10-Q 1 d10q.txt QUARTERLY REPORT 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, 2001 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: 23,437,449 shares of the Company's Common Stock ($.50 par value), excluding treasury shares of 3,152,450 and 3,236,343 shares of the Company's Class B Common Stock ($.50 par value), excluding treasury shares of 48,263 were outstanding as of August 1, 2001. 1 of 14 PART I. FINANCIAL INFORMATION WATSCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2001 and December 31, 2000 (In thousands, except per share data)
June 30, December 31, 2001 2000 -------- ----------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 5,449 $ 4,781 Accounts receivable, net 190,013 163,770 Inventories 228,447 205,805 Other current assets 13,076 18,179 -------- -------- Total current assets 436,985 392,535 Property and equipment, net 28,433 30,258 Intangible assets, net 126,886 128,656 Other assets 13,213 12,021 -------- -------- $605,517 $563,470 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 1,615 $ 1,887 Accounts payable 109,892 86,108 Accrued liabilities 22,016 26,099 -------- -------- Total current liabilities 133,523 114,094 -------- -------- Long-term obligations: Borrowings under revolving credit agreement 117,903 138,000 Long-term notes 30,000 - Bank and other debt 2,507 2,878 -------- -------- Total long-term obligations 150,410 140,878 -------- -------- Deferred income taxes and other liabilities 5,057 4,334 -------- -------- Shareholders' equity: Common Stock, $.50 par value 13,285 13,217 Class B Common Stock, $.50 par value 1,643 1,579 Paid-in capital 207,767 204,871 Unearned compensation related to outstanding restricted stock (8,419) (6,031) Accumulated other comprehensive income (loss), net of tax (1,027) 105 Retained earnings 136,387 122,348 Treasury stock, at cost (33,109) (31,925) -------- -------- Total shareholders' equity 316,527 304,164 -------- -------- $605,517 $563,470 ======== ========
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, 2001 and 2000 (In thousands, except per share data) (Unaudited)
Quarter Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2001 2000 2001 2000 -------- -------- -------- --------- Revenue $351,710 $370,832 $629,262 $657,176 Cost of sales 267,138 283,052 476,489 501,929 -------- -------- -------- --------- Gross profit 84,572 87,780 152,773 155,247 Selling, general and administrative expenses 61,339 64,467 122,881 123,896 -------- -------- -------- --------- Operating income 23,233 23,313 29,892 31,351 Interest expense, net 2,636 3,218 5,528 6,394 -------- -------- -------- --------- Income before income taxes 20,597 20,095 24,364 24,957 Income taxes 7,613 7,475 9,014 9,284 -------- -------- -------- --------- Net income $ 12,984 $ 12,620 $ 15,350 $ 15,673 ======== ======== ======== ========= Basic earnings per share $ 0.50 $ 0.47 $ 0.59 $ 0.57 -------- -------- -------- --------- Diluted earnings per share $ 0.48 $ 0.45 $ 0.56 $ 0.55 -------- -------- -------- --------- Weighted average shares and equivalent shares used to calculate earnings per share: Basic 25,937 26,940 25,951 27,315 ======== ======== ======== ========= Diluted 27,325 28,325 27,251 28,476 ======== ======== ======== =========
See accompanying notes to condensed consolidated financial statements. 3 of 14
WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (In thousands) (Unaudited) 2001 2000 -------- -------- Cash flows from operating activities: Net income $ 15,350 $ 15,673 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 6,084 6,078 Provision for doubtful accounts 2,311 2,150 Other, net (136) (60) Changes in operating assets and liabilities: Accounts receivable (28,554) (40,833) Inventories (22,642) (28,226) Accounts payable and accrued liabilities 18,981 40,124 Other, net 4,124 (1,011) -------- -------- Net cash used in operating activities (4,482) (6,105) -------- -------- Cash flows from investing activities: Capital expenditures (3,115) (4,615) Proceeds from sale of property and equipment 1,233 - -------- -------- Net cash used in investing activities (1,882) (4,615) -------- -------- Cash flows from financing activities: Net borrowings (repayments) under revolving credit agreement (20,097) 28,310 Proceeds from issuance of long-term notes 30,000 - Net repayments of bank and other debt (643) (4,339) Net proceeds from issuances of common stock 253 564 Common stock dividends (1,297) (1,367) Acquisition of common stock (1,184) (12,074) -------- -------- Net cash provided by financing activities 7,032 11,094 -------- -------- Net increase in cash and cash equivalents 668 374 Cash and cash equivalents at beginning of period 4,781 7,484 -------- -------- Cash and cash equivalents at end of period $ 5,449 $ 7,858 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 of 14 WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (In thousands, except share data) (Unaudited) 1. The condensed consolidated balance sheet as of December 31, 2000, which has been derived from the Company's audited financial statements, and the unaudited interim condensed consolidated financial statements, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation have been included in the condensed consolidated financial statements herein. 