
economic conditions affecting general business spending, consumer spending,
consumer debt levels, weather conditions, prevailing interest rates, competitive
factors and the ability of the Company to continue to implement its business and
acquisition strategies. In light of these uncertainties, there can be no
assurance that the forward-looking information contained herein will be realized
or, even if substantially realized, that the information will have the expected
consequences to or effects on the Company or its business or operations.
ITEM 1. BUSINESS
GENERAL
Watsco, Inc. (the "Registrant" or "Company") was incorporated in 1956 and is the
largest independent distributor of air conditioning, heating, and refrigeration
equipment and related parts and supplies ("HVAC") in the United States. The
Company has two business segments - the HVAC distribution ("Distribution")
segment, which accounted for 97% of 2002 revenue and presently operates from 276
locations in 31 states and a national temporary staffing and permanent placement
services ("Staffing") segment, which accounted for 3% of 2002 revenue. The
Company's revenue has increased from $80 million in 1989 to over $1.18 billion
in 2002 via a strategy of acquisitions and internal growth. See Note 13 to the
Company's consolidated financial statements for more information regarding
revenue, operating income, assets and other financial information on the
Company's Distribution and Staffing segments as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's principal executive offices are located at 2665 South Bayshore
Drive, Suite 901, Coconut Grove, Florida 33133, and its telephone number is
(305) 714-4100. E-mail may be sent to the Company at [email protected].
RESIDENTIAL CENTRAL AIR CONDITIONING, HEATING AND REFRIGERATION INDUSTRY
According to data published by the Air Conditioning and Refrigeration Institute
("ARI") and Gas Appliance Manufacturers Association, the market for residential
central air conditioning, heating and refrigeration equipment and related parts
and supplies in the United States is approximately $20 billion with unitary
equipment shipments having grown at a compounded annual rate of 6% since 1993.
Residential central air conditioners are manufactured primarily by seven major
companies that together account for approximately 90% of all units shipped in
the United States each year. These companies are: Carrier Corporation
("Carrier"), a subsidiary of United Technologies Corporation, Goodman
Manufacturing Corporation, Rheem Manufacturing Company ("Rheem"), American
Standard Companies Inc. ("American Standard"), York International Corporation
("York"), Lennox International, Inc. ("Lennox") and Nordyne Corporation
("Nordyne"), a subsidiary of Nortek Corporation. These manufacturers distribute
their products through a combination of factory-owned and independent
distributors who, in turn, supply the equipment and related parts and supplies
to contractors and dealers nationwide that sell to and install the products for
the consumer.
Residential central air conditioning and heating equipment is sold to both the
replacement and the homebuilding markets. The replacement market has increased
substantially in size and importance over the past several years as a result of
the aging of the installed base of residential central air conditioners, the
introduction of new energy efficient models, the upgrading of existing homes to
central air conditioning and the consumers' overall unwillingness to live
without air conditioning or heating products. According to industry data, over
120 million central air conditioning units and warm air gas furnaces have been
installed in the United States in the past 20 years. Many units installed during
this period have reached the end of their useful lives, thus providing a growing
and substantial replacement market. The mechanical life of central air
conditioning and warm-air gas furnaces varies by geographical region due to
usage and is estimated to range from 8 to 20 years.
The Company also sells products to the refrigeration market. Such products
include condensing units, compressors, evaporators, valves, refrigerant, walk-in
coolers and ice machines for industrial and commercial applications. The Company
distributes products
3
manufactured by Copeland Compressor Corporation, a subsidiary of Emerson
Electric Co., Tecumseh Products Company, and The Manitowoc Company, Inc.
BUSINESS STRATEGY
The Company's business strategy includes five primary concepts: (i) implement
programs to build market share in existing markets, (ii) complete strategic
acquisitions to expand in existing markets or to extend the Company's geographic
reach into new markets, (iii) leverage the fixed-cost investments of the
Company's existing infrastructure by obtaining new or expanded territories from
the grant of distribution rights by manufacturers, (iv) implement initiatives to
streamline operations, reduce cost structures and improve operating margins of
both acquired and existing businesses and (v) develop and implement technology
strategies that compete favorably in the marketplace.
Strategy in Existing Markets The Company's strategy for growth in existing
- ----------------------------
markets focuses on satisfying the needs of the higher growth, higher margin
replacement market, where customers generally demand immediate, convenient and
reliable service. In response to this need, the Company's focus is to (i) offer
expansive product lines, including the necessary equipment, parts and supplies
to enable a contractor to install or repair a central air conditioner, furnace
or refrigeration system, (ii) maintain multiple warehouse locations for
increased customer convenience, (iii) maintain well-stocked inventories to
ensure that customer orders are filled in a timely manner, (iv) provide a high
degree of technical expertise at the point of sale and (v) develop and implement
technological strategies to further enhance customer service capabilities. The
Company believes these concepts provide a competitive advantage over smaller,
lesser-capitalized competitors who are unable to commit resources to open
additional locations, implement technological business solutions, provide the
same variety of products as the Company, maintain the same inventory levels or
attract the wide range of expertise that is required to support a diverse
product offering. The Company also believes that in some geographic areas it has
a competitive advantage over factory-operated distributor networks who typically
do not maintain as diversified inventories of parts and supplies and whose fewer
number of warehouse locations compared to the Company make it more difficult to
meet the time-sensitive demands of the replacement market.
