SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 12, 1996
Commission File Number 1-5581
WATSCO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
FLORIDA
- --------------------------------------------------------------------------------
(State or other jurisdiction ofincorporation)
59-0778222
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
2665 SOUTH BAYSHORE DRIVE
SUITE 901
COCONUT GROVE, FLORIDA 33133
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (305) 858-0828
(Former name or former address, if changed since last report) NOT APPLICABLE
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 12, 1996, TSSC Acquisition, Inc. ("TSSC Acquisition"), a
wholly-owned subsidiary of Watsco, Inc. ("Watsco") and Three States Supply Co.,
Inc. ("Three States") and UIS, Inc. (the parent company of Three States),
completed a transaction pursuant to an Asset Purchase Agreement (the
"Agreement") whereby TSSC Acquisition purchased the accounts receivable,
inventory, fixed assets, certain other operating assets and business from Three
States and assumed certain of its liabilities (such net amount of assets
purchased and liabilities assumed is referred to herein as the "Net Assets").
The purchase price for the Net Assets (expected to be approximately $14
million) is equal to the audited book value of the Net Assets at the closing
date (April 12, 1996), as determined in accordance with generally accepted
accounting principles. A cash payment of $13.7 million was made to Three States
as a preliminary payment of the purchase price. The final determination of the
purchase price will be made based on an audit of the Net Assets and a final
payment will be made by or to Three States, as applicable. Payment of the
purchase price is being made out of a portion of the net proceeds from a public
offering of Watsco's Common Stock completed on March 8, 1996.
TSSC Acquisition acquired real property and buildings as well as other
operating assets used by Three States in connection with its wholesale
distribution operations. TSSC Acquisition intends to use such assets in a manner
consistent with the historical operations of Three States.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS PAGE NO.
(a) Financial statements of Three States Supply Co., Inc.:
Report of Independent Certified Public Accountants 5
Balance Sheet as of December 31, 1995 6
Statements of Income and Retained Earnings for the
years ended December 31, 1995 and 1994 7
Statements of Cash Flows for the years ended 8
December 31, 1995 and 1994
Notes to Financial Statements 9-11
(b) Unaudited pro forma condensed consolidated financial statements:
(i) Unaudited Pro Forma Condensed Consolidated Balance Sheet as of 12
December 31, 1995 giving effect to the Three States
acquisition as if it had been consummated on December 31, 1995
(ii) Unaudited Pro Forma Condensed Consolidated Income Statements 13-14
13-14 for the Years Ended December 31, 1995 and 1994 giving
effect to the acquisition of Three States as if it had been
consummated on January 1, 1995 and 1994, respectively
(iii) Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements 15
(c) Exhibits:
10.19. Asset Purchase Agreement dated March 27, 1996 by and among 16-53
TSSC Acquisition, Inc., Three States Supply, Co., Inc. and
UIS, Inc.
2
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WATSCO, INC.
By: /s/ RONALD P. NEWMAN
-----------------------
Ronald P. Newman
Vice President - Finance
Date: April 19, 1996
3
ITEM 7(a)
THREE STATES SUPPLY CO., INC.
( A SUBSIDIARY OF UIS, INC.)
FINANCIAL STATEMENTS
DECEMBER 31, 1995
4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Three States Supply Co., Inc.
Memphis, Tennessee
We have audited the accompanying balance sheets of Three States Supply Co.,
Inc. (a subsidiary of UIS, Inc.) as of December 31, 1995 and the related
statements of income and retained earnings and cash flows for the years ended
December 31, 1995 and 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Three States Supply Co., Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
RHEA & IVY, PLC
Memphis, Tennessee
February 5, 1996, except for the
matter discussed in Note 8 as to
which the date is April 12, 1996.
5
THREE STATES SUPPLY CO., INC.
BALANCE SHEET
DECEMBER 31, 1995
(In thousands, except share data)
ASSETS
Current assets:
Cash $ 903
Accounts receivable, less an allowance for
doubtful accounts of $52 6,117
Notes receivable 52
Inventories 5,075
Prepaid expenses 28
Deferred income taxes 88
-------
Total current assets 12,263
-------
Property and equipment:
Land 283
Buildings and leasehold improvements 1,434
Machinery and equipment 4,271
-------
5,988
Less-Accumulated depreciation 3,242
-------
2,746
-------
Other assets 5
-------
$15,014
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,430
Accrued compensation and other expenses 810
Income taxes payable 907
Due to parent company 583
-------
Total current liabilities 4,730
-------
Deferred income taxes 171
Commitments (Note 6)
Shareholders' equity
Common stock - authorized, 20,000 shares of $10.00
par value; issued and outstanding, 1,000 shares 10
Retained earnings 10,103
-------
Total shareholders' equity 10,113
-------
$15,014
=======
The accompanying notes to financial statements are an integral
part of this balance sheet.