2. The results of operations for the quarter and six months ended June 30, 2001, are not necessarily indicative of the results for the year ending December 31, 2001. The sale of the Company's products and services is seasonal with revenue generally increasing during the months of May through August. 3. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 4. Basic earnings per share is computed by dividing net income by the total of the weighted average shares outstanding. Diluted earnings per share additionally assumes, if dilutive, any added dilution from common stock equivalents. Shares used to calculate earnings per share are as follows:
Quarter Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Weighted average shares outstanding 25,936,682 26,940,397 25,950,860 27,315,433 Dilutive stock options and restricted shares of common stock 1,388,655 1,384,200 1,300,410 1,160,555 ---------- ---------- ---------- ---------- Shares for diluted earnings per share 27,325,337 28,324,597 27,251,270 28,475,988 ========== ========== ========== ========== Stock options and restricted shares of common stock outstanding which are not included in the calculation of diluted earnings per share because their impact is antidilutive 2,938,699 2,547,378 3,022,951 2,499,628 ========== ========== ========== ==========
5. The Company enters into interest rate swap agreements to reduce its exposure to market risks from changing interest rates. Under the swap agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional principal amount. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. The Company does not hold or issue such financial instruments for trading purposes. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. 5 of 14 Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income ("OCI") and are recognized in the income statement when the hedged items affect earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative pre-tax reduction to OCI of $1,001 ($629 after-tax). The Company also recorded a gain of $396, net of income tax expense of $233, and a loss of $500, net of an income tax benefit of $294, in OCI relating to the change in value of the cash flow hedges for the quarter and six months ended June 30, 2001, respectively. 6. Comprehensive income consists of net income and changes in the value of available-for-sale securities and derivative instruments and the cumulative change in accounting principles as further discussed in Note 5 to the Condensed Consolidated Financial Statements at June 30, 2001 and 2000. The components of the Company's comprehensive income are as follows for the quarter and six months ended June 30, 2001 and 2000:
Quarter Ended Six Months Ended June 30, June 30, ----------------- ------------------- 2001 2000 2001 2000 ------- ------- ------- -------- Net income $12,984 $12,620 $15,350 $15,673 Unrealized holding gains (losses) on investments arising during the period, net of income tax benefit (expense) of $(7), $61, $2 and $108, respectively 12 (103) (3) (183) Cumulative effect of accounting change, net of income tax benefit of $372 - - (629) - Gain (loss) on derivative instruments, net of income tax benefit (expense) of $(233) and $294, respectively 396 - (500) - ------- ------- ------- ------- Comprehensive income $13,392 $12,517 $14,218 $15,490 ======= ======= ======= =======
7. During the fourth quarter of 2000, the Company's Board of Directors approved plans adopted by certain business units of the Company to improve operating efficiency and profitability. Those initiatives eliminate certain underperforming locations, reduce market overlap, dispose of inventory related to discontinued product lines and eliminate other nonproductive SKUs. In connection with these restructuring activities, 25 locations closed during 2000 and 7 locations closed during 2001. 6 of 14 The following table summarizes the activity in restructuring liabilities or valuation reserves during the six months ended June 30, 2001.