In addition to the replacement market, the Company sells to the homebuilding
market, including both traditional site-built homes and manufactured housing.
The Company believes that its reputation for reliable, high-quality service and
its relationships with contractors, who may serve both the replacement and new
construction markets, allow it to compete effectively in these markets.
The Company has also developed private-label brand strategies as a means to
obtain market share and grow revenue. Historically, the Company's ability to
expand product offerings of HVAC equipment has been dependent on the granting of
distribution rights by the industry's major manufacturers. In 1999, the Company
introduced a private-label brand of equipment, "Grandaire," that is currently
being distributed from 83 locations in one of its subsidiaries located in the
Southeast United States. Based on the launch of this value-oriented brand, the
Company pursued and, on January 1, 2002, executed an exclusive licensing
arrangement with Whirlpool Corporation (the "Whirlpool Licensing Agreement"),
the nation's leading manufacturer of appliances. Under the Whirlpool Licensing
Agreement, the Company plans to introduce during the spring of 2003 a line of
Whirlpool(R)-branded HVAC equipment targeted at both the replacement and new
homebuilding markets.
Acquisition Strategy The Company's acquisition strategy is focused on acquiring
- --------------------
businesses that complement the Company's presence in existing markets or
establishing a presence in new markets. Since 1989, the Company has acquired 42
distributors of air conditioning, heating and refrigeration products, 11 of
which operate as primary operating subsidiaries of the Company. The other
smaller distributors acquired have been integrated into the Company's primary
operating subsidiaries.
Distribution Rights The Company actively seeks new or expanded territories of
- -------------------
distribution from the major equipment manufacturers. The Company maintains
significant distribution relationships with Rheem, Carrier, Nordyne, American
Standard and York.
Operating Philosophy The Company's operating subsidiaries operate in a manner
- --------------------
that recognizes the long-term relationships established between the distributors
and their customers. Generally, the Company preserves the identity of acquired
businesses by retaining their management and sales organizations, maintaining
the product brand name offerings previously distributed by them and selectively
expanding complementary product offerings. The Company believes this strategy
builds on the value of the acquired operations by creating additional sales
opportunities.
The Company maintains a specialized functional support staff at its corporate
headquarters to support the individual operating subsidiaries' strategies for
growth in their respective markets. Such functional support includes specialists
in finance, information technology, accounting, human resources, product
procurement, treasury and working capital management, tax planning, risk
4
management and safety. The Company targets certain general and administrative
expenses for cost savings initiatives that leverage the Company's overall volume
and improve operating efficiencies.
Technology The Company's technology initiatives include: (i) implementation of
- ----------
effective point-of-sale systems that allow timely and effective customer
service, including up-to-date pricing and inventory availability, (ii) enabling
connectivity by customers to the subsidiaries' operating software and (iii) a
web site, ACDoctor.com, which provides homeowners and businesses useful
information and a variety of services.
In addition to point-of-sale systems at each operating location, the Company's
subsidiaries have operating software that allows customers to access the
Company's systems on-line 24 hours a day, 7 days a week to search for desired
products, verify inventory availability, obtain pricing, place orders, check
order status, schedule pickup or delivery times and make payments.
ACDoctor.com provides consumers useful information in areas that broaden
knowledge about HVAC products. The site highlights new products and allows
homeowners and businesses to locate, select and hire a licensed contractor. The
primary functionality of the site provides consumers a choice of contractors in
their area that can service their air conditioning and heating systems.
DESCRIPTION OF BUSINESS
DISTRIBUTION SEGMENT
Products The Company sells an expansive line of products and maintains a diverse
- --------
mix of inventory to meet its customers' immediate needs. The Company seeks to
provide products a contractor would generally require when installing or
repairing a central air conditioner, furnace or refrigeration system. The
products distributed by the Company in its markets consist of: (i) equipment,
including residential central air conditioners ranging from 1-1/2 to 5 tons*,
light commercial air conditioners ranging up to 20 tons, gas, electric and oil
furnaces ranging from 50,000 to 150,000 BTUs, commercial air conditioning and
heating equipment and systems ranging from 5 to 25 tons, and other specialized
equipment; (ii) parts, including replacement compressors, evaporator coils,
thermostats, motors and other component parts; and (iii) supplies, including
insulation material, refrigerants, ductwork, grills, registers, sheet metal,
tools, copper tubing, concrete pads, tape, adhesives and other ancillary
supplies.
