NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)

1. Significant Accounting Policies

Nature of Operations
Watsco, Inc. and its subsidiaries (collectively the "Company" or "Watsco") is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies in the United States. The Company operates from 300 locations in 30 states.

Basis of Consolidation
The consolidated financial statements include the accounts of Watsco and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition
The Company recognizes revenue upon shipment of products or upon delivery of services. Substantially all customer returns are under warranty by the Company's manufacturers. Accordingly, the Company's risk of loss for customer returns is not material.

Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Inventories
Inventories consist of air conditioning, heating and refrigeration equipment and related parts and supplies and are stated at the lower of cost (first-in, first-out method) or market. Provision is made as necessary to reduce excess or obsolete inventories to their net realizable value.

Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of property and equipment is computed using the straight-line method. Buildings and improvements are being depreciated or amortized over estimated useful lives ranging from 2-40 years. Leasehold improvements are amortized over the shorter of the respective lease terms or useful lives. Estimated useful lives for other depreciable assets range from 3-12 years. Depreciation and amortization related to property and equipment amounted to $8,259, $7,634 and $6,118 for the years ended December 31, 2000, 1999 and 1998, respectively.

Intangible Assets
Intangible assets, net of accumulated amortization of $13,273 and $9,987 at December 31, 2000 and 1999, respectively, consist of goodwill arising from the excess of the cost of acquired businesses over the fair value of their net assets. Goodwill is amortized on a straight-line basis over 40 years. The Company assesses the recoverability of long-lived assets by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. Amortization expense related to intangible assets amounted to $3,612, $3,257 and $2,611 for the years ended December 31, 2000, 1999 and 1998, respectively.

Investment Securities
Investments in marketable equity securities of $255 and $1,197 at December 31, 2000 and 1999, respectively, are included in other assets and are classified as available-for-sale. The Company records the securities at fair value with unrealized holding gains and losses, net of applicable income taxes, included as a separate component of shareholders' equity. Dividend and interest income are recognized when earned. The difference between cost and market was an unrealized holding gain of $105 in 2000 and a loss of $669, net of income tax expense of $62 in 2000 and income tax benefit of $392 in 1999. During the year ended December 31, 2000, the Company recorded a $2,169 write-down related to the permanent impairment of an investment in marketable securities held in one of the Company's primary competitors.

Derivative Financial Instruments
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.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - Deferral of the Effective Date of FASB Statement SFAS No. 133." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133." SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that the Company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS No. 133, as amended, on January 1, 2001. The adoption of this accounting standard did not have a material impact on the Company's results of operations. Other comprehensive income was reduced by approximately $600, net of tax benefit of $400, on January 1, 2001.

Advertising Costs
Advertising costs are expensed as incurred. Advertising expense amounted to $4,833, $5,179 and $3,538 for the years ended December 31, 2000, 1999 and 1998, respectively.

Self-insurance
The Company is self-insured for certain group health benefits. The Company has limited its exposure by maintaining excess and aggregate liability coverages. Self-insurance reserves are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators.

Income Taxes
The Company provides for federal and state income taxes currently payable, as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial statement and income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return.

Stock-Based Compensation
As described in Note 7, the Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123.

Earnings Per Share
Basic earnings per share is computed by dividing net income by the total of the weighted average number of 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:

Years Ended December 31,                           2000              1999             1998
-------------------------------------------------------------------------------------------------
Weighted average shares outstanding             26,549,211       28,498,683        27,147,622
Dilutive stock options and restricted
       shares of common stock                    1,243,821        1,242,157         1,542,842
-------------------------------------------------------------------------------------------------
Shares for diluted earnings per share           27,793,032       29,740,840        28,690,464
=================================================================================================
Stock options and restricted shares of
     common stock outstanding which
     are not included in the calculation of
     diluted earning because their impact
     is antidilutive                             2,886,251        1,565,868           284,625
=================================================================================================