Restructuring Restructuring Liability or Write-down of Liability or Valuation Reserves at Assets to Net Cash Valuation Reserves at December 31, 2000 Realizable Value Payments June 30, 2001 --------------------- ------------------ -------- --------------------- Discontinued product lines $3,484 $(1,632) $ - $1,852 Noncancelable lease obligations 1,194 - (626) 568 Other 477 (29) (293) 155 ------ ------- ----- ------ Total $5,155 $(1,661) $(919) $2,575 ====== ======= ===== ======
8. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combination." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interest method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS No. 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001. The Company does not believe that the adoption of SFAS No. 141 will have a significant impact on its financial statements. In July 2001, the FASB also issued SFAS No. 142 "Goodwill and Intangible Assets." SFAS No. 142 eliminates the current 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. SFAS No. 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date. SFAS No. 142 is effective for fiscal 2002. The Company is currently assessing the Statement and has not yet made a determination of the impact that adoption of SFAS No. 142 will have on the consolidated financial statements. 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 for the quarter and six months ended June 30, 2001 and 2000, expressed as a percent of revenue:
Quarter Six Months Ended June 30, Ended June 30, ---------------- --------------- 2001 2000 2001 2000 ----- ----- ----- ----- Revenue 100.0% 100.0% 100.0% 100.0% Cost of sales 76.0 76.3 75.7 76.4 ----- ----- ----- ----- Gross profit 24.0 23.7 24.3 23.6 Selling, general and administrative expenses 17.4 17.4 19.5 18.8 ----- ----- ----- ----- Operating income 6.6 6.3 4.8 4.8 Interest expense, net (0.7) (0.9) (0.9) (1.0) Income taxes (2.2) (2.0) (1.5) (1.4) ----- ----- ----- ----- Net income 3.7% 3.4% 2.4% 2.4% ===== ===== ===== =====
Data presented in the following narratives referring to "same-store basis" excludes the effects of locations opened and closed during the prior twelve months. QUARTER ENDED JUNE 30, 2001 VS. QUARTER ENDED JUNE 30, 2000 Revenue for the three months ended June 30, 2001 decreased $19.1 million, or 5%, compared to the same period in 2000, and includes flat same-store sales in the Company's core residential and light-commercial air conditioning, heating and refrigeration ("HVAC") business (such business operations comprised 89% of second quarter sales). Revenue results for the quarter were primarily impacted by the closure of 35 locations, a 17% same-store sales decline in the manufactured housing operations and lower sales in the personnel staffing operations. During the quarter ended June 30, 2001, manufactured housing and personnel staffing operations represented 7% and 4% of revenue, respectively. Gross profit for the three months ended June 30, 2001 decreased $3.2 million, or 4%, as compared to the same period in 2000, primarily as a result of the aforementioned revenue decrease. Gross profit margin in the second quarter increased to 24.0% in 2001 from 23.7% in 2000. The increase in gross profit margin is primarily attributable to improved pricing disciplines and improved vendor programs. On a same-store basis in the Company's core HVAC business, gross profit margin increased to 23.5% in 2001 from 23.3% in 2000. Selling, general and administrative expenses for the three months ended June 30, 2001 decreased $3.1 million, or 5%, as compared to the same period in 2000. The decrease in selling, general and administrative expenses is primarily attributable to the closure of 35 locations. Selling, general and administrative expenses as a percent of revenue remained unchanged when compared to the same period in 2000. On a same-store basis in the Company's core HVAC business, selling, general and administrative expenses decreased $.7 million and, as a percent of revenue, decreased to 16.9% in 2001 from 17.0% in 2000. Interest expense, net for the second quarter in 2001 decreased $.6 million, or 18%, compared to the same period in 2000, primarily due to lower average borrowings and lower interest rates during the quarter. The effective tax rate for the second quarter declined to 37.0% from 37.2% following the implementation of certain tax planning strategies. 8 of 14 SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Revenue for the six months ended June 30, 2001 decreased $27.9 million, or 4%, compared to the same period in 2000, and includes a 1% same-store sales increase in the Company's core HVAC business (such business operations comprised 89% of sales for the six months ended June 30, 2001). Revenue results for the six months ended June 30, 2001 were primarily impacted by the closure of 35 locations, a 22% same-store sales decline in the manufactured housing operations and lower sales in the personnel staffing operations. During the six months ended June 30, 2001, the Company's manufactured housing and personnel staffing operations represented 7% and 4% of revenue, respectively. The Company believes that market share gains were achieved during the six months ended June 30, 2001 in its core HVAC business as the Company's 1% same- store sales growth compares favorably to a 5% decrease in industry-wide