Sales of air conditioning and heating equipment accounted for approximately 52%,
53% and 52% of revenue for the years ended December 31, 2002, 2001 and 2000,
respectively. Sales of parts and supplies (currently sourced through a network
of over 1,500 different vendors) comprised 48%, 47% and 48% of revenue for such
periods respectively.
Distribution and Sales The Company currently operates from 276 locations, most
- ----------------------
of which are located in regions that the Company believes have favorable
demographic trends. The Company maintains large inventories at each warehouse
location, which is accomplished by transporting inventory between locations
daily and either directly delivering products to customers with the Company's
fleet of 698 trucks or making the products available for pick-up at the location
nearest to the customer. The Company has over 260 commissioned salespeople,
averaging 11 years or more of experience in the air conditioning, heating and
refrigeration distribution industry.
Markets The Company's network serves 31 states from these 276 locations. The
- -------
Company's primary markets include (in order of the number of locations in the
state): Florida, Texas, Georgia, California, South Carolina, North Carolina,
Alabama, Tennessee, Arizona, Arkansas, Mississippi and Massachusetts. The
Company also serves Missouri, Kansas, Louisiana, Virginia, Oklahoma,
Connecticut, Iowa, Maine, Nebraska, New Hampshire, New York, South Dakota,
Kentucky, Maryland, Nevada, New Jersey, North Dakota, Rhode Island and Vermont.
The Company also exports products to portions of Latin America and the Caribbean
Basin. Export sales are less than 1% of the Company's total revenue.
Customers and Customer Service The Company sells to contractors and dealers who
- ------------------------------
service the replacement and new construction markets for residential and light
commercial central air conditioning, heating and refrigeration systems. The
Company currently serves over 35,000 customers, with no single customer in 2002,
2001 or 2000 representing more than 1% of consolidated revenue. The Company
focuses on providing products where and when the customer needs them, technical
support by phone or on site as required, and quick and efficient service at the
locations. The Company also provides increased customer convenience through e-
- ----------
* 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.
5
commerce, which allows customers to access the Company's systems on-line 24
hours a day, 7 days a week to search for desired products, verify inventory
availability, obtain pricing, place orders, check order status, schedule pickup
or delivery times and make payments. Management believes that the Company
successfully competes with other distributors primarily on the basis of its
experienced sales organization, strong service support, high quality reputation
and broad product lines.
Key Equipment Suppliers The Company maintains significant relationships with
- -----------------------
Rheem, Carrier, Nordyne, American Standard and York, each a leading manufacturer
of residential central air conditioning and heating equipment in the United
States. Each manufacturer has a well-established reputation of producing
high-quality, competitively priced products. The Company believes the
manufacturers' current product offerings, quality, serviceability and brand-name
recognition allow the Company to operate favorably against its competitors. To
maintain brand-name recognition, the manufacturers provide national advertising
and participate with the Company in cooperative advertising programs and
promotional incentives that are targeted to both contractors and end-users. The
Company estimates the replacement market currently accounts for approximately
two-thirds of industry sales in the United States and expects this percentage to
increase as units installed in the past 20 years wear out and get replaced or
updated to more energy-efficient models.
The Company made approximately 46%, 45% and 46% of its total 2002, 2001 and 2000
purchases, respectively, from five key equipment suppliers. The Company's
largest supplier accounted for 17%, 16% and 16% of all purchases made by the
Company in 2002, 2001 and 2000, respectively. A significant interruption in the
delivery of these products could impair the Company's ability to continue to
maintain its current inventory levels and could adversely affect the Company's
business. The Company's future results of operations are also materially
dependent upon the continued market acceptance of these manufacturers' products
and their ability to continue to manufacture products that comply with laws
relating to environmental and efficiency standards. The Company believes that
its sales of other complementary equipment products and continued emphasis to
expand sales of parts and supplies are mitigating factors against such risks.
Distribution Agreements The Company has distribution agreements with each of its
- -----------------------
key equipment suppliers, either on an exclusive or non-exclusive basis, for
terms generally ranging from one to ten years. Certain of the distribution
agreements contain provisions that restrict or limit the sale of competitive
products in the markets served. Other than the markets where such restrictions
and limitations may apply, the Company may distribute other manufacturers' lines
of air conditioning or heating equipment.
Seasonality Sales of residential central air conditioners, heating equipment and
- -----------
parts and supplies distributed by the Company have historically been seasonal.
See "Business - Risk Factors."
Competition All of the Company's businesses operate in highly competitive
- -----------
environments. See "Business - Risk Factors."
STAFFING SEGMENT
The Company also owns Dunhill Staffing Systems, Inc. ("Dunhill"), which was
founded in 1952 and is one of the nation's best-known staffing service networks.