6
THREE STATES SUPPLY CO., INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands)
1995 1994
------- -------
Net sales $47,314 $44,941
Cost of sales 35,827 34,688
------- -------
Gross profit 11,487 10,253
------- -------
Operating expenses:
Shipping and warehousing 3,143 3,050
Selling 2,537 2,511
Administrative and general 2,864 2,813
------- -------
8,544 8,374
------- -------
Income before income taxes 2,943 1,879
------- -------
Income taxes
Currently payable
Federal 908 592
State 185 131
------- -------
Total current provision 1,093 723
Deferred provision 63 15
------- -------
Total provision for income taxes 1,156 738
------- -------
Net income 1,787 1,141
Retained earnings, beginning of year 8,316 7,175
------- -------
Retained earnings, end of year $10,103 $ 8,316
======= =======
The accompanying notes to financial statements are an integral
part of these statements.
7
THREE STATES SUPPLY CO., INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands)
1995 1994
------- -------
Cash flows from operating activities:
Net income $ 1,787 $ 1,141
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 568 531
Provision for deferred income taxes 63 15
Gain on disposal of property (13) (27)
Cash provided by (used in) changes in
assets and liabilities:
Accounts receivable (572) (674)
Notes receivable (52) 17
Prepaid expenses 19 5
Inventories 1,588 (332)
Accounts payable 1,292 (470)
Other accrued expenses 95 129
Income taxes payable 314 104
------- -------
Total adjustments 3,302 (702)
------- -------
Net cash provided by operating activities 5,089 439
------- -------
Cash flows from investing activities:
Purchases of property and equipment (509) (804)
Proceeds from sale of property and equipment 12 54
------- -------
Net cash used in investing activities (497) (750)
------- -------
Cash flows from financing activities:
Advances from parent company 1,593 1,034
Repayments of advances from parent company (5,637) (500)
------- -------
Net cash provided by (used in) financing activities (4,044) 534
------- -------
Net increase in cash 548 223
Cash, beginning of year 355 132
------- -------
Cash, end of year $ 903 $ 355
======= =======
Supplemental disclosure of cash flow information:
State income taxes paid $ 122 $ 137
======= =======
The accompanying notes to financial statements are an integral
part of these statements.
8
THREE STATES SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE (1) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Three States Supply Co., Inc., a Tennessee corporation (hereinafter referred
to as the "Company"), is a 99.8% owned subsidiary of UIS, Inc. The Company is
engaged in the wholesale distribution of supplies used primarily in air
conditioning and heating systems and operates in the mid-south primarily through
its branch locations in Memphis and Nashville, Tennessee; Jackson, Mississippi;
Huntsville, Alabama; Little Rock and Fort Smith, Arkansas; and St. Louis,
Missouri. Credit is granted to customers after an extensive credit review.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
Use of Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories -
Inventories are stated at the lower of cost or market; cost is determined
using the last-in, first-out (LIFO) method as more fully described in Note 2.
Depreciation and Amortization
Depreciation of property and equipment is provided for in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives, using the straight line method. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, whichever is shorter. Depreciation and amortization expense was
$568,000 and $531,000 in 1995 and 1994, respectively.
The useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Buildings and leasehold improvement 5 - 20 years
Machinery and equipment 3 - 10 years
Income Taxes -
The taxable income of the Company is included in the consolidated federal
income tax return of its parent and, accordingly, taxes are reported using the
separate return method under a tax sharing agreement with the parent. The
provision is based on using a 35% income tax rate.
The Company files state income tax returns separately from its parent.
9
NOTE (2) - EFFECT OF LIFO INVENTORY ON OPERATIONS
Inventories are stated at the lower of cost, determined by the last-in,
first-out (LIFO) method, or market. If the first-in, first-out (FIFO) method had
been used for all inventories, inventories would have been increased by
$2,389,000 at December 31, 1995, and cost of sales would have been decreased by
$9,000 and $394,000 in 1995 and 1994, respectively. The effect of LIFO inventory
decrements for the year ended December 31, 1995 was to reduce cost of sales by
approximately $239,000. A summary of inventory at December 31, 1995 is as
follows (in thousands):
Inventories at FIFO $ 7,464
LIFO reserve (2,389)
-------
Inventories at LIFO $ 5,075
=======
NOTE (3) - SAVINGS AND INVESTMENT PLAN
The Company maintains a defined contribution and savings and investment plan
whereby employees can elect to contribute up to 10% of their gross earnings to
the plan on a pre-tax basis. The Company, at its discretion, may match 50% of
the employees' contributions of up to 5% of the employees' gross earnings (as
defined in the plan). The Company has elected to match the maximum allowable
under the plan, and contributions of $60,000 have been provided for in the
accompanying financial statements for 1995 and 1994.
