-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OzyhrB82cPu7tT2DgxbdQDRlk1JPW4c50gnKgJnTppDjujJhWr63j0ORSFReDU6i YV4lZz3qtLRM/h3MRdETLw== 0001005477-02-001775.txt : 20020424 0001005477-02-001775.hdr.sgml : 20020424 ACCESSION NUMBER: 0001005477-02-001775 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020125 FILED AS OF DATE: 20020424 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUGHES SUPPLY INC CENTRAL INDEX KEY: 0000049029 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRICAL APPARATUS & EQUIPMENT, WIRING SUPPLIES [5063] IRS NUMBER: 590559446 STATE OF INCORPORATION: FL FISCAL YEAR END: 0125 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08772 FILM NUMBER: 02619167 BUSINESS ADDRESS: STREET 1: 20 N ORANGE AVE, STE 200 STREET 2: P O BOX 2273 CITY: ORLANDO STATE: FL ZIP: 32802-2273 BUSINESS PHONE: 4078414755 10-K 1 d02-50438_10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 25, 2002 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 No. 001-08772 HUGHES SUPPLY, INC. (Exact name of registrant as specified in its charter) Florida 59-0559446 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 North Orange Avenue Suite 200 Orlando, Florida 32801 (Address of principal executive offices) (407) 841-4755 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock ($1.00 Par Value) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Page 1 of 24 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the Registrant's voting stock held by non-affiliates ($41.40 per share): $903,043,255 as of April 19, 2002. There were 23,850,329 shares of the Registrant's Common Stock ($1.00 par value) outstanding as of April 19, 2002. DOCUMENTS INCORPORATED BY REFERENCE Designated portions of the Annual Report to Shareholders for the fiscal year ended January 25, 2002 are incorporated by reference in Parts I, II, and IV of this Report. Designated portions of the Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report. Page 2 of 24 TABLE OF CONTENTS
Page ---- PART I Item 1. Business.................................................................. 4 Item 2. Properties................................................................ 13 Item 3. Legal Proceedings......................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders....................... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 14 Item 6. Selected Financial Data................................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 14 Item 8. Financial Statements and Supplementary Data............................... 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 14 PART III Item 10. Directors and Executive Officers of the Registrant........................ 15 Item 11. Executive Compensation ................................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 15 Item 13. Certain Relationships and Related Transactions ........................... 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......... 16 Signatures................................................................ 23 Index of Exhibits Filed with this Report.................................. 24
Page 3 of 24 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS Certain statements set forth in this Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, and are subject to the safe harbor created by such sections. When used in this Report, the words "believe," "anticipate," "estimate," "expect," "may," "will," "should," "plan," "intend," "potential," "predict," "forecast," and similar expressions are intended to identify forward-looking statements. Although Hughes Supply, Inc. (as used throughout this Report, "Hughes Supply," the "Company" or the "Registrant" refers to Hughes Supply, Inc. and its subsidiaries, except where the context otherwise requires) believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results or events may differ significantly from those indicated in such forward-looking statements as a result of various important factors. These factors are discussed further in the caption "Risk Factors" below. The Company assumes no obligation to publicly update or revise its forward-looking statements. The following should be read in conjunction with the Company's consolidated financial statements and the notes thereto filed as part of this Report. GENERAL Hughes Supply, Inc., founded in 1928, is a diversified wholesale distributor of construction and industrial materials, equipment, and supplies to commercial construction, residential construction, industrial and public infrastructure markets in North America. Operating in 34 states and Mexico, the Company distributes over 240,000 products, through its 434 branches and six central distribution centers. The Company's principal customers are electrical, plumbing, mechanical, fire protection, and underground utility contractors, electric utility customers, property management and property development companies, municipalities and government agencies, telecommunication companies, and industrial companies. Industrial companies include businesses in the petrochemical, food and beverage, pulp and paper, mining, pharmaceutical, and marine industries. The Company's operations are managed in five strategic business units ("Groups"), each of which is led by one of three Group presidents. These Groups are built around five broad product categories and are: Electrical; Plumbing/HVAC; Industrial; Building Materials; and Water & Sewer. These Groups represent the Company's reportable segments and constitute the basis management uses for making operating decisions and assessing performance. This product-driven organizational structure is designed to enhance the Company's competitive position in the marketplace by intensifying the Company's focus on satisfying customer needs, strengthening vendor relationships, and streamlining the decision-making processes of the Company. Financial information about the Company's Groups is set forth in Note 12 of the Notes to Consolidated Financial Statements of the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, a copy of which is filed as an exhibit to this Report, and the cited portion of which is incorporated herein by reference. PRODUCTS The Company focuses on distributing construction and industrial products that leverage its strengths in inventory management, specialized sales forces by product category, distribution and logistics, credit management, and information technology. The Company has intensified its focus on providing value-added products and services, including integrated supply arrangements, fabrication, equipment rental, maintenance and repair, facilities management, and the development of national accounts. The Company distributes products and offers services in the following five broad Groups: Electrical The Electrical Group includes the Company's electrical and electric utility product lines. Markets served include industrial and commercial buildings, single and multi-family residential, manufacturing plants, underground utilities, Page 4 of 24 electrical substations, power generation facilities, power line construction, and all types of general construction. The Electrical Group primarily operates throughout the Midwestern, Southeastern, and Southwestern United States. Key customers are electrical contractors, industrial companies, schools and institutions, hospitals, commercial businesses, municipalities, investor-owned facilities, and co-op and municipal-owned utilities. Products and services include wire management products, distribution equipment, wire and cable, automation equipment, tools and fasteners, lamp/lighting controls, energy products, data/communications products, meter repair and certification, pole line hardware, and storeroom/job trailer management. Plumbing/HVAC The Plumbing/HVAC Group includes the Company's plumbing, HVAC, mechanical pipe, valves and fittings product lines, and its international business. Markets served include commercial, institutional, industrial, municipal, single and multi-family residential, kitchen and bath dealers, building supply, hardware, and export. The Plumbing/HVAC Group primarily operates throughout the Midwestern, Southeastern, and Southwestern United States and Mexico. Key customers are plumbing and HVAC contractors, remodeling contractors, mechanical contractors, commercial and industrial purchasing agents, municipalities, fabricators, OEM's, industrial subcontractors, exporters, maintenance departments, engineering departments, and planners. Products and services in the Plumbing/HVAC Group include residential and commercial water heaters, furnaces, heat pumps, air conditioning units, copper, steel, cast iron, poly and PVC pipe and fittings, plumbing fixtures, faucets and accessories, pumps and sprinkler heads, commercial drains, mechanical valves, repair parts, and procurement services. Industrial The Industrial Group includes the Company's industrial pipe, plate, valves, and fittings product lines. Markets served include special purpose piping systems (requiring exotic alloy pipe, nickel or composite), manufacturing facilities, marine applications, flow control processing systems (high temperature and high corrosive types of fluids), process plants, phosphate, chemical, utility, pulp and paper, pharmaceutical, export, citrus, food and