Through franchised, licensed and company-owned offices in 36 states and Canada,
Dunhill provides temporary staffing and permanent placement services to
businesses (including the Company's operating subsidiaries), professional and
service organizations, government agencies, health care providers and other
employers. Dunhill's operations primarily consist of 20 company-owned and 11
licensed temporary staffing offices, as well as 89 franchised permanent
placement offices and 4 franchised temporary staffing offices. Dunhill's
franchisees operate their businesses autonomously within the framework of
Dunhill'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. See Note 13 to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
EMPLOYEES
The Company employed approximately 2,400 persons as of December 31, 2002,
substantially all of which are non-union employees. The Company believes that
its relations with its employees are good.
ORDER BACKLOG
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.
6
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. These include
laws and regulations implementing the Clean Air Act, relating to minimum energy
efficiency standards of HVAC systems and the production, servicing and disposal
of certain ozone-depleting refrigerants used in such systems, including those
established at the Montreal Protocol in 1992 concerning the phase-out of
CFC-based refrigerants. The Company is also subject to regulations concerning
the transport of hazardous materials, including regulations adopted pursuant to
the Motor Carrier Safety Act of 1990. Management believes that the Company is in
compliance with all applicable federal, state and local provisions relating to
the protection of the environment and transport of hazardous materials.
BUSINESS RISK FACTORS
Supplier Concentration The Company has distribution agreements with five key
- ----------------------
equipment suppliers, either on an exclusive or non-exclusive basis, for terms
generally ranging from one to ten years. Certain of the distribution agreements
contain provisions that restrict or limit the sale of competitive products in
the markets served. Other than the markets where such restrictions and
limitations may apply, the Company may distribute other manufacturers' lines of
air conditioning or heating equipment. Purchases from these five suppliers
comprised 46% of all purchases made in 2002. The Company's largest supplier
accounted for 17% of all purchases made in 2002. Any significant interruption by
the manufacturers or a termination of a distribution agreement could temporarily
disrupt the operations of certain subsidiaries. The Company's future results of
operations are also materially dependent upon the continued market acceptance of
these manufacturers' products and their ability to continue to manufacture
products that comply with laws relating to environmental and efficiency
standards. The Company believes that its sales of other complementary equipment
products and continued emphasis to expand sales of parts and supplies are
mitigating factors against such risks.
Competition All of the Company's businesses operate in highly competitive
- -----------
environments. The Company's Distribution segment competes with a number of
distributors and also with several air conditioning and heating equipment
manufacturers that distribute a significant portion of their products through
their own distribution organizations in certain markets. Competition within any
given geographic market is based upon product availability, customer service,
price and quality. Competitive pressures or other factors could cause the
Company's products or services to lose market acceptance or result in
significant price erosion, all of which would have a material adverse effect on
the Company's profitability.
Seasonality Sales of residential central air conditioners, heating equipment and
- -----------
parts and supplies distributed by the Company have historically been seasonal.
Furthermore, the Company's results of operations can be impacted favorably or
unfavorably based on the severity or mildness of weather patterns during summer
or winter selling seasons. Demand related to the residential central air
conditioning replacement market is highest in the second and third quarters with
demand for heating equipment usually highest in the fourth quarter. Demand
related to the new construction sectors throughout most of the Sunbelt markets
is fairly even during the year except for dependence on housing completions and
related weather and economic conditions.
Temporary Staffing Services The Company's Staffing segment (representing 3% of
- ---------------------------
revenue in 2002) derives 98% of its revenue from temporary staffing services,
which are sensitive to changes in the level of economic activity. As economic
activity begins to slow down, companies tend to reduce their use of temporary
employees before undertaking layoffs of their regular employees, resulting in
decreased demand for temporary personnel. Significant declines in demand for
temporary staffing services and thus in the Company's revenue, would have a
material adverse effect on the Staffing segment's operating profits. The
Staffing segment has experienced a decline in sales and profits due to the
economic softness in the past two years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
information.
GENERAL RISK FACTORS
Risks Related to Insurance Coverage The Company carries general liability,
- -----------------------------------
comprehensive property damage, workers' compensation and other insurance
coverages that management considers adequate for the protection of its assets
and operations. There can be no assurance, however, that the coverage limits of
such policies will be adequate to cover losses and expenses for lawsuits brought
or which may be brought against the Company. A successful claim against the
Company in excess of insurance coverages could have a material adverse effect on
the Company. The Company retains certain self-insurance risks for health
benefits and casualty insurance programs. Self-insurance reserves are
established based on claims filed and estimates of claims incurred but not yet
reported. There can be no assurance that the Company's actual claims will not
exceed the Company's estimates. The Company has limited its exposure by
maintaining excess and aggregate liability coverages.