Years Ended December 31,                                                     2000                  1999              1998
---------------------------------------------------------------------------------------------------------------------------
Unrealized holding losses arising during the period, net
     of income tax benefit of $27, $382 and $1,740,
     respectively                                                         $  (45)                $  (651)          $  (2,962)
Reclassification adjustment for losses realized
      in income, net of income tax of $1,729                                   -                   2,944                   -
Reclassification adjustment for losses realized from the
     write-down of marketable securities, net of income
     tax of $480                                                             819                       -                   -
----------------------------------------------------------------------------------------------------------------------------
Changes in value of available-for-sale
    securities, net of income taxes                                         $774                 $2,293              $(2,962)
============================================================================================================================

Use of Estimates
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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications
Certain reclassifications have been made to prior year consolidated financial statements to conform to the current year presentation.

New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." In June 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until the fourth quarter of 2000. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company's revenue recognition policies are consistent with SAB 101.

In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting for Certain Transactions involving Stock Compensation," which clarifies the application of APB Opinion No. 25 for certain issues. The interpretation was effective July 1, 2000, except for the provisions that relate to modifications that directly or indirectly reduce the exercise price of an award and the definition of an employee, which were effective after December 15, 1998. The adoption of FIN 44 did not have a material effect on the Company's consolidated financial statements.

In July 2000, the Emerging Issues Task Force ("EITF") issued 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF 00-10 became effective in the fourth quarter of 2000. EITF 00-10 prohibits the netting of shipping and handling costs against shipping and handling revenues. EITF 00-10 permits companies to adopt a policy of including shipping and handling costs in cost of sales or other income statement line items. The adoption of EITF 00-10 did not have a material effect on the Company's consolidated financial statements. Shipping and handling costs included in selling, general and administrative expenses amounted to $2,914, $2,379 and $971 for the years ended December 31, 2000, 1999 and 1998, respectively.

2. Supplier Concentration

The Company has distribution agreements with five key equipment suppliers. Purchases from these five suppliers comprised 46%, 43% and 39% of all purchases made in 2000, 1999 and 1998, respectively. The Company's largest supplier accounted for 16%, 18% and 17% of all purchases made in 2000, 1999 and 1998, respectively. Any significant interruption by the manufacturers or a termination of a distribution agreement could temporarily disrupt the operations of certain subsidiaries. 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 this risk.

3. Discontinued Operations

In November 1997, the Company's Board of Directors approved a plan to dispose of the Company's manufacturing operation, Watsco Components, Inc. ("Components"). In May 1998, the Company sold substantially all the operating assets of Components to International Comfort Products Corporation ("ICP") in exchange for approximately $16,649 of ICP's common stock. The results of Components have been accounted for as a discontinued operation and the consolidated financial statements presented herein report separately the net assets, net cash flows and operating results of this discontinued operation.

Unaudited summarized results for the discontinued operation are as follows:

Year Ended December 31,                                            1998
---------------------------------------------------------------------------
Revenue                                                          $  8,861
---------------------------------------------------------------------------
Loss before income taxes                                         $ (1,270)
Income tax benefit                                                    470
---------------------------------------------------------------------------
Net loss                                                         $   (800)
===========================================================================

Income before income taxes includes allocated interest expense of $177 in 1998. Interest expense was allocated to Components based on a ratio of the net assets of the discontinued operation to the total Company's consolidated net assets.