NOTE (4) - DUE TO PARENT COMPANY
This amount represents cash advances to the Company from the parent company
and is non-interest bearing.
NOTE (5) - INCOME TAXES
Deferred income taxes have been provided for temporary differences in income
tax and financial statement reporting of accumulated depreciation, allowance for
doubtful accounts and inventory capitalization. The net deferred income tax
assets and liabilities presented in the accompanying 1995 balance sheet consist
of the following (in thousands):
CURRENT LONG-TERM
------- ---------
Deferred tax assets $88 $ -
Deferred tax liabilities - (171)
--- --------
Net $88 $(171)
=== ========
Management believes that it is more likely than not that the deferred tax
assets will be utilized, accordingly, no valuation allowance has been recorded.
The provisions for income taxes computed at the federal statutory rate differ
primarily due to state income taxes.
10
NOTE (6) - COMMITMENTS
The Company conducts a portion of its operations from leased warehouses. The
following is a schedule by year of future minimum rental payments under
non-cancelable operating leases (in thousands):
Years ending December 31,
1996 $331
1997 316
1998 213
1999 25
----
Total minimum payments $885
====
Rent expense for leased facilities in 1995 and 1994 totaled $377,000 and
$365,000, respectively.
NOTE (7) - CONCENTRATIONS OF CREDIT RISK
On December 31, 1995, the Company had concentrations of credit risk in the
form of cash deposits maintained with financial institutions in excess of
federally insured amounts.
NOTE (8) - SUBSEQUENT EVENT
In April 1996, the parent completed the sale of certain of the net assets and
business of the Company to TSSC Acquisition, Inc., a wholly-owned subsidiary of
Watsco, Inc. The accompanying financial statements do not include the effects,
if any, on the carrying amount of assets and liabilities relative to the
transaction contemplated in asset purchase agreement.
11
ITEM 7(b)(i)
WATSCO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
THREE PRO FORMA PRO FORMA
WATSCO STATES ADJUSTMENTS COMBINED
--------- --------- ----------- ----------
ASSETS Dr. (Cr.)
Current assets:
Cash and cash equivalents $ 3,751 $ 903 $ (903) (2) $ 3,751
Marketable securities 267 - 267
Accounts receivable, net 43,564 6,169 49,733
Inventories 59,724 5,075 2,389 (2) 67,188
Prepaid expenses and other current assets 5,073 116 (88) (2) 5,101
-------- ------- -------- --------
Total current assets 112,379 12,263 1,398 126,040
-------- ------- -------- --------
Property, plant and equipment, net 11,286 2,746 14,032
Intangible assets, net 16,995 - 100 (2) 17,095
Other assets 4,224 5 4,229
-------- ------- -------- --------
$144,884 $15,014 $ 1,498 $161,396
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 2,455 $ - $ 2,455
Short-term promissory notes 4,250 - 4,250
Borrowings under revolving credit
agreements 40,185 - 40,185
Due to parent - 583 $ 583 (2) -
Accounts payable 17,229 2,430 19,659
Accrued liabilities 7,091 1,717 1,717 (2) 7,091
-------- ------- -------- --------
Total current liabilities 71,210 4,730 2,300 73,640
-------- ------- -------- --------
Long-term obligations:
Bank and other debt 3,818 - 3,818
Subordinated note 2,500 - 2,500
-------- ------- --------
6,318 - 6,318
-------- ------- --------
Deferred income taxes 978 171 171 (2) 978
Minority interests 12,622 - 12,622
Shareholders' equity:
Common Stock 2,401 10 10 (2) 2,740
(339) (4)
Class B Common Stock 740 - 740
Paid-in capital 19,479 - (13,743) (4) 33,222
Retained earnings 31,136 10,103 10,103 (2) 31,136
-------- ------- -------- --------
Total shareholders' equity 53,756 10,113 (3,969) 67,838
-------- ------- -------- --------
$144,884 $15,014 $ (1,498) $161,396
======== ======= ======== ========
The accompanying notes to unaudited pro forma condensed consolidated
financial statements are an integral part of this statement.
12
ITEM 7 (b)(ii)
WATSCO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE PRO FORMA PRO FORMA
WATSCO STATES ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
Dr. (Cr.)