7
Goodwill At December 31, 2002, goodwill represented approximately 25% of the
- --------
Company's total assets. On January 1, 2002 the Company adopted the provisions of
SFAS No. 142. SFAS No. 142 eliminates the requirement to amortize goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. In accordance with the transition provisions
of SFAS No. 142, the Company was required to perform an initial impairment
review of goodwill as of the transition date of January 1, 2002. This test
involved the use of estimates to determine the fair value of the Company's
reporting units with which goodwill was associated and compared to the carrying
value of the reporting unit. The initial impairment review as of the transition
date of January 1, 2002 was completed in the second quarter of 2002 and resulted
in no goodwill impairment charge. On January 1, 2003, the Company performed the
required annual goodwill impairment test and determined there was no impairment.
The Company evaluates the recoverability of goodwill for impairment when events
or changes in circumstances indicate that the carrying amount of goodwill may
not be recoverable. The Company's accounting for impairment contains uncertainty
because management must use judgment in determining appropriate market value
multiples. As previously discussed, operating results of the Staffing segment
have been negatively impacted by economic softness experienced in the past two
years. In the event that the operating results of the Staffing segment do not
improve, a goodwill impairment charge may be necessary to the extent that the
implied fair value of goodwill is less than the carrying value. There can be no
assurance that goodwill impairment will not occur in the future.
Control by Existing Shareholder As of December 31, 2002, Albert H. Nahmad, the
- -------------------------------
Company's Chairman of the Board of Directors and President, and a limited
partnership controlled by him, collectively had beneficial ownership of
approximately 60% of the combined voting power of the outstanding Common Stock
and Class B Common Stock. Based on Mr. Nahmad's stock ownership and the stock
ownership of the limited partnership controlled by him, Mr. Nahmad has the
voting power to elect all but three members of the Company's nine-person Board
of Directors and to control most corporate actions requiring shareholder
approval.
ADDITIONAL INFORMATION
The Company files reports with the Securities and Exchange Commission ("SEC"),
including annual reports on Form 10-K, quarterly reports on Form 10-Q and other
reports from time to time. The public may read and copy any materials the
Company files with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
Company is an electronic filer and the SEC maintains an Internet site at
www.sec.gov that contains the reports, proxy and information statements, and
other information filed electronically.
The Company's Internet website address is www.watsco.com. The Company makes
available free of charge on or through its website its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to these reports, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes such material to, the SEC.
The Company also makes available on its web site other reports filed with the
SEC under the Securities Exchange Act of 1934, as amended, including its proxy
statements and reports filed by officers and directors under Section 16(a) of
that Act. These reports may be found on the web site by selecting the option
entitled "SEC FILINGS" under the "INVESTORS INFO" area of the web site. The
Company does not intend for information contained in its Web site to be part of
this Form 10-K.
The Company maintains an "Employee Code of Business Ethics and Conduct" that is
applicable to all employees and additionally a "Code of Conduct for Senior
Executives" that is applicable to members of the Company's Board of Directors,
executive officers and senior operating and financial personnel. These codes
require continued observance of high ethical standards such as honesty,
integrity and compliance with the law in the conduct of the Company's business.
ITEM 2. PROPERTIES
The Company's principal owned and leased properties include the Company's
trucks, warehousing and distribution facilities, administration office space and
Staffing segment facilities.
Trucks At December 31, 2002, the Company's Distribution segment operated 698
- ------
ground transport vehicles, including delivery and pick-up trucks, vans and
tractors. The Company believes that the present size of its truck fleet is
adequate to support its operation.
Warehousing and Distribution Facilities At December 31, 2002, the Company's
- ---------------------------------------
Distribution segment operated 276 warehousing and distribution facilities across
31 states in the United States having approximately 5.4 million square feet of
space in the aggregate of which approximately 5 million square feet is leased.
The majority of these leases are for terms of 3 to 5 years.
8
Administrative and Other Properties and Facilities The Company maintains a
- --------------------------------------------------
specialized functional support staff at its corporate headquarters in Coconut
Grove, Florida on approximately 6,000 square feet of leased space. The Company
also leases approximately 99,000 square feet of space for additional storage and
offices.
Staffing Segment Facilities The Company's Staffing segment operates from 20
- ---------------------------
locations, with an aggregate of approximately 46,000 square feet, all of which
are leased. The majority of these leases are for terms of 3 to 5 years.