4. Property and Equipment, net

Property and equipment, net, consists of:

December 31,                                     2000               1999
-----------------------------------------------------------------------------
Land, buildings and improvements                 $17,698          $17,008
Machinery, vehicles and equipment                 34,643           34,838
Furniture and fixtures                            19,127           14,977
-----------------------------------------------------------------------------
                                                  71,468           66,823
Less: accumulated depreciation
   and amortization                              (41,210)         (35,396)
-----------------------------------------------------------------------------
                                                 $30,258          $31,427
=============================================================================

5.       Long-Term Obligations

Revolving Credit Agreement

The Company maintains a bank-syndicated revolving credit agreement that provides for borrowings of up to $315,000, 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 aggregated $138,000 and $155,000 in 2000 and 1999, respectively, and bear interest at primarily London Interbank Offered Rate ("LIBOR") based rates plus a spread that is dependent upon the Company's financial performance (LIBOR plus .6% and LIBOR plus .5% as of December 31, 2000 and 1999, respectively). The Company must pay a variable commitment fee on the unused portion of the commitment. 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 December 31, 2000. See Note 11 for details regarding related interest rate swap agreements designated as hedges.

Bank and Other Debt

Bank and other debt (net of current portion) of $2,878 and $4,415 at December 31, 2000 and 1999, respectively, primarily consists of promissory notes issued for business acquisitions and capital leases on equipment. Interest rates on bank and other debt range from 5% to 13% and mature at varying dates through 2008. Annual maturities of long-term obligations for the years subsequent to December 31, 2000 are as follows: $1,887 in 2001, $1,503 in 2002, $474 in 2003, $419 in 2004, $180 in 2005 and $302 thereafter.

On January 31, 2000, the Company entered into a $125,000 private placement shelf facility. The uncommitted loan facility provides Watsco a source of long term, fixed-rate financing as a complement to the variable rate borrowings available under its existing revolving credit facility. At December 31, 2000, the Company did not have any outstanding debt under this shelf facility. See Note 14 for drawings made subsequent to December 31, 2000.

Total cash payments for interest were $12,499, $13,183 and $11,424 for the years ended December 31, 2000, 1999 and 1998, respectively.

6. Income Taxes

The income tax provision on income from continuing operations consists of:

Years Ended December 31,               2000             1999             1998
----------------------------------------------------------------------------------------
Federal                              $11,087           $16,489           $15,211
State                                    234               826               630
----------------------------------------------------------------------------------------
                                     $11,321           $17,315           $15,841
========================================================================================
Current                              $10,080           $16,195           $16,161
Deferred                               1,241             1,120              (320)
----------------------------------------------------------------------------------------
                                     $11,321           $17,315           $15,841
========================================================================================

A reconciliation of the provision for federal income taxes on income from continuing operations from the federal statutory income tax rate to the effective income tax rate as reported is as follows:

Years Ended December 31,                  2000              1999            1998
----------------------------------------------------------------------------------------
Federal statutory rate                    35.0%             35.0%             35.0%
State income taxes, net of federal benefit 2.2               2.0               2.0
----------------------------------------------------------------------------------------
                                          37.2%             37.0%             37.0%
========================================================================================

The following is a summary of the significant components of the Company's deferred tax assets and liabilities:

December 31,                                              2000            1999
----------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable reserves                            $2,593            $1,234
Capitalized inventory costs and inventory reserves       2,453             6,163
Unrealized loss on investments                             807               392
Net operating loss carryforwards of subsidiary             487               487
Other                                                    1,099                 -
----------------------------------------------------------------------------------------
                                                         7,439             8,276
----------------------------------------------------------------------------------------
Deferred tax liabilities:
Deductible goodwill                                     (3,938)           (3,415)
Depreciation and amortization                             (437)             (528)
Other                                                     (901)             (475)
----------------------------------------------------------------------------------------
                                                        (5,276)           (4,418)
----------------------------------------------------------------------------------------
Net deferred tax assets (1)                             $2,163            $3,858
========================================================================================

(1) Net deferred tax assets of $5,718 and $7,159 have been included in the consolidated balance sheet in "Other current assets" at December 31, 2000 and 1999, respectively.

A subsidiary of the Company has available net operating loss carryforwards ("NOLs") of $1,392, which are available to offset future taxable income in equal annual amounts of $278 through 2005. SFAS No. 109, "Accounting for Income Taxes," requires that the tax

benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be more likely than not. Management has determined, based on the subsidiary's recent taxable income and expectations for the future, that taxable income of the subsidiary will be sufficient to fully utilize the available NOLs.