dairy, solid waste, engineering, commercial, institutional, and municipal. The Industrial Group primarily operates throughout the Southeastern and Southwestern United States. Key customers are industrial and mechanical contractors, fabricators, wholesale distributors, exporters, OEMs, and industrial concerns (food and beverage, pulp and paper, mining, petro-chemical, marine, pharmaceutical, etc.). Products in the Industrial Group include valves, fittings, pressure fittings, angle, flanges, plate, sheet, pipe (i.e. carbon, stainless and thermoplastic, etc.), tubing and bar, steam traps, actuators, valve positioners, and gauges. Services provided include valve automation and repair, piping fabrication, and pipe cutting and grooving. Building Materials The Building Materials Group includes the Company's building materials and maintenance supplies product lines. This Group primarily operates in the Southeastern United States. The building materials product line focuses on the construction of roads and bridges along with commercial, industrial, multi-family and infrastructure projects. Key customers of the building materials product line are concrete, masonry caulking/waterproofing, and road and bridge contractors and subcontractors. Products and services in the building materials product line include concrete and masonry supplies and accessories, lumber, bridge rail, overhand brackets, erosion control products, bearing pads, tilt-up bracing rental and lifting/bracing inserts, sealants, waterproofing and fireproofing materials, commercial washroom specialties, tools, and accessories. The maintenance supplies product line serves the multi-family housing market with after-market rehab and maintenance supplies, including plumbing, electrical, appliances/parts, hardware, door/window parts, HVAC equipment/parts, and janitorial supplies. Key customers for the maintenance supplies product line are property management and property development firms, and apartment owner/operated properties. Water & Sewer The Water & Sewer Group includes the Company's water and sewer, concrete, and fire protection product lines. This Group primarily operates throughout the Midwestern, Southeastern, Southwestern, and Western United States. The water and sewer and concrete product lines primarily serve the Company's infrastructure market through customers such as underground utility contractors, utility companies, telecommunication companies, site developers, municipalities, and government agencies. The fire protection product line serves fire protection contractors in the commercial construction, Page 5 of 24 residential construction, and industrial markets. Products and services in the Water & Sewer product category include all piping products (ductile iron, PVC, HDPE, and steel, etc.), fire hydrants, valves, fittings, storm drains, backflow prevention devices, water meters, leak detection, irrigation products, pumps, tanks, manhole rehab services, concrete sewer products, concrete electrical and telephone vaults, fire protection products (including sprinkler heads, steel pipe and fittings), and fire protection fabrication services. CUSTOMERS The Company currently serves over 75,000 customers, and no single customer accounts for more than 2% of total annual sales. Unlike do-it-yourself home center retailers, the Company does not market its products to retail consumers. Consequently, the Company differentiates itself with respect to its customer base, breadth of products offered, and level of service provided. Management believes that the Company's customers are typically professionals who choose their vendors primarily on the basis of product availability, price, relationships with sales personnel, and the quality and scope of services offered by such suppliers. Furthermore, professional customers generally buy in large volumes, are repeat buyers because of their involvement in longer-term projects, and require specialized services not typically provided by do-it-yourself home center retailers. The Company provides its customers with credit services, design assistance, material specifications, scheduled job site delivery, job site visits to ensure satisfaction, technical product services (including blueprint take-off and computerized order quotes), and assistance with product returns. Accordingly, the Company has been able to serve customer groups that do-it-yourself home center retailers generally do not emphasize. VENDORS The Company purchases from over 13,000 manufacturers and vendors, of which approximately 700 are part of the Company's Preferred Vendor Program. This Preferred Vendor Program leverages the Company's existing relationships with a number of vendors and helps to increase sales of their products in local markets through various initiatives, including sales promotions, cooperative marketing efforts, dedicated sales force, and product exclusivity. In return, many of these key vendors offer lower prices and volume incentive programs to the Company. The Company actively solicits volume-purchasing discounts and rebates from its preferred vendors and is constantly working to consolidate its Preferred Vendor Program. This program has reduced the number of vendors and has resulted in stronger, more strategic relationships with a more concentrated group of vendors. The concentration of vendors has also improved the Company's ability to ensure more timely delivery, to reduce errors, and to obtain better terms and greater financial incentives. To strengthen relations with its vendors, the Company created a centralized Vendor Development Department during fiscal 2002. This department is solely attentive to fostering and examining the communications and agreements with the Company's vendors. In addition, the Company has a freight management program, with similar goals of reducing its number of freight vendors and controlling the cost of inbound and outbound freight. Other programs currently being implemented with vendors include vendor-managed inventory systems, bar coding, and electronic exchange of purchase orders and invoices. No single vendor accounted for more than 5% of the Company's total purchases during fiscal 2002. DISTRIBUTION AND LOGISTICS The Company's distribution network consists of 434 branches and six central distribution centers in the United States and Mexico. The efficient operation of the Company's distribution network is critical in providing quality service to the Company's customer base. The Company's central distribution centers and branches use technology in warehouse management to optimize receiving, inventory control, picking, packing, and shipping functions. The Company's purchasing agents in its branches use a computerized inventory system to monitor stock levels, while central distribution centers in Arizona, Florida, Georgia, North Carolina, and Texas provide purchasing assistance as well as a broad stock of inventory which supplements the inventory of the branches. In addition, the Company uses several of its larger branches in other parts of the country as distribution points for certain product lines. The substantial majority of customer orders are shipped from inventory at the Company's branches. The Company also accommodates special orders from its customers and facilitates the shipment of certain large volume orders directly from the manufacturer to the customer. Orders for larger construction projects normally require long-term delivery schedules throughout the period of construction, which in some cases may continue for several years. Page 6 of 24 SALES AND MARKETING The Company employs a specialized and experienced sales force for each of its product lines, including approximately 950 outside sales representatives who call on and work with professional buyers for contractors and subcontractors. They provide product specifications and usage data, design alternatives, and job quotes in an effort to assist them in fulfilling their material needs. Approximately 700 inside account associates expedite orders, deliveries, quotations, requests for pricing, and the release of products for delivery. A re-emphasis on sales training has occurred within Hughes Supply. During fiscal 2002, the Company began and completed formal classroom training nationwide to target specific sales skills to its outside sales force. In addition, the new Hughes Persuasive Selling model was introduced to its outside sales force. Similarly, Hughes plans to establish new formal training for its inside sales force. The Sales and Marketing Department offers the sales force the tools they need to communicate the benefits of the Company to their customers, prospects, and business partners. During fiscal 2002, Sales and Marketing introduced the new Hughes Supply brandmark. It contains both the traditional Hughes Supply shield shape and a strong presentation of the Hughes Supply name, as well as the new tagline - Solutions. Supply. Service., to reinforce the Company's position as a premier diversified industrial distributor. The Company focuses its sales and marketing efforts on building strong customer relationships. The Company has developed several new programs, including Hughes Access, HughesPlus, and the Hughes Customer Adventures Program. All of these programs are designed to keep existing customers, to build