Revenues $331,008 $47,314 $378,322
Cost of sales 257,710 35,827 $(9) (3) 293,528
-------- ------- --- --------
Gross profit 73,298 11,487 (9) 84,794
Selling, general and
administrative expenses 55,288 8,544 3 (2) 63,835
-------- ------- --- --------
Operating income 18,010 2,943 (6) 20,959
-------- ------- --- --------
Other income (expense):
Investment income, net 281 - 281
Interest expense (4,221) - (4,221)
-------- ------- --------
(3,940) - (3,940)
-------- ------- --------
Income before income taxes
and minority interests 14,070 2,943 (6) 17,019
Income taxes (5,234) (1,156) 2 (5) (6,392)
Minority interests (1,586) - (1,586)
-------- ------- --- --------
Net income $ 7,250 $ 1,787 $(4) $ 9,041
======== ======= === ========
Earnings per share:
Primary $1.08 $1.23
===== =====
Fully diluted $1.04 $1.18
===== =====
Weighted average shares outstanding:
Primary 6,582 678 (4) 7,260
===== === =====
Fully diluted 6,971 678 (4) 7,649
===== === =====
The accompanying notes to unaudited pro forma condensed consolidated
financial statements are an integral part of this statement.
13
ITEM 7 (b)(ii)
WATSCO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE PRO FORMA PRO FORMA
WATSCO STATES ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
Dr. (Cr.)
Revenues $283,731 $44,941 $328,672
Cost of sales 220,519 34,688 $(394) (3) 254,813
-------- ------- ----- --------
Gross profit 63,212 10,253 (394) 73,859
Selling, general and
administrative expenses 48,169 8,374 3 (2) 56,546
-------- ------- ----- --------
Operating income 15,043 1,879 (391) 17,313
-------- ------- ----- --------
Other income (expense):
Investment income, net 140 - 140
Interest expense (3,155) - (3,155)
-------- ------- --------
(3,015) - (3,015)
-------- ------- --------
Income before income taxes
and minority interests 12,028 1,879 (391) 14,298
Income taxes (4,630) (738) 149 (5) (5,517)
Minority interests (1,636) - (1,636)
-------- ------- ----- --------
Net income $ 5,762 $ 1,141 $(242) $ 7,145
======== ======= ===== ========
Earnings per share:
Primary $.89 $1.00
==== =====
Fully diluted $.87 $ .97
==== =====
Weighted average shares outstanding:
Primary 6,326 678 (4) 7,004
===== === =====
Fully diluted 6,646 678 (4) 7,324
===== === =====
The accompanying notes to unaudited pro forma condensed consolidated
financial statements are an integral part of this statement.
14
ITEM 7(b)(iii)
WATSCO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) The Unaudited Pro Forma Condensed Consolidated Financial Statements gives
effect to the purchase by TSSC Acquisition, Inc., a wholly owned subsidiary
of Watsco, Inc. ("Watsco") of certain assets and the assumption of certain
liabilities of Three States Supply Co., Inc. ("Three States"). The pro
forma information is based on the historical financial statements of Watsco
and Three States. The acquisition will be accounted for under the purchase
method of accounting.
The Unaudited Pro Forma Condensed Consolidated Financial Statements may not
necessarily be indicative of the results that would actually have been
obtained had the acquisition of Three States occurred on the dates
indicated or which may be obtained in the future. In the opinion of the
Company's management, all adjustments necessary to present fairly such
Unaudited Pro Forma Condensed Consolidated Financial Statements have been
included. The pro forma condensed consolidated financial statements should
be read in conjunction with the historical financial statements and related
notes of Watsco and Three States.
(2) Represents the estimated purchase price for Three States determined as
follows (in thousands):
Net assets of Three States $10,113
Write-up of inventories to fair market value 2,389 (3)
Assets not purchased (991)
Liabilities not assumed 1,888
Due to parent not assumed 583
Payment of acquisition expenses 100
-------
Pro forma purchase price $14,082
=======
Goodwill (representing acquisition expenses incurred in the transaction)
will be amortized over a 40 year period.
(3) The inventories included in the historical financial statements of Three
States are stated under the last-in, first-out method. Subsequent to the
acquisition of Three States, such inventory amounts will be stated by
Watsco based on the first-in, first-out (FIFO) method. These amounts
represent an adjustment to the cost of sales using the FIFO method as if
Three States valued inventories under the FIFO method as of the beginning
of each year presented in the accompanying pro forma condensed consolidated
financial statements.
(4) In March 1996, Watsco completed the sale of 1,570,000 shares of Common
Stock receiving net proceeds of $32,609,000. A portion of the proceeds will
be used in the acquisition of Three States. The pro forma number of shares,
based on the pro forma purchase price and the net proceeds per share of
$20.77 realized upon such sale of Common Stock, is 677,997 and 789,889 in
1995 and 1994, respectively.
Watsco intends to use the remaining proceeds from the sale of its Common
Stock to fund other potential acquisitions, to reduce debt and for general
corporate purposes.
(5) Represents pro forma income taxes at a blended statutory rate of 38%.
15