Total cash payments for income taxes were $11,247, $15,745 and $17,396 for the years ended December 31, 2000, 1999 and 1998, respectively.

7. Stock Option and Benefit Plans

Stock Option Plans
At December 31, 2000, the Company had two stock option plans. Under the 1991 Stock Option Plan (the "1991 Plan"), options for an aggregate of 6,750,000 shares of Common Stock and Class B Common Stock may be granted. Options as to 4,417,170 of Common Stock and 2,223,872 of Class B Common Stock have been granted through December 31, 2000. The terms of the 1991 Plan require the option price per share be equivalent to the fair market value of the underlying common stock on the date of grant. Options under the 1991 Plan are for a term of ten years and are exercisable as determined by the Option Committee of the Board of Directors. The 1983 Executive Stock Option Plan (the "1983 Plan") expired in February 1993; therefore, no additional options may be granted. Options as to 36,158 shares of Common Stock are outstanding under the 1983 Plan at December 31, 2000. Options under the 1983 Plan are for a term of ten years and, generally, may be exercised in annual 20% installments beginning one year after grant. Under either plan, the Option Committee may waive the vesting period and permit options to be exercised immediately. There were 108,958 shares of common stock reserved for future grants as of December 31, 2000 under the 1991 Plan.

A summary of option activity is shown below:

                                            2000                    1999                     1998
                                    ---------------------   ----------------------     -------------------
                                             Weighted-                   Weighted-                Weighted-
                                              Average                     Average                  Average
                                             Exercise                    Exercise                 Exercise
                                    Options     Price         Options      Price        Options     Price
----------------------------------------------------------------------------------------------------------

Outstanding on January 1,           4,157,833    $11.23        3,747,830   $10.75       2,954,255     $8.47
Granted                             1,121,289      9.39          703,000    13.46       1,075,999     16.70
Exercised                             (91,275)     5.84         (140,210)    5.56        (205,874)     5.73
Forfeited                            (264,751)    13.75         (152,787)   14.98         (76,550)    19.82
-----------------------------------------------------------------------------------------------------------
Outstanding on  December 31,        4,923,096    $10.78        4,157,833   $11.23       3,747,830    $10.75
===========================================================================================================
Options exercisable at end of year  3,158,851    $10.01        2,650,365    $8.87       2,200,986     $6.97
===========================================================================================================

The following sets forth certain information with respect to those stock options outstanding on December 31, 2000:

                                 Options Outstanding                        Options Exercisable
---------------------------------------------------------------------    ----------------------------------
                                              Weighted-     Weighted-                             Weighted-
                             Number            Average       Average              Number           Average
                           Outstanding at     Exercise      Remaining         Outstanding at      Exercise
                         December 31, 2000       Price    Contractual Life  December 31, 2000       Price
-----------------------------------------------------------------------------------------------------------
$2.32 - $5.00                   1,287,194        $3.84         2.2              1,287,194            $3.84
$5.01 - $10.00                  1,067,151         8.28         8.2                319,068             7.56
$10.01-$15.00                     990,750        13.26         8.0                381,266            13.46
$15.01-$20.00                   1,523,288        16.41         6.7              1,139,936            16.19
$20.01-$23.17                      54,713        21.55         6.1                 31,387            21.47
-----------------------------------------------------------------------------------------------------------
                                4,923,096       $10.78         6.1              3,158,851           $10.01
===========================================================================================================

Employee Stock Purchase Plan
Effective July 1, 1996, the Company adopted the Watsco, Inc. Qualified Employee Stock Purchase Plan under which full-time employees with at least 90 days of service may purchase up to an aggregate of 800,000 shares of the Company's Common Stock. The plan allows participating employees to purchase, through payroll deductions or lump-sum contribution, shares of the Company's Common Stock at 85% of the fair market value at specified times subject to certain restrictions. During 2000, 1999, and 1998 employees purchased 77,822, 70,909 and 163,123 shares of Common Stock at an average price of $8.54, $11.52 and $14.13 per share, respectively. At December 31, 2000, 274,209 shares remained available for purchase under the plan.