relationships with new customers, and to identify profitable customers who have not purchased recently from the Company. The innovative Hughes Access program presents special value promotions to customers from select Hughes Supply vendors. In essence, the Company partners with top vendors in each product line and provides Hughes' customers with exclusive limited-time offers. Under the HughesPlus program, the Company leverages its buying power to benefit customers. The Company offers its customers special buying privileges from well-known national firms. This preferred pricing is on items that range from office products to capital financing. The Hughes Customer Adventures program is a way for the Company to reward its best customers with a trip of their choice when they exceed a specified purchase volume. The trip options include, among others, exotic hunting and fishing expeditions, photo safaris, and skiing. The Company also created a national accounts program and established a government sales division to more effectively secure bids on local, state, and national levels. INFORMATION TECHNOLOGY The Company's IT systems are capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management, sales analysis, and accounting. The Company's customers and sales representatives rely on these systems for real-time information on product pricing, inventory availability, and order status. The systems also provide management with information relating to sales, inventory levels and customer payments, and with other data that is essential for the Company to operate efficiently and provide a high level of service to its customers. The Company believes that its continued investment in upgrading and consolidating its IT systems is necessary to provide a platform to implement its e-commerce initiatives and to allow it to continue its strategic growth initiatives. In fiscal 2001, the Company selected a new distribution/logistics software provider. This integrated software is an e-commerce enabled, customer fulfillment, inventory management, logistics, and distribution management system. It is designed specifically for MRO- and contractor-oriented distributors. The Company began implementing this software in December 2001 and expects implementation to be staggered over approximately a two-year period. The Company believes that this timeframe will enable it to reduce risk, minimize customer disruption, and spread implementation costs. Once implementation is complete, the Company expects to be operating primarily under one platform, compared to its 26 current operating systems. The Company believes that consolidation of its operating systems allows for increased operational efficiencies, particularly in the area of working capital management, provides a means for decreasing transaction costs, and provides the Company with the infrastructure necessary to realize administrative synergies associated with past and future business acquisitions. Page 7 of 24 The Company is significantly expanding its electronic data interchange (EDI) presence, particularly with vendors, and the new operating system being implemented will help facilitate this process. OPERATING STRATEGY The Company's operating strategy is based on decentralizing, at the branch level, customer-related functions such as sales and local inventory management. The administrative responsibilities for certain functions such as credit, human resources, finance and accounting, legal, and information technology are centralized at the corporate level. In addition, the Company has re-centralized its Operations Department and created a new Inventory Management Department in fiscal 2002. These departments are responsible for streamlining and implementing improved operational processes within the Company and managing inventory levels, focusing specifically on excess inventory. All operating branches are assigned to one of the Company's five Groups, each of which is led by one of three Group presidents. Under this structure, the Company's branches are grouped into territories, territories into districts, districts into regions, and regions into Groups. Territory managers generally have oversight responsibility for branches within a territory as well as direct responsibility for a specific branch within the territory. District managers have responsibility over certain groups of branches but do not have direct responsibility for a specific branch. District and territory managers report to regional managers. Regional managers report to the Group presidents. Management believes its organizational structure is designed to enhance the Company's competitive position in the marketplace by intensifying the Company's focus on satisfying customer needs, strengthening vendor relationships, and streamlining the decision-making processes of the Company. Key elements of the Company's operating strategy include: Local Market Focus Hughes Supply has organized its branches as autonomous, decentralized branches capable of meeting local market needs and offering competitive prices. Each branch handles one or more of the Company's product lines and operates as a separate profit center with its own specialized and experienced sales force. Each branch manager has the authority and responsibility to set pricing and tailor the inventory offering and mix (as well as the nature of services offered) in order to meet the local market demand. In addition, each branch manager is responsible for purchasing, maintaining adequate inventory levels, cost control, and customer relations. A substantial portion of a branch manager's compensation is dependent on their branch's financial performance. The Company has been able to tailor its branch size and product offerings to meet perceived market demand. As a result, the Company successfully operates branches in secondary cities where management believes it has achieved significant market share and in larger metropolitan areas where it has established a sound market presence. Superior Customer Service Substantially all of Hughes Supply's sales are to professional customers with whom the Company has developed long-term relationships. These relationships are based on the Company's history of providing superior service, which in turn creates trust. Customer services provided by the Company include credit, design assistance, material specifications, scheduled job site delivery, job site visits to ensure satisfaction, technical product services (including blueprint take-off and computerized order quotes), and assistance with product returns. In addition to the Sales and Marketing Department initiatives discussed above, the Company has recently introduced the 12 Commitments to Customer Service. The 12 Commitments were developed through discussions with customers about what measures Hughes Supply must take to gain and maintain business. They are a compilation of essential principles that every member of the Hughes Supply team should be guided by on a daily basis. The goal encompassed in every one of the 12 Commitments is for the Company to be the best in customer service in each of the industries it serves. Comprehensive and Diversified Product Categories As part of its emphasis on superior customer service, the Company offers more than 240,000 products at competitive prices. Distribution of a wide variety of products within each product category helps the Company's customers manage their inventory, arrange for consolidated delivery requirements, and purchase a greater portion of total job specifications. The depth and breadth of the Company's product categories generally permits it to make add-on sales of higher margin, non-commodity items. The Company is diversified across multiple product categories, geographic regions, and various sectors of the construction industry (such as commercial, residential, public infrastructure and Page 8 of 24 industrial), which lessens its dependence upon market conditions applicable to any of its product categories or any single sector of the construction industry. This product diversification provides opportunities for the Company to participate in multiple phases of construction projects, capturing more of the total construction spending dollar and spanning the entire construction cycle. Well-Trained and Experienced Workforce The Company has implemented extensive employee recruiting and training programs to ensure that its employees have the skill levels necessary to compete effectively in today's marketplace. The Company utilizes in-depth training seminars covering basic and advanced product knowledge, as well as multiple levels of selling, purchasing, negotiating, and management skills workshops. The Company has also developed a recruiting and training program to increase the number of qualified applicants introduced into its management and sales ranks. The Company's corporate management, branch managers, outside sales representatives, and inside sales account associates have considerable experience with the Company. In fiscal 2002, there has been turnover of certain corporate management positions, including the appointment of Thomas I. Morgan as successor President and Chief Operating Officer. Additionally, in fiscal 2002, the Company created several executive positions, including Senior Vice President of Sales and Marketing, Senior