distributor shipments during the same period, according to data published by the Air Conditioning & Refrigeration Institute. Gross profit for the six months ended June 30, 2001 decreased $2.5 million, or 2%, as compared to the same period in 2000, primarily as a result of the aforementioned revenue decrease. Gross profit margin for the six months ended June 30, 2001 increased to 24.3% in 2001 from 23.6% in 2000. The increase in gross profit margin is primarily attributable to improved pricing disciplines and improved vendor programs. On a same-store basis in the Company's core HVAC business, gross profit increased $3.7 million or 3%, with gross profit margin increasing to 23.9% in 2001 from 23.4% in 2000. Selling, general and administrative expenses for the six months ended June 30, 2001 decreased $1.0 million, or 1%, as compared to the same period in 2000. The decrease in selling, general and administrative expenses is primarily attributable to the closure of 35 locations. Selling, general and administrative expenses as a percent of revenue increased to 19.5% in 2001 from 18.8% in 2000, primarily due to operating inefficiencies resulting from lower than expected sales volume. On a same-store basis in the Company's core HVAC business, selling, general and administrative expenses increased $3.6 million, and as a percent of revenue, increased to 19.0% in 2001 from 18.5% in 2000. Interest expense, net for the six months ended June 30, 2001 decreased $0.9 million, or 14%, compared to the same period in 2000, primarily due to lower average borrowings and lower interest rates during the period. The effective tax rate for the six months ended June 30, 2001 declined to 37.0% from 37.2% following the implementation of certain tax planning strategies. Restructuring Activities During the fourth quarter of 2000, the Company's Board of Directors approved plans adopted by certain business units of the Company to improve operating efficiency and profitability. Those initiatives eliminate certain underperforming locations, reduce market overlap, dispose of inventory related to discontinued product lines and eliminate other nonproductive SKUs. In connection with these restructuring activities, 25 locations closed during 2000 and 7 locations closed during 2001. The Company believes that the remaining restructuring liability and valuation reserves are adequate to complete all other restructuring activities by December 31, 2001. Liquidity and Capital Resources The Company maintains a bank-syndicated revolving credit agreement that provides for borrowings of up to $315.0 million, expiring on August 8, 2002. Borrowings under the unsecured agreement are used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions. Borrowings under the agreement, which aggregated $117.9 million at June 30, 2001, bear interest at primarily LIBOR-based rates plus a spread that is dependent upon the Company's financial performance (LIBOR plus .6% at June 30, 2001). The revolving credit agreement contains customary affirmative and negative covenants including certain financial covenants with respect to the Company's consolidated net worth, interest and debt coverage ratios and limits capital expenditures and dividends in addition to other restrictions. The Company was in compliance with all covenants at June 30, 2001. 9 of 14 On January 31, 2000, the Company entered into a $125.0 million private placement shelf facility. The uncommitted loan facility provides the Company a source of long-term, fixed-rate financing as a complement to the variable rate borrowings available under its existing revolving credit facility. On February 7, 2001, the Company issued $30.0 million Senior Series A Notes ("Notes") bearing 7.07% interest under its private placement shelf facility. The Notes have an average life of 5 years with repayment in equal installments of $10.0 million beginning on April 9, 2005 until the final maturity on April 9, 2007. Interest is to be paid on a quarterly basis beginning on April 9, 2001. The Company used the net proceeds from the issuance of the Notes for the repayment of a portion of its outstanding indebtedness under its revolving credit facility. The Company's Board of Directors has authorized the repurchase, at management's discretion, of up to 4.5 million shares of the Company's stock in the open market or via private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders' equity. During the six months ended June 30, 2001, the Company purchased 105,200 shares at a cost of $1.2 million. Cumulative under the program, the Company has purchased approximately 3.2 million shares at a cost of $33.1 million. Working capital increased to $303.5 million at June 30, 2001 from $278.4 million at December 31, 2000 primarily due to the Company's seasonal build-up of inventory in preparation for the summer selling season. This increase was funded primarily by borrowings as described above. Cash and cash equivalents increased $.7 million during the six month period ended June 30, 2001. Borrowings were the principal source of cash during the period. The principal uses of cash were for seasonal working capital needs, capital expenditures, common stock dividend payments and the Company's repurchase of its Common Stock. Due to the seasonal nature of the Company's business, outstanding borrowings typically peak