Management believes that suitable alternative facilities are available on
satisfactory terms, if necessary. The Company believes that its facilities are
well-maintained and adequate to meet its needs and believes that its insurance
coverage with respect to its real property interests and its truck fleet are
adequate.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation incidental to the
operation of the Company's business. The Company vigorously defends all matters
in which the Company or its subsidiaries are named defendants and, for insurable
losses, maintains significant levels of insurance to protect against adverse
judgments, claims or assessments that may affect the Company. In the opinion of
the Company, although the adequacy of existing insurance coverage or the outcome
of any legal proceedings cannot be predicted with certainty, the ultimate
liability associated with any claims or litigation in which the Company or its
subsidiaries are involved will not materially affect the Company's financial
condition 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, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Page 44 of the Company's 2002 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, 2002, 2001 and 2000 and is incorporated herein
by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2002 with
respect to compensation plans (including individual compensation arrangements)
under which the Company's equity securities are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION(3)
----------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES UNDER EQUITY
TO BE ISSUED UPON COMPENSATION PLANS
EXERCISE OF WEIGHTED-AVERAGE (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, EXERCISE PRICE OF REFLECTED IN
WARRANTS AND RIGHTS OUTSTANDING OPTIONS, COLUMN (a)
PLAN CATEGORY (IN THOUSANDS) WARRANTS AND RIGHTS (IN THOUSANDS)
(a) (b) (c)
- ------------------------------------------ -------------------- -------------------- ---------------------
Equity compensation plans approved by
security holders......................... 3,714,113 $ 12.13 2,227,733(2)
Equity compensation plans not approved by
security holders......................... (1) - -
-------------------- -------------------- ---------------------
Total..................................... 3,714,113 $ 12.13 2,227,733
==================== ==================== =====================
(1) Does not include 211,250 shares of restricted Common Stock and 505,000
shares of restricted Class B Common Stock granted to certain employees of
the Company prior to the adoption of the 2001 Incentive Compensation Plan.
(2) Does not include 189,733 shares reserved for issuance under the Company's
Employee Stock Purchase Plan ("ESPP"). An aggregate of 52,795 shares of
Common Stock was purchased under the ESPP in 2002.
(3) See Note 6 to the consolidated financial statements for additional
information regarding stock based compensation and benefit plans.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Page 8 of the Company's 2002 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 18 of the Company's 2002 Annual Report contain "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Page 16 of the Company's 2002 Annual Report contains "Qualitative and
Quantitative Disclosures about Market Risk" and is incorporated herein by
reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 19 through 41 of the Company's 2002 Annual Report contain the 2002 and
2001 Consolidated Balance Sheets and other consolidated financial statements for
the years ended December 31, 2002, 2001 and 2000, together with the reports
thereon of Ernst & Young LLP dated February 14, 2003 and Arthur Andersen LLP
dated February 11, 2002, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 22, 2002, the Board of Directors of the Company and its Audit Committee
dismissed Arthur Andersen LLP ("Andersen") as the Company's independent public
accountants and engaged Ernst & Young LLP ("E&Y") to serve as the Company's
independent public accountants for the fiscal year 2002.
Andersen's reports on the Company's financial statements for the fiscal years
ended 2001 and 2000 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified as to uncertainty, audit scope or accounting
principles.
During the years ended December 31, 2001 and 2000, and the interim period
between December 2001 and May 22, 2002, there were no disagreements between the
Company and Andersen on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to Andersen's satisfaction, would have caused it to make a reference to
the subject matter of the disagreements in connection with their reports on the
Company's consolidated financial statements for such years; and there were no
reportable events as defined in Item 304 (a)(1)(v) of Regulation S-K.
The Company previously provided Andersen with a copy of the foregoing
disclosures, and a letter from Andersen, dated May 29, 2002, stating its
agreement with such statements was filed as Exhibit 16.1 to the Company's
Current Report on Form 8-K filed with the Commission on May 22, 2002 and is
hereby incorporated by reference.
During the years ended December 31, 2001 and 2000 and through May 22, 2002, the
Company did not consult E&Y with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in items 304
(a)(2)(i) and (ii) of Regulation S-K.
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.
10
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Based on their most recent evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures, which was
completed within 90 days of the filing of this Annual Report on Form 10-K, the
Company's Chief Executive Officer and Chief Financial Officer have each
concluded that the Company's disclosure controls and procedures required to be
included in this Annual Report, were effective as of the date of their
evaluation in timely alerting them to material information relating to the
Company, including its consolidated subsidiaries. There have been no significant
changes in internal controls or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
PAGE NO. IN
ANNUAL REPORT
-------------
(a) Consolidated Financial Statements, Consolidated Financial Statement
Schedule and Exhibits
(1) Consolidated Financial Statements (incorporated by reference from the
2002 Annual Report of Watsco, Inc.):
Consolidated Statements of Income for the years
ended December 31, 2002, 2001 and 2000 19
Consolidated Balance Sheets as of December 31, 2002 and 2001 20
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2002, 2001 and 2000 21
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000 22
Notes to Consolidated Financial Statements 24-41
Report of Independent Certified Public Accountants Ernst & Young LLP
and Arthur Andersen LLP 42-43
Selected Quarterly Financial Data (Unaudited) 44
PAGE NO. IN
FORM 10-K
-----------
(2) Consolidated Financial Statement Schedule
for the three years ended December 31, 2002, 2001 and 2000
Report of Independent Certified Public Accountants Ernst & Young LLP on Schedule S-1
Report of Independent Certified Public Accountants Arthur Andersen LLP on Schedule S-2
Schedule II. Valuation and Qualifying Accounts S-3
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.