Vice President of Operations, and Vice President of Human Resources, to provide new emphasis on these functions. Centralized Administrative Functions In fiscal 2001, the Company has re-centralized certain administrative functions such as credit, human resources and payroll, finance and accounting, legal, and information technology. Centralization of human resources, finance and accounting functions ensure conformity in policy and lower costs of administration. The Company's credit function is essential to its success. Dedicated credit managers are assigned to specific geographic areas in the United States. All credit decisions are researched, analyzed, and approved by the regional credit managers to ensure conformity and quality of credit decisions across the Company's operations. GROWTH STRATEGY Many local and regional distributors are privately-owned, relationship-based companies. Such distributors often have limited purchasing power, lack sufficient resources to offer broad product lines and multiple brands, and lack the sophisticated inventory management and control systems necessary to operate multiple branches efficiently. As a result, such distributors target their services to a particular type or size of customer and/or a particular product category. To counter the limitations experienced by small distributors, certain wholesale distributors, including the Company, have grown considerably through acquisitions. This expansion has enabled Hughes Supply to service various sizes and types of customers with multiple product categories and to diversify its sales across various types of construction and users of its products. Because of Hughes Supply's strong competitive position, its size and its management infrastructure, management believes that the Company is well positioned to continue to benefit from consolidation trends within the wholesale distribution business. Hughes Supply's strategy for growth has focused on both internal growth and growth through acquisitions. Historically, the Company has centered its internal growth and growth through acquisitions around customer groups and products which help it to diversify geographically and product-wise, capturing more of the total construction dollar while focusing more on products used in repair, maintenance, replacement, and renovation applications. These products generally offer higher margins and are less dependent on new construction. Management believes that the Company's product, market and geographic diversification helps reduce the impact of economic cycles on its profitability. A summary of the Company's internal growth and acquisition program follows. Internal Growth Over the last five years, Hughes Supply has grown internally through increases in comparable branch sales and the opening of new branches. Comparable branch sales increases have been attributable to new product introductions within existing branches, such as fire protection equipment and concrete fabrication products, fiber-optic products, and the higher value-added services such as integrated supply, national account business, and complete warehouse management contracts. Since January 31, 1997, Hughes Supply has opened 81 new branches (excluding branches opened and closed within this time period). New branches are generally opened to fill in existing market areas or to accommodate the split Page 9 of 24 out of branches handling multiple product lines. Since January 31, 1997, the Company has closed 45 branches, excluding branches that were opened and closed within this time period and branches that were sold as part of the divestiture of its pool and spa business in January 2001. The Company closed these branches because they did not strategically fit into the Company's core businesses and/or they did not perform to expectations. During fiscal 2002, the Company closed or decided to close 43 under-performing branches, including its e-commerce venture. The Company will continue to evaluate the operations and performance of its branches over the next fiscal year. Acquisitions Historically, Hughes Supply has pursued an active acquisition strategy to capitalize on the large, growing and highly-fragmented markets in which it competes. The Company's acquisition strategy focuses on acquiring profitable, private, wholesale distribution businesses with strong management teams and well-developed market positions and customer relationships. Hughes Supply identifies acquisition targets that present growth opportunities and complement Hughes Supply's existing structure, allowing the Company to benefit from synergies resulting from the integration of these targets' operations with its own. Management believes that significant acquisition opportunities exist in each of its product categories. Hughes Supply categorizes its acquisitions as fill-in acquisitions or new market acquisitions. Fill-in acquisitions represent acquisitions of primarily small companies that distribute some of the same product lines as the Company in geographic areas already served by Hughes Supply. Since January 31, 1997, the Company has added 25 branches through the completion of 12 fill-in acquisitions. The Company's management believes that significant additional fill-in acquisition opportunities are available. New market acquisitions represent the addition of new product lines, primarily within the Company's existing product categories, or the entry into new geographic markets, or both. The Company's principal acquisition criteria with respect to new market acquisitions has been to: o add products and product lines with higher gross margins; o increase sales to the replacement and industrial markets (that tend to be less cyclical than new construction markets); o achieve greater geographical diversification; o develop additional opportunities for future fill-in acquisitions and new branch openings; and o expand its current product offering from leading suppliers. Since January 31, 1997, the Company has completed 26 new market acquisitions representing 131 branches, including the acquisition of Water Works Sales Companies in May 2001. Water Works Sales Companies, with six branches in Colorado, New Mexico and Texas, significantly expanded the Company's water and sewer business in new geographic markets. SEASONALITY The Company's operating results are impacted by seasonality. Generally, sales of the Company's products are higher in the second and third quarters of each year due to more favorable weather conditions during these periods. COMPETITION Management believes that the Company is one of the largest wholesale distributors of its range of products in the United States and that no other company competes against it across all of its product categories. However, there is strong competition in each product category distributed by the Company. The main sources of competition are other wholesalers, manufacturers who sell certain lines directly to contractors and, to a limited extent, retailers in the markets for plumbing, electrical fixtures and supplies, building materials, and contractors' tools. The principal competitive factors in the Company's business are product availability, pricing, technical knowledge as to application and usage, and advisory and other service capabilities which develop the trust factor needed in successful customer relationships. Page 10 of 24 INVENTORIES The Company is a wholesale distributor of construction and industrial materials and maintains significant inventories to meet rapid delivery requirements and to ensure a continuous allotment of goods from suppliers. As of January 25, 2002, inventories totaled approximately $396.4 million and represented approximately 31% of the Company's total assets. EMPLOYEES As of January 25, 2002, the Company had 7,156 employees consisting of 15 executives, 538 managers, 2,036 sales personnel and 4,567 other employees, including truck drivers, warehouse personnel, office and clerical workers. Over the last year, the Company's work force has decreased approximately 7%. This decrease was primarily the result of the eliminations of various management and staff positions to bring headcount more in line with current economic conditions and to streamline the Company's operations. This reduction is also impacted by the closure of approximately 40 branches in fiscal 2002. The decrease was partially offset by increases resulting from acquired and newly-opened wholesale branches. The Company considers its relationships with its employees to be good. ENVIRONMENTAL LAWS Compliance with federal, state and local environmental protection laws has not had in the past, and is not expected to have in the future, a material effect upon the Company's liquidity or results of operations. RISK FACTORS The following factors could significantly affect our operations and financial results and cause our results to differ from those anticipated by forward-looking statements in this Report: The Company's operating results are linked to the strength of the construction markets. Demand for the Company's products depends highly on the commercial, residential, and industrial construction markets. The level of activity in the commercial construction market depends largely on vacancy rates, interest rates, regional economic outlooks, the availability of financing, and