during the first and second quarters as the Company finances inventory purchases in advance of the Company's highest sales periods, May through August. The Company has adequate availability of capital from operations and its borrowings 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; however, the Company currently has no binding agreement with respect to any 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. These swaps are entered into with a group of financial institutions with investment grade credit ratings, thereby minimizing the risk of credit loss. All items described below are non-trading. At June 30, 2001, the Company had various interest rate swap agreements with an aggregate notional amount of $60.0 million to manage its net exposure to interest rate changes related to a portion of the borrowings under the revolving credit agreement. The interest rate swap agreements effectively convert a portion of the Company's LIBOR-based variable rate borrowings into fixed rate borrowings with a weighted average pay rate of 6.4%. Effective January 1, 2001 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other 10 of 14 comprehensive income ("OCI") and are recognized in the income statement when the hedged items affect earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative pre- tax reduction to OCI of $1.0 million ($.6 million after-tax). The Company also recorded a gain of $.4 million, net of income tax expense of $.2 million, and a loss of $.5 million, net of an income tax benefit of $.3 million, in OCI relating to the change in value of the cash flow hedges for the quarter and six months ended June 30, 2001, respectively. Safe Harbor Statement This quarterly report contains statements which, to the extent they are not historical fact, constitute "forward looking statements" under the securities laws, including statements regarding acquisitions, financing agreements and industry, demographic and other trends affecting the Company. All forward looking statements involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from those contemplated or projected, forecasted, estimated, budgeted, expressed or implied by or in such forward looking statements. The forward looking statements in this document are intended to be subject to the safe harbor protection provided under the securities laws. The Company's shareholders should also be aware that while the Company does, at various times, communicate with securities analysts, it is against the Company's policies to disclose to such analysts any material non-public information or other confidential information. Accordingly, our shareholders should not assume that the Company agrees with all statements or reports issued by such analysts. To the extent statements or reports issued by analysts contain projections, forecasts or opinions by such analysts about our Company, such reports are not the responsibility of the Company. 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 "Business Risk Factors". 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, 2000. Item 2. Changes in Securities and Use of Proceeds During the quarter ended June 30, 2001, the Company issued 50,000 shares of restricted Class B Common Stock to an executive officer. The Company believes this issuance was exempt from registration pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities Holders (a) The Company's 2001 Annual Meeting of Shareholders was held on June 4, 2001. (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 (the Common Stock director having been elected by holders of the Company's Common Stock voting as a single class and the Class B Common Stock directors having been elected by the Common Stock shareholders and the Class B Common Stock shareholders voting as a single class): Votes For Votes Withheld ---------- -------------- Common Stock Director --------------------- Charles Walker 15,492,099 1,624,191 Class B Common Stock Directors ------------------------------ David B. Fleeman 47,112,789 1,664,811 Bob L. Moss 47,113,239 1,664,361 Additionally, Messrs. Cesar L. Alvarez, J. Ira Harris, Paul F. Manley and Roberto Motta will continue to serve as directors of the Company. (c) A proposal was voted upon at the Annual Meeting of Shareholders to ratify the action of the Board of Directors amending the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock, par value $.50 per share, of the Company to 60,000,000 and to increase the number of authorized shares of Class B Common Stock, par value $.50 per share, of the Company to 10,000,000 shares. The vote of the Company's Common Stock and Class B Common Stock shareholders was as follows: Common Stock ------------ For 11,637,741 Against 5,462,594 Withheld 15,956 Class B Common Stock -------------------- For 31,402,340 Against 166,580 Withheld 92,390 12 of 14 (d) A proposal was voted upon to ratify the action of the Board of Directors adopting the Company's 2001 Incentive Compensation Plan. The combined vote of the Company's Common Stock and Class B Common Stock shareholders was as follows: For 35,016,083 Against 6,799,763 Withheld 94,695 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of Watsco, Inc. (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 7, 2001 14 of 14 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Articles of Incorporation of Watsco, Inc.