The Company accounts for its stock option plans and employee stock purchase plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation cost has been recognized in the consolidated statements of income. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under the stock option plans and purchases under the employee stock purchase plan consistent with the method of SFAS No. 123, the Company's pro forma net earnings and earnings per share would be as follows:

Years Ended December 31,                               2000            1999           1998
-------------------------------------------------------------------------------------------------
Net income                          As reported        $19,114        $29,481         $25,191
                                    Pro forma          $14,853        $25,823         $22,088

Basic earnings per share            As reported          $0.72          $1.03          $0.93
                                    Pro forma            $0.56          $0.91          $0.81

Diluted earnings per share          As reported          $0.69          $0.99          $0.89
                                    Pro forma            $0.53          $0.87          $0.78

The Company's pro forma information above is not representative of the pro forma effect of the fair value provisions of SFAS No. 123 on the Company's net income in future years because pro forma compensation expense related to grants made prior to 1995 may not be taken into consideration.

The weighted-average fair value at date of grant for stock options granted during 2000, 1999 and 1998 was $6.56, $7.64 and $8.19, respectively, and was estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

Years Ended December 31,                                2000         1999         1998
----------------------------------------------------------------------------------------
Expected life in years                                   7.7          8.2         6.0
Risk-free interest rate                                  5.1%         6.1%        4.8%
Expected volatility                                     71.5%        43.3%       43.3%
Dividend yield                                           0.8%         0.5%        0.5%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Company's stock-based compensation arrangements have characteristics significantly different from those of traded options, and changes in the subjective input assumptions used in valuation models can materially affect the fair value estimate. As a result, the existing models may not necessarily provide a reliable single measure of the fair value of its stock-based compensation.

Restricted Stock
During 2000, 1999 and 1998, certain employees were granted an aggregate of 127,000, 93,000 and 127,500 shares, respectively, of the Company's common stock, subject to certain significant restrictions. The restrictions lapse upon attainment of retirement age or under other circumstances. During 2000 and 1998, 45,000 and 48,750 shares, respectively, were forfeited upon certain employee terminations. The unearned compensation resulting from the grant of restricted shares is reported as a reduction to shareholders' equity in the consolidated balance sheets and is being amortized to earnings over the period from date of issuance to the respective retirement age of each employee. Total amortization expense related to the restricted shares amounted to $389, $349 and $252 for the years ended December 31, 2000, 1999 and 1998, respectively.

401(k) Plan
The Company has a profit sharing retirement plan for its employees that is qualified under Section 401(k) of the Internal Revenue Code. The Company makes an annual matching contribution based on a percentage of eligible employee compensation deferrals. The contribution is made in cash or by the issuance of the Company's Common Stock to the plan on behalf of its employees. For the years ended December 31, 2000, 1999 and 1998, the aggregate contribution to the plan was $998, $893 and $790, respectively.

8. Acquisitions

The Company has completed various acquisitions, all of which have been accounted for under the purchase method of accounting. Accordingly, their results of operations have been included in the consolidated statements of income beginning on their respective dates of acquisition.

During 2000, the Company completed the acquisition of a refrigeration equipment distributor in Florida for cash consideration of $896.

During 1999, the Company completed the acquisition of six wholesale distributors of air conditioning and heating products and one staffing service franchise for cash consideration of $26,440 (net of cash acquired), including repayment of debt totaling $4,592, the issuance of a $6,098 promissory note and 842,569 shares of Common Stock having a fair value of $9,350.