general economic conditions. The level of activity in the residential construction market depends on new housing starts and residential renovation projects. Factors influencing the demand for new housing starts and residential renovation projects include interest rates, availability of financing, housing affordability, unemployment, demographic trends, gross domestic product growth, and consumer confidence. The level of activity in the industrial construction market depends on the industrial economic outlook, corporate profitability, interest rates, and capacity utilization. The factors influencing each of the Company market segments are not within its control. Since each of the Company's market segments is sensitive to cyclical changes in the economy, future downturns in the economy or lack of improvement in the economy may adversely affect its results of operations. The Company is especially susceptible to economic fluctuations in Florida, Texas, and Georgia, which accounted for approximately 24%, 17%, and 10% of its net sales, respectively, in fiscal 2002. Fluctuating commodity prices and unexpected product shortages may impair the Company's operating results. The cost of stainless steel, aluminum, copper, nickel alloys, plastic, and other commodities used in products distributed by the Company can be volatile. Significant fluctuations in the cost of such commodities may adversely affect the Company's results of operations and contribute to cyclicality in its operating performance. In total, the Company distributes construction materials and supplies from over 13,000 manufacturers and vendors, no one of which accounted for more than 5% of total material and supply purchases during fiscal 2002. Despite this widely diversified base of manufacturers and vendors, the Company may still experience shortages as a result of unexpected demand or production difficulties. If this were to occur and the Company was unable to obtain a sufficient allocation of products from manufacturers and vendors, there could be a short-term adverse effect on its results of operations. In addition, the Company has entered into strategic partnerships with certain vendors. The Company's inability to maintain such partnerships, and the loss of the competitive pricing such partnerships offer the Company could adversely affect its results of operations. Page 11 of 24 The Company operates in very competitive marketplace. The building products industry is highly competitive and fragmented. The principal competitive factors in the Company's business are: o availability of materials and supplies; o pricing of products; o availability of credit; o technical product knowledge as to application and usage; and o advisory or other service capabilities. Hughes Supply's competition includes other wholesalers, manufacturers who sell certain products directly to its customer base, and certain Hughes Supply customers. The Company also competes, to a limited extent, with retailers in the markets for plumbing, electrical fixtures and supplies, building materials, and contractors' tools. Competition varies depending on product line, customer classification, and geographic market. The Company may not be successful in responding effectively to competitive pressures, particularly from competitors with substantially greater financial and other resources than the Company. The Company relies heavily on its key personnel. The Company is highly dependent upon the skills, experience and efforts of its executive officers. The loss of one or more of its executive officers could have a material adverse effect on its business and development. Hughes Supply's growth also depends in part on its ability to attract and retain qualified managers, salespersons and other key employees and on its ability to manage growth successfully. The Company may not be successful in attracting and retaining such employees or in managing its growth successfully, which may in turn have an adverse effect on its results of operations. Dividend payments are restricted. The decision to pay dividends and the amount of such payments depends on the Company's results of operations, financial condition, capital requirements, and other factors that the Board of Directors deems relevant. The Company is also party to certain debt instruments and agreements that contain provisions limiting the amount of dividends that may be paid by the Company to its shareholders. In the future, the Company may become a party to debt instruments or agreements that may further restrict its ability to pay dividends. Hughes Supply's stock price may fluctuate substantially. The market price for Hughes Supply's common stock may fluctuate substantially based, among other factors, on: o availability of credit; o the Company's operating results; o the operating results of other companies in the building products industry; o changes in general economic conditions; o changes in the financial markets; and o other developments affecting the Company or its competitors. The Company's sales are predominately on credit. The Company distributes materials, equipment, and supplies for the construction and industrial markets primarily in the Southeastern, Southwestern, and Midwestern United States. Approximately 95% of the Company's net sales are credit sales made primarily to customers whose ability to pay depends on the economic strength of the construction industry in such regions. Cyclical changes in the economy, future downturns in the economy, or lack of improvement in the economy in such regions could adversely affect the Company's ability to collect trade accounts receivable and in turn its results of operations. Page 12 of 24 Quarterly results are seasonal. The Company's net sales and net income are seasonal. Hughes Supply has historically experienced lower operating results in the first and fourth quarters than in the second and third quarters of its fiscal year. Seasonal variations in operating results may also be significantly increased by weather conditions, such as cold or wet weather, which can delay construction projects. Political and economic events can also affect revenues. If sales fall below expectations, the Company's operating results may be adversely affected. The Company's operations may be impacted by the success of its system integration project. The Company began implementing a company-wide operating system in December 2001 and expects implementation to be staggered over approximately a two-year period. The Company believes that this timeframe will enable it to reduce risk, minimize customer disruption, and spread implementation costs. The Company may be adversely affected if the new operating system does not meet management's expectations. Certain anti-takeover provisions may make Hughes Supply's stock less attractive to investors. Certain provisions of the Company's Restated Articles of Incorporation, as amended, and Florida law may make it more difficult for a third party to acquire a controlling interest in Hughes Supply even if such change in control would benefit shareholders. These provisions may delay or prevent transactions in which shareholders would receive a substantial premium for their shares over then prevailing market prices. These provisions may also limit shareholders' ability to approve transactions they may otherwise believe are in their best interests. Such provisions include: o a provision dividing the Board of Directors into three classes of directors elected for staggered three-year terms; o a provision authorizing the issuance of preferred stock without shareholder approval; and o a provision requiring that certain business combinations receive approval by two-thirds of its voting stock. ITEM 2. PROPERTIES The Company leases approximately 65,000 square feet of an office building in Orlando, Florida for its corporate headquarters. The Company also leases approximately 31,000 square feet of a computer center in Orlando, Florida for its IT operations. In addition, the Company owns or leases 434 branches in 34 states and Mexico. The typical sales branch consists of a combined office and warehouse facility ranging in size from 1,000 to 150,000 square feet, with paved parking and storage areas. The Company also operates six central distribution centers, ranging in size from 54,000 to 160,000 square feet. The Company believes that its properties are in good condition and are suitable and adequate to carry on the Company's business. None of the owned principal properties is subject to any encumbrance material to the consolidated operations of the Company. Additional information regarding owned and leased properties of the Company is set forth as Exhibit 99.1 to this Report. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the normal course of its business. In the opinion of management, none of the proceedings are material in relation to the Company's consolidated operations, cash flows, or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended January 25, 2002. Page 13 of 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information with respect to the principal market for the Company's common stock, stock prices and dividend information is set forth under the caption "Corporate and Shareholder Information" and in Note 13 of the Notes to Consolidated Financial Statements of the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, a copy of which is filed as an exhibit to this Report, and the cited portions of which are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information with respect to selected financial data of the Company is set forth under the caption "Selected Financial Data" of the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, a copy of which is filed as an exhibit to this Report and the cited portion of which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to the Company's financial condition, changes in financial condition and results of operations is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, a copy of which is filed as an exhibit to this Report and, the cited portion of which is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information with respect to the Company's market risk is set forth under the caption "Quantitative and Qualitative Disclosure About Market Risk" under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, a copy of which is filed as an exhibit to this Report, and the cited portion of which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) Financial Statements The financial statements filed with this Report are set forth in Item 14(a). (b) Selected Quarterly Financial Data Information with respect to selected quarterly financial data of the Company is set forth in Note 13 of the Notes to Consolidated Financial Statements of the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, a copy of which is filed as an exhibit to this Report, and the cited portion of which is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not had any change in, or disagreement with, its accountants or reportable event which are required to be reported in response to this item. Page 14 of 24 PART III All information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the Company's Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders. Page 15 of 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: (1) All Financial Statements The following consolidated financial statements of the Company and its subsidiaries included in the Company's Annual Report to Shareholders for the fiscal year ended January 25, 2002, are filed under Item 8 and are incorporated by reference: Annual Report Page(s) Consolidated Statements of Income for the years ended January 25, 2002, January 26, 2001 and January 28, 2000........... 10 Consolidated Balance Sheets as of January 25, 2002 and January 26, 2001.................................................. 11 Consolidated Statements of Shareholders' Equity for the years ended January 25, 2002, January 26, 2001 and January 28, 2000..... 12 Consolidated Statements of Cash Flows for the years ended January 25, 2002, January 26, 2001 and January 28, 2000........... 13 Notes to Consolidated Financial Statements........................ 14-26 Report of Independent Certified Public Accountants................ 27 Management's Responsibility for Financial Statements.............. 27 Page 16 of 24 (2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the fiscal years ended January 25, 2002, January 26, 2001 and January 28, 2000. Hughes Supply, Inc. Schedule II - Valuation and Qualifying Accounts (in thousands)
Fiscal Years Ended --------------------------------------- January 25, January 26, January 28, 2002 2001 2000 ----------- ----------- ----------- Allowance for doubtful accounts: Balance at beginning of year $ 6,106 $ 2,777 $ 2,809 Additions charged to costs and expenses, net 11,065 10,626 4,064 Deductions (8,783) (7,297) (4,096) -------- -------- -------- Balance at end of year $ 8,388 $ 6,106 $ 2,777 ======== ======== ======== Inventory reserves: Balance at beginning of year $ 10,379 $ 7,253 $ 4,117 Additions charged to costs and expenses, net 8,044 12,395 8,489 Deductions (8,574) (9,269) (5,353) -------- -------- -------- Balance at end of year $ 9,849 $ 10,379 $ 7,253 ======== ======== ======== Deferred income taxes: Balance at beginning of year $ 698 $ -- $ -- Additions charged to costs and expenses, net -- 698 -- Deductions (626) -- -- -------- -------- -------- Balance at end of year $ 72 $ 698 $ -- ======== ======== ======
All other schedules have been omitted as they are either not applicable, not required or the information is given in the financial statements or related notes thereto. Page 17 of 24 Report of Independent Certified Public Accountants on Financial Statement Schedule To the Shareholders and Board of Directors of Hughes Supply, Inc. Our audits of the consolidated financial statements referred to in our report dated March 14, 2002 appearing in the 2002 Annual Report to Shareholders of Hughes Supply, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Orlando, Florida March 14, 2002 Page 18 of 24 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter ended January 25, 2002. (c) Exhibits Filed A substantial number of the exhibits referred to below are indicated as having been previously filed as exhibits to other reports under the Securities Exchange Act of 1934, as amended, or as exhibits to registration statements under the Securities Act of 1933, as amended. Such previously filed exhibits are incorporated by reference in this Form 10-K. Exhibits not incorporated by reference herein are filed with this Report. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. Not applicable. (3) Articles of incorporation and by-laws. 3.1 Restated Articles of Incorporation, as amended, incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended April 30, 1997 (Commission File No. 001-08772). 3.2 Composite By-Laws, as amended, incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended October 31, 1999 (Commission File No. 001-08772). 3.3 Form of Articles of Amendment to Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 99.2 to Form 8-A dated May 22, 1998 (Commission File No. 001-08772). (4) Instruments defining the rights of security holders, including indentures. 4.1 Form of Common Stock Certificate representing shares of the Registrant's common stock, $1.00 par value, incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended July 31, 1997 (Commission File No. 001-08772). 4.2 Rights Agreement dated as of May 20, 1998 between Hughes Supply, Inc. and American Stock Transfer & Trust Company, incorporated by reference to Exhibit 99.2 to Form 8-A dated May 22, 1998 (Commission File No. 001-08772). (9) Voting trust agreement. Not applicable. (10) Material contracts. 10.1 Lease Agreements with Hughes, Inc. (a) Leases effective March 31, 1988, incorporated by reference to Exhibit 10.1(c) to Form 10-K for the year ended January 27, 1989 (Commission File No. 0-5235). Sub-Item Property -------- -------- (1) Clearwater (2) Daytona Beach (3) Fort Pierce (4) Lakeland (6) Leesburg (7) Orlando Electrical Operation (8) Orlando Plumbing Operation (9) Orlando Utility Warehouse (11) Sarasota (12) Venice (13) Winter Haven Page 19 of 24 (b) Lease Agreement dated June 1, 1987, between Hughes, Inc. and the Registrant, for additional Sarasota property, incorporated by reference to Exhibit 10.1(j) to Form 10-K for the fiscal year ended January 29, 1988 (Commission File No. 0-5235). (c) Lease Agreement dated March 11, 1992, incorporated by reference to Exhibit 10.1(e) to Form 10-K for the fiscal year ended January 31, 1992 (Commission File No. 0-5235). Sub-Item Property -------- -------- (2) Gainesville Electrical Operation (d) Amendments to leases between Hughes, Inc. and the Registrant, dated April 1, 1998, amending the leases for the thirteen properties listed in Exhibit 10.1(b), (d) and (e), incorporated by reference to Exhibit 10.1 to Form 10-K for the fiscal year ended January 30, 1998 (Commission File No. 001-08772). 10.2 Hughes Supply, Inc. 1988 Stock Option Plan as amended March 12, 1996 incorporated by reference to Exhibit 10.2 to Form 10-K for the fiscal year ended January 26, 1996 (Commission File No. 001-08772). 10.4 Directors' Stock Option Plan, as amended, incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended October 31, 1999 (Commission File No. 001-08772). 10.5 Hughes Supply, Inc. Amended Senior Executives' Long-Term Incentive Bonus Plan, adopted January 25, 1996, incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended January 26, 1996 (Commission File No. 001-08772). 10.6 Note Purchase Agreement, dated as of August 28, 1997, by and among the Company and certain purchasers identified in Schedule A of the Note Purchase Agreement, incorporated by reference to Exhibit 10.15 to Form 10-Q for the quarter ended July 31, 1997 (Commission File No. 001-08772). 10.7 (a) Hughes Supply, Inc. 1997 Executive Stock Plan, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended January 28, 2000 (Commission File No. 001-08772). 10.7 (b) Amendment No. 1 to the Hughes Supply, Inc. 1997 Executive Stock Plan, incorporated by reference to Exhibit 10.7(b) to Form 10-Q for the quarter ended April 30, 2000 (Commission File No. 001-08772). 10.8 Note Purchase Agreement, dated as of May 29, 1996, by and among the Company and certain purchasers identified in Schedule A of the Note Purchase Agreement, incorporated by reference to Exhibit 10.13 to Form 10-K for the fiscal year ended January 30, 1998 (Commission File No. 001-08772). 