(3) Exhibits: The following list of exhibits includes exhibits submitted with
this Form 10-K as filed with the SEC and those incorporated by reference
to other filings.
3.1 Company's Amended and Restated Articles of Incorporation (filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein by
reference).
3.2 Company's Amended Bylaws (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 31,
1985 and incorporated herein by reference).
4.1 Specimen form of Class B Common Stock Certificate (filed as
Exhibit 4.6 to the Company's Registration Statement on Form S-1
(No. 33-56646) and incorporated herein by reference).
11
4.2 Specimen form of Common Stock Certificate (filed as Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference).
10.1 Revolving Credit Agreement dated as of April 19, 2002 among
Watsco, Inc., as borrower, the Lenders from Time to Time Party and
SunTrust Bank as administrative agent. (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2002 and incorporated herein by reference).
10.2 Key Executive Deferred Compensation Agreement dated January 31,
1983, between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1 (No.
33-56646) and incorporated herein by reference). +*
10.3 Watsco, Inc. Amended and Restated 1991 Stock Option Plan (filed as
Exhibit 4.23 to the Company's Registration Statement on Form S-8
(333-82011) and incorporated herein by reference). +
10.4 Watsco, Inc. Amended and Restated Profit Sharing Retirement Plan
and Trust Agreement dated October 21, 1994 (filed as Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference). +
10.5 Employment Agreement and Incentive Plan dated January 31, 1996 by
and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit
10.20 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996 and incorporated herein by
reference). +*
10.6 Watsco, Inc. 1996 Qualified Employee Stock Purchase Plan (filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-8
(333-80341) and incorporated herein by reference). +
10.7 Watsco, Inc. 2001 Incentive Compensation Plan (filed as Appendix B
to the Company's Definitive Proxy Statement for the year ended
December 31, 2000 and incorporated herein by reference.) +
10.8 Watsco, Inc. $125,000,000 Private Shelf Agreement as of January
31, 2000 by and among, Watsco, Inc. and the Prudential Insurance
Company of America. (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
10.9 First Amendment dated January 1, 2001 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco, Inc.
and Albert H. Nahmad. (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000
and incorporated herein by reference). +*
10.10 Second Amendment dated January 1, 2002 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco, Inc.
and Albert H. Nahmad (filed as Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001
and incorporated herein by reference). +*
10.11 Third Amendment dated February 10, 2003 to Employment Agreement
and Incentive Plan dated January 31, 1996 by and between Watsco,
Inc. and Albert H. Nahmad. #+*
10.12 Amended and Restated Watsco, Inc. $125,000,000 Private Shelf
Agreement as of October 30, 2002 by and among Watsco Inc., and the
Prudential Insurance Company of America. #
13. 2002 Annual Report to Shareholders (with the exception of the
information incorporated by reference into Items 1, 5, 6, 7 and 8
of this Form 10-K, the 2002 Annual Report to Shareholders is
provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form 10-K). #
21. Subsidiaries of the Registrant. #
23.1 Consent of Independent Certified Public Accountants. #
23.2 Statement Regarding Consent of Arthur Andersen LLP. #
12
99.1 Certification of Chief Executive Officer pursuant to 18 USC
Section 1350. #
99.2 Certification of Chief Financial Officer pursuant to 18 USC
Section 1350. #
Notes to exhibits:
# Submitted electronically herewith.
+ Compensation Plan or Arrangement
* Management Contract
(b) Reports on Form 8-K:
None.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WATSCO, INC.
March 31, 2003 By: /s/ Albert H. Nahmad
-----------------------------------
Albert H. Nahmad, President
March 31, 2003 By: /s/ Barry S. Logan
-----------------------------------
Barry S. Logan, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------- ----------------------------- ----------------------
/s/ Albert H. Nahmad Chairman of the Board and March 31, 2003
--------------------
Albert H. Nahmad President (principal
executive officer)
/s/ Barry S. Logan Vice President - Finance and March 31, 2003
--------------------
Barry S. Logan Secretary (principal
accounting officer)
/s/ Cesar L. Alvarez Director March 31, 2003
--------------------
Cesar L. Alvarez
/s/ George Fugelsang Director March 31, 2003
--------------------
George Fugelsang
/s/ William Graham Director March 31, 2003
--------------------
William Graham
/s/ Victor Lopez Director March 31, 2003
--------------------
Victor Lopez
/s/ Paul F. Manley Director March 31, 2003
--------------------
Paul F. Manley
/s/ Bob L. Moss Director March 31, 2003
--------------------
Bob L. Moss
/s/ Roberto Motta Director March 31, 2003
--------------------
Roberto Motta
/s/ Alan Potamkin Director March 31, 2003
--------------------
Alan Potamkin
14
CERTIFICATIONS
I, Albert H. Nahmad, certify that:
1. I have reviewed this annual report on Form 10-K of Watsco, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Albert H. Nahmad
-----------------------------
Albert H. Nahmad
Chief Executive Officer
15
CERTIFICATIONS
I, Barry S. Logan, certify that:
1. I have reviewed this annual report on Form 10-K of Watsco, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Barry S. Logan
--------------------
Barry S. Logan
Chief Financial Officer
16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Watsco, Inc.