During 1998, the Company completed the acquisition of 11 wholesale distributors of air conditioning and heating products and six staffing service franchises for cash consideration of $24,944 (net of cash acquired) and the issuance of 1,397,041 shares of Common Stock having a fair value of $23,931.

The unaudited pro forma information of the Company as if the above acquisitions had occurred on January 1, 1998 is as follows:

Years Ended December 31,                                   1999              1998
----------------------------------------------------------------------------------------
Revenue                                                 $1,282,621        $1,225,881
Income from continuing operations                          $32,175           $32,061
Diluted earnings per share from continuing operations        $1.07             $1.06

The unaudited pro forma information is not necessarily indicative of either the results of operations that would have occurred had the above companies been acquired on January 1, 1998 for the years presented or of future results of operations. The 2000 acquisition was not material to the Company's operations.

The purchase price allocations for business combinations are as follows:

Years Ended December 31,                              2000            1999             1998
---------------------------------------------------------------------------------------------
Accounts receivable, net                              $383          $13,453           $18,644
Inventories                                            476            9,941            16,988
Property and equipment, net                             20            1,625             4,697
Intangible assets                                      256           24,413            33,337
Other assets                                             -            1,629               915
Accounts payable and accrued expenses                 (239)          (9,173)          (17,570)
Long-term debt                                           -           (6,098)           (8,136)
Fair value of common stock issued                        -           (9,350)          (23,931)
----------------------------------------------------------------------------------------------
Cash used in acquisitions, net of
cash acquired                                         $896          $26,440           $24,944
=============================================================================================

9. Restructuring and Non-Cash Charges

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. These 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 in 2000 and 7 locations will close in 2001. The Company expects to complete these restructuring activities by December 31, 2001.

In accordance with Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and SEC Staff Accounting Bulletin No. 100, "Restructuring & Impairment Charges," the Company recorded restructuring charges of $8,481 ($5,326 after-tax) during the fourth quarter of 2000. A portion of this restructuring charge ($4,269 on a pre-tax basis) relates to the valuation of inventory to be disposed of and has been classified in cost of sales.

Selected information relating to the restructuring charge follows:

                                               Restructuring                                                  Restructuring
                                                charge for the          Write-down of                          liability or
                                                  year ended             assets to net       Cash         valuation reserves at
                                              December 31, 2000       realizable value      payments        December 31, 2000
-------------------------------------------- -----------------------------------------------------------------------------------

Discontinued product lines                          $4,269                  (785)               -                $3,484
Noncancelable lease obligations                      1,541                     -             (347)                1,194
Write-down of accounts receivable                      924                  (894)               -                    30
Employee severance and benefits                        326                     -             (272)                   54
Write-down of property and equipment                   185                  (147)               -                    38
Other                                                1,236                     -             (881)                  355
-----------------------------------------------------------------------------------------------------------------------
Total                                               $8,481                (1,826)          (1,500)               $5,155
=======================================================================================================================

At December 31, 2000, valuation reserves of $3,484 and $30, respectively, are netted against related asset balances - inventory and accounts receivable, net and the $1,641 restructuring liability is included in accrued liabilities in the consolidated balance sheets.

Also in the fourth quarter of 2000, the Company recorded non-cash charges of $788 related to additional inventory reserves, $1,731 related to accounts receivable valuation reserves in its manufactured housing subsidiaries and $2,169 related to the write-down of an impaired investment in one of the Company's primary competitors.

On an after-tax basis, restructuring and other non-cash charges were $8,270.

10. Shareholders' Equity

Common Stock and Class B Common Stock share equally in the earnings of the Company and are identical in most other respects except (i) Common Stock has limited voting rights, each share of Common Stock being entitled to one vote on most matters and each share of Class B Common Stock being entitled to ten votes;
(ii) shareholders of Common Stock are entitled to elect 25% of the Board of Directors (rounded up to the nearest whole number) and Class B shareholders are entitled to elect the balance of the Board of Directors; (iii) cash dividends may be paid on Common Stock without paying a cash dividend on Class B Common Stock and no cash dividend may be paid on Class B Common Stock unless at least an equal cash dividend is paid on Common Stock and (iv) Class B Common Stock is convertible at any time into Common Stock on a one-for-one basis at the option of the shareholder.