10.9 Note Purchase Agreement, dated as of May 5, 1998, by and among the Company and certain purchasers identified in Schedule A of the Note Purchase Agreement, incorporated by reference to Exhibit 10.11 to Form 10-Q for the quarter ended April 30, 1998 (Commission File No. 001-08772). 10.10 Revolving Credit Agreement, dated as of January 26, 1999 and amended on various dates through December 20, 2000, by and among the Company and a group of banks incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended January 26, 2001. (Commission File No. 001-08772). 10.11 Line of Credit Agreement, dated as of January 26, 1999 and amended on various dates through Page 20 of 24 December 20, 2000, by and among the Company and a group of banks incorporated by reference to Exhibit 10.11 to Form 10-Q for the quarter ended July 31, 2001. (Commission File No. 001-08772) 10.11 (a) Sixth Amendment to the Line of Credit Agreement dated as of January 30, 2002 by and among the Company and a group of banks. 10.12 Note Purchase Agreement, dated as of December 21, 2000 and amended January 19, 2001, by and among the Company and certain purchasers identified in Schedule A of the Note Purchase Agreement incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended January 26, 2001 (Commission File No. 001-08772). 10.13 Separation and Release Agreement, dated as of March 28, 2001, by and between the Company and A. Stewart Hall, Jr. incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended January 26, 2001 (Commission File No. 001-08772). 10.14 Master Lease Agreement, dated as of June 22, 2001 between Atlantic Financial Group, Ltd, Lessor and Hughes Supply, Inc. and Certain Subsidiaries of Hughes Supply, Inc. as Lessees - Synthetic Lease incorporated by reference to Exhibit 10.14 to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.14 (a) Loan Agreement, dated as of June 22, 2001 among Atlantic Financial Group, Ltd, as Lessor and Borrower, the financial institutions party thereto as Lenders and SunTrust Bank, as Agent - Synthetic Lease incorporated by reference to Exhibit 10.14 (a) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.14 (b) Construction Agency Agreement, dated as of June 22, 2001 among Atlantic Financial Group, Ltd, and Hughes Supply, Inc. as Construction Agent - Synthetic Lease incorporated by reference to Exhibit 10.14 (b) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.14 (c) Guaranty Agreement from Hughes Supply, Inc., dated as of June 22, 2001 - Synthetic Lease incorporated by reference to Exhibit 10.14 (c) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.14 (d) Appendix A to the Operative Documents, Definitions and Interpretation - Synthetic Lease incorporated by reference to Exhibit 10.14 (d) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.15 Master Lease Agreement, dated as of June 22, 2001 between Atlantic Financial Group, Ltd, as Lessor and Hughes Supply, Inc. and Certain Subsidiaries of Hughes Supply, Inc., as Lessees - Operating Lease incorporated by reference to Exhibit 10.15 to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.15 (a) Loan Agreement, dated as of June 22, 2001 among Atlantic Financial Group, Ltd, as Lessor and Borrower, the financial institutions party hereto as Lenders and SunTrust Bank, as Agent - Operating Lease incorporated by reference to Exhibit 10.15 (a) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.15 (b) Construction Agency Agreement, dated as of June 22, 2001 among Atlantic Financial Group, Ltd, and Hughes Supply, Inc. as Construction Agent - Operating Lease incorporated by reference to Exhibit 10.15 (b) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). Page 21 of 24 10.15 (c) Guaranty Agreement from Hughes Supply, Inc., dated as of June 22, 2001 - Operating Lease incorporated by reference to Exhibit 10.15 (c) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.15 (d) Appendix A to the Operative Documents, Definitions and Interpretation - Operating Lease incorporated by reference to Exhibit 10.15 (d) to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 10.16 Uncommitted Guidance and Swing Line Demand Promissory Note dated March 1, 1999 and amended on various dates through February 11, 2002, by the Company and SunTrust Bank, Inc. (11) Statement re computation of per share earnings. Not applicable. (12) Statements re computation of ratios. Not applicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders. 13.1 Information incorporated by reference into Form 10-K from the Annual Report to Shareholders for the fiscal year ended January 25, 2002. (16) Letter re change in certifying accountant. Not applicable. (18) Letter re change in accounting principles. Not applicable. (21) Subsidiaries of the Registrant. 21.1 Subsidiaries of the Registrant. (22) Published report regarding matters submitted to vote of security holders. Not applicable. (23) Consents of experts and counsel. 23.1 Consent of PricewaterhouseCoopers LLP. (24) Power of attorney. Not applicable. (99) Additional exhibits. 99.1 Location of Facilities. Page 22 of 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. HUGHES SUPPLY, INC. By: /s/ David H. Hughes ------------------------------- David H. Hughes Chairman of the Board and Chief Executive Officer /s/ J. Stephen Zepf ------------------------------- J. Stephen Zepf Chief Financial Officer and Chief Accounting Officer Date: April 22, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ David H. Hughes /s/ Toni Jennings -------------------------- --------------------------------- David H. Hughes Toni Jennings April 22, 2002 April 22, 2002 (Director) (Director) /s/ John D. Baker II /s/ William P. Kennedy -------------------------- --------------------------------- John D. Baker II William P. Kennedy April 22, 2002 April 22, 2002 (Director) (Director) /s/ Robert N. Blackford /s/ Amos R. McMullian -------------------------- --------------------------------- Robert N. Blackford Amos R. McMullian April 22, 2001 April 22, 2002 (Director) (Director) /s/ H. Corbin Day /s/ Thomas I. Morgan -------------------------- --------------------------------- H. Corbin Day Thomas I. Morgan April 22, 2002 April 22, 2002 (Director) (Director) /s/ Vincent S. Hughes -------------------------- Vincent S. Hughes April 22, 2002 (Director) Page 23 of 24 INDEX OF EXHIBITS FILED WITH THIS REPORT 10.11 (a) Sixth Amendment to the Line of Credit Agreement dated as of January 30, 2002 by and among the Company and a group of banks. 10.16 Uncommitted Guidance and Swing Line Demand Promissory Note dated March 1, 1999 and amended on various dates through February 11, 2002, by the Company and SunTrust Bank, Inc. 13.1 Information incorporated by reference into Form 10-K from the Annual Report to Shareholders for the fiscal year ended January 25, 2002. 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 99.1 Location of Facilities. Page 24 of 24 EX-11 3 ex10-11.txt 6TH AMENDMENT TO LINE OF CREDIT AGREEMENT Exhibit 10.11 SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT THIS SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT (this "Sixth Amendment") is made and entered into as January 30, 2002, by and among HUGHES SUPPLY, INC. ("Borrower"), a Florida corporation, SUNTRUST BANK, a Georgia banking corporation and successor by merger to SunTrust Bank, Central Florida, National Association, BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., a national banking association, PNC BANK, N.A., a national banking association, THE FIFTH THIRD BANK, a national banking association, and such other financial institutions becoming a party hereto from time to time (individually, a "Lender" and collectively, the "Lenders"), SUNTRUST BANK, as administrative agent for the Lenders (in such capacity, the "Administrative Agent") and BANK OF AMERICA, N.A., as syndication agent for the Lenders (in such capacity, the "Syndication Agent"). W I T N E S S E T H: WHEREAS, ABN AMRO Bank, N.V., a banking corporation organized under the laws of the Netherlands, Wachovia Bank, N.A., a national banking association, SouthTrust Bank, an Alabama corporation, formerly known as SouthTrust Bank, N.A. (individually, an "Exiting Lender" and collectively, the "Exiting Lenders"), the Lenders, the Administrative Agent, the Syndication Agent, SouthTrust Bank as co-agent (the "Co-Agent") and the Borrower are party to that certain Line of Credit Agreement dated as of January 26, 1999, as amended by that certain First Amendment to Line of Credit Agreement dated as of September 29, 1999, that certain Second Amendment to Line of Credit Agreement dated as of May 29, 2000, that certain Third Amendment to Line of Credit Agreement dated as of December 13, 2000, that certain Fourth Amendment to Line of Credit Agreement dated as of December 20, 2000, and that certain Fifth Amendment to Line of Credit Agreement dated as of May 31, 2001 (as so amended, and as further amended, restated, supplemented, or otherwise modified, the "Line of Credit Agreement"), pursuant to which the Lenders and the Exiting Lenders made available to Borrower credit facilities subject to the terms and conditions set forth therein; and WHEREAS, Borrower has requested an extension of the Line of Credit Termination Date to July 31, 2002 together with certain other modifications to the Line of Credit Agreement (the "Modifications"), the Exiting Lenders and the Co-Agent have not