We have audited the consolidated financial statements of Watsco, Inc. and
subsidiaries as of December 31, 2002, and for the year then ended, and have
issued our report thereon dated February 14, 2003 (included elsewhere in this
Form 10-K). Our audit also included Schedule II-Valuation and Qualifying
Accounts as of December 31, 2002, and for the year then ended, included in this
Annual Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our audit. The financial statement schedule of Watsco, Inc. and subsidiaries
as of December 31, 2001 and 2000, and for the years then ended was subjected to
the auditing procedures applied by other auditors in their audit of the
consolidated financial statements for those years and whose report dated
February 11, 2002, indicated that such financial statement schedule fairly
stated in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
In our opinion, the financial statement schedule as of December 31, 2002, and
for the year then ended, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Miami, Florida
February 14, 2003
S-1
The following is a copy of the previously issued report of Arthur Andersen LLP
on Schedule II dated February 11, 2002, issued in connection with their audit of
the consolidated financial statements of Watsco, Inc. and subsidiaries (the
"Company") for December 31, 2001 and each of the two years in the period ended
December 31, 2001 and has not been reissued by Arthur Andersen LLP. Arthur
Andersen LLP has ceased operations and is no longer practicing before the
Commission and, accordingly, is unable to reissue this report or provide its
consent to the inclusion of the report in this annual report on Form 10-K. For
further discussion, see Exhibit 23.2 which is filed herewith and hereby
incorporated by reference into the Form 10-K for the fiscal year ended December
31, 2002 of which this report forms a part.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To Watsco, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Watsco, Inc.'s
annual report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 11, 2002 (except with respect to
the matter discussed in Note 14, as to which the date is March 22, 2002). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The accompanying Schedule II is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 11, 2002.
S-2
WATSCO, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
BALANCE, December 31, 1999 $ 5,564
Additions charged to costs and expenses 5,386
Write-offs, net (3,980)
---------
BALANCE, December 31, 2000 6,970
Additions charged to costs and expenses 6,319
Write-offs, net (6,968)
---------
BALANCE, December 31, 2001 6,321
Additions charged to costs and expenses 5,317
Write-offs, net (7,880)
---------
BALANCE, December 31, 2002 $ 3,758
=========
RESTRUCTURING LIABILITY AND VALUATION RESERVES:
BALANCE, December 31, 1999 $ -
Additions charged to costs and expenses 8,481
Write-down of assets to net realizable value (1,826)
Cash payments (1,500)
---------
BALANCE, December 31, 2000(1) 5,155
Additions charged to costs and expenses 3,424
Write-down of assets to net realizable value (4,891)
Cash payments (1,748)
Change in estimate (227)
---------
BALANCE, December 31, 2001(2) 1,713
Write-down of assets to net realizable value (574)
Cash payments (846)
Change in estimate (293)
---------
BALANCE, December 31, 2002 $ -
=========
(1) At December 31, 2000, valuation reserves of $3,484 and $30, respectively,
were netted against related asset balances - inventories and accounts
receivable, net and a $1,641 restructuring liability was included in
accrued liabilities in the consolidated balance sheet.
(2) At December 31, 2001, a restructuring liability of $1,385 is included in
accrued liabilities and an inventory valuation reserve of $328 is netted
against inventories in the consolidated balance sheet.
S-3
Exhibit Index
Exhibit
Number Decription
10.11 Third Amendment dated February 10, 2003 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and
Albert H. Nahmad.
10.12 Amended and Restated Watsco, Inc. $125,000,000 Private Shelf Agreement
as of October 30, 2002 by and among Watsco Inc., and the Prudential
Insurance Company of America.
13 2002 Annual Report to Shareholders (with the exception of the
information incorporated by reference into Items 1, 5, 6, 7 and 8 of
this Form 10-K, the 2002 Annual Report to Shareholders is provided
solely for the information of the Securities and Exchange Commission
and is not deemed "filed" as part of this Form 10-K).
21 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants.
23.2 Statement Regarding Consent of Arthur Andersen LLP.
99.1 Certification of Chief Executive Officer pursuant to 18 USC Section
1350.
99.2 Certification of Chief Financial Officer pursuant to 18 USC Section
1350.