The Company's Board of Directors authorized the repurchase, at management's discretion, of up to 4,500,000 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. The Company purchased 1,749,313 shares at a cost of $17,604 in 2000 and 1,346,200 shares at a cost of $14,321, bringing the total purchased to 3,095,513 shares at a cost of $31,925.

11. Financial Instruments

Recorded Financial Instruments
The Company's recorded financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, the current portion of long-term obligations, borrowings under revolving credit agreement and debt instruments included in other long-term obligations.

At December 31, 2000 and 1999, the fair values of cash and cash equivalents, accounts receivable, accounts payable and the current portion of long-term obligations approximated their carrying values due to the short term nature of these instruments.

The fair values of borrowings under the revolving credit agreement and debt instruments included in long-term obligations also approximate their carrying value based upon interest rates available to the Company for similar instruments with consistent terms and remaining maturities.

Off-Balance Sheet Financial Instruments
The Company uses interest rate swaps to alter the interest rate risk profile related to outstanding borrowings under its revolving credit agreement, thereby altering the Company's exposure to changes in interest rates. The swap agreements exchange the variable rate of LIBOR plus the spread on its revolving credit agreement to fixed interest rate payments ranging from 6.25% to 6.49% in 2000 and 1999. At December 31, 2000, the Company's interest rate swap portfolio consisted of several swaps aggregating a notional value of $60,000 and maturity dates ranging from 2002 to 2007. At December 31, 1999, the Company's interest rate swap portfolio consisted

of several swaps totaling a notional value of $60,000 and maturity dates ranging from 2002 to 2007 and a single swap with a notional value of $70,000 that matured on January 26, 2000 and was used to hedge a short-term interest rate increase related to Year 2000 systems issues.

At December 31, 2000 and 1999, respectively, the Company is contingently liable under standby letters of credit aggregating approximately $2,300 and $7,300 that were primarily used as collateral for promissory notes issued in connection with certain acquisitions. The Company does not expect any material losses to result from the issuance of the standby letters of credit because performance is not expected to be required. Accordingly, the estimated fair value of these instruments is zero.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash investments and accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution or investment. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographical regions. The Company establishes and monitors an allowance for doubtful accounts based on the credit risk of specific customers, historical trends and other information. At December 31, 2000 and 1999, the allowance for doubtful accounts was $6,970 and $5,564, respectively. Although the Company believes its allowance is sufficient, the amount the Company ultimately realizes could differ materially in the near-term from the amount reported above.

12. Commitments and Contingencies

At December 31, 2000, the Company is obligated under non-cancelable operating leases of real property and equipment used in its continuing operations for minimum annual rentals as follows: $25,852 in 2001, $22,914 in 2002, $17,858 in 2003, $13,750 in 2004, $9,560 in 2005 and $15,865 thereafter. Rental expense for continuing operations for the years ended December 31, 2000, 1999 and 1998 was $26,462, $25,831 and $21,911, respectively.

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.

13. Segment Information

The Company's primary business is the operation of a distribution network selling air conditioning, heating and refrigeration equipment and related parts and supplies. The Company also operates Dunhill, a national temporary staffing and permanent employment services business, which is immaterial (as defined in SFAS 131) to the Company's financial results, net assets and net cash flows. Accordingly, there is no segment information reportable in these notes to the consolidated financial statements.

14. Subsequent Events

On February 7, 2001, the Company issued $30,000 Senior Series A Notes bearing 7.07% interest under its private placement shelf facility (see Note 5). The Company's notes have an average life to maturity of 6 years with equal installments of $10,000 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 revolver credit facility.