agreed to the Modifications, but the Lenders, the Administrative Agent and the Syndication Agent are willing to agree to the Modifications on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the terms and conditions contained herein, the parties hereto, intending to be legally bound, hereby amend the Line of Credit Agreement and agree as follows: A. AMENDMENTS 1. The preamble to the Line of Credit Agreement is hereby amended by replacing the "Whereas" clause in its entirety with the following: WHEREAS, Borrower has requested that the Lenders establish a $36,250,000 line of credit facility in favor of Borrower, and subject to the terms and conditions contained herein, the Lenders are willing to establish such line of credit facility in favor of Borrower subject to the terms and conditions set forth below; 2. The Line of Credit Agreement is hereby amended by replacing the definitions of "Line of Credit Commitment" and "Line of Credit Termination Date" in Section 1.01 in their entirety with the following: "Line of Credit Commitment" or "Commitment" shall mean at any time for any Lender, the amount of such commitment set forth opposite such Lender's name on the signature pages to the Sixth Amendment or in any assignment hereafter executed by any assignee of a Lender pursuant to Section 10.06, as the same may be increased or decreased from time to time as a result of any reduction thereof pursuant to Section 2.03, any assignment thereof pursuant to Section 10.06, or any amendment thereof pursuant to Section 10.02. "Line of Credit Termination Date" shall mean the earlier of (i) July 31, 2002, and (ii) the date on which the Line of Credit Commitments are terminated in accordance with Article VIII. 3. The Line of Credit Agreement is hereby amended by adding the following definition of "Sixth Amendment" to Section 1.01 in the proper alphabetical order: "Sixth Amendment" shall mean that certain Sixth Amendment to Line of Credit Agreement, dated as of January 30, 2002, executed by the Borrower, the Lenders, the Administrative Agent and the Syndication Agent. 4. Section 2.01 is of the Line of Credit Agreement is hereby amended by replacing Section 2.01(c) in its entirety with the following: (c) The proceeds of the Line of Credit Loans shall be used solely to provide liquidity for the payment of commercial paper issued by Borrower from time to time pursuant to the Borrower's unrated commercial paper program with SunTrust Bank or any of its Affiliates. Line of Credit Loans plus the amount of all commercial paper issued by Borrower may not at any one time exceed Thirty-Six Million Two Hundred Fifty Thousand and 00/100 Dollars ($36,250,000). 5. The Line of Credit Agreement is hereby amended by deleting Section 9.12 in its entirety. 6. Upon this Sixth Amendment becoming effective, (i) the Exiting Lenders shall no longer be deemed "Lenders" under the Line of Credit Agreement, (ii) the Line of Credit Commitment and the Pro Rata Shares of the Lenders under the Line of Credit Agreement shall be deemed adjusted to the amounts and percentages set forth on the signature pages to this Sixth Amendment, (iii) there shall be no Co-Agent under the Line of Credit Agreement, and (iv) any 2 outstanding Loans shall be reallocated among the Lenders based their Pro Rata Shares reflected on the signature pages hereto. 7. Prior to this Sixth Amendment becoming effective, any outstanding Advances in excess of Thirty-Six Million Two Hundred Fifty Thousand and 00/100 Dollars ($36,250,000) shall be prepaid in accordance with the terms of the Line of Credit Agreement. B. CONDITIONS TO EFFECTIVENESS The effectiveness of this Sixth Amendment is conditioned upon (a) all accrued interest and fees due and payable to the Exiting Lenders being paid in full by the Borrower to such Exiting Lenders, (b) the aggregate outstanding Advances under the Line of Credit Agreement being less than or equal to Thirty-Six Million Two Hundred Fifty Thousand and 00/100 Dollars ($36,250,000), and (c) the Administrative Agent's receipt of the following, each dated as of the date hereof, in form and substance reasonably satisfactory in all respects to the Administrative Agent: (a) The duly executed original counterparts of this Sixth Amendment; (b) The duly executed Consent and Ratification of Guaranty (Line of Credit Agreement), dated as of the date hereof, made by each of the Subsidiaries of Borrower listed on the signature pages thereof; (c) The duly executed Supplement to Subsidiary Guaranty Agreement, dated as of the date hereof, made by each of the Subsidiaries of Borrower listed on the signature pages thereof; and (d) a certificate of a Secretary or Assistant Secretary of each "Additional Guarantor" (as defined in the Supplement to Subsidiary Guaranty Agreement), certifying such Additional Guarantor's (i) articles of organization or incorporation, (ii) operating agreements or bylaws, and (iii) the unanimous written consent of its members or directors, authorizing the execution, delivery and performance of the Supplement to Subsidiary Guaranty Agreement. C. MISCELLANEOUS 1. Borrower represents and warrants that after giving effect to this Sixth Amendment and the transactions contemplated hereby, all of the representations and warranties set forth in Article V of the Line of Credit Agreement are true and correct in all material respects and no Default or Event of Default has occurred and is continuing as of the date hereof. 2. Except as expressly provided herein, the Line of Credit Agreement shall continue in full force and effect, and the unamended terms and conditions of the Line of Credit Agreement are expressly incorporated herein and ratified and confirmed in all respects. This Sixth Amendment is not intended to be or to create, nor shall it be construed as, a novation or an accord and satisfaction. 3 3. From and after the date hereof, references to the Line of Credit Agreement shall be references to the Line of Credit Agreement as amended hereby. 4. This Sixth Amendment constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. Neither this Sixth Amendment nor any provision hereof may be changed, waived, discharged, modified or terminated orally, but only by an instrument in writing signed by the parties required to be a party thereto pursuant to Section 10.02 of the Line of Credit Agreement. 5. THIS SIXTH AMENDMENT SHALL BE GOVERNED IN ALL RESPECTS BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF). 6. This Sixth Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same document, and shall be effective as of the date first above written. 7. Borrower shall reimburse the Administrative Agent for the reasonable fees and expenses of counsel for the Administrative Agent in connection with this Sixth Amendment. 8. Borrower hereby represents and warrants that each of the following Subsidiaries of Borrower has been dissolved and is no longer in existence: (i) ATLANTIC PUMP & EQUIPMENT COMPANY OF MIAMI, INC. , (ii) ATLANTIC PUMP & EQUIPMENT COMPANY OF WEST PALM BEACH, INC., (iii) DOMINION PIPE FABRICATORS, INCORPORATED, (iv) ELEC-TEL SUPPLY COMPANY, (v) PORT CITY ELECTRICAL SUPPLY, INC., and (vi) R & G PLUMBING SUPPLY, INC. [signatures on following page] 4 IN WITNESS WHEREOF, the Borrower, the Administrative Agent, the Syndication Agent, and the Lenders have caused this Sixth Amendment to be executed as of the date first above written. Address for Notices: BORROWER: 20 N. Orange Avenue HUGHES SUPPLY, INC. Suite 200 Orlando, Florida 32801 Attention: J. Stephen Zepf By:_______________________________ Thomas I. Morgan President [SIGNATURE PAGE TO SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT] Address for Notices: SUNTRUST BANK, formerly known as SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, individually and as 200 S. Orange Avenue Administrative Agent MC 2064 Orlando, Florida 32801 By: ______________________________ Attn: Mr. William C. Barr Name: Title: Telecopy No. (407) 237-4076 Payment Office: 200 S. Orange Avenue MC 2064 Orlando, Florida 32801 _________________________________________ Line of Credit Commitment: $13,750,000.00 Pro Rata Share of Line of Credit Commitment: 37.93% [SIGNATURE PAGE TO SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT] Address for Notices: BANK OF AMERICA, N.A., formerly known as NATIONSBANK, N.A., individually and as 100 SE 2nd Street, 14th Floor Syndication Agent Miami, Florida 33131 Attn: Mr. Richard Starke By:_______________________________ Telecopy No. (305) 533-2437 Name: Title: Payment Office: Bank of America, N.A. 101 N. Tryon Street Charlotte, North Carolina 28255 Attn: Ms. Deon Wright __________________________________________ Line of Credit Commitment: $12,500,000.00 Pro Rata Share of Line of Credit Commitment: 34.48% [SIGNATURE PAGE TO SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT] Address for Notices: PNC BANK, N.A. 249 5th Avenue Pittsburgh, Pennsylvania 15222 Attn: Mr. Doug King By:_______________________________ Telecopy No. (412) 762-6484 Name: Title: Payment Office: Two PNC Plaza/ Liberty Avenue. Pittsburgh, Pennsylvania 15222 Attn: Ms. Anita Truchman ________________________________________ Line of Credit Commitment: $6,250,000.00 Pro Rata Share of Line of Credit Commitment: 17.24% [SIGNATURE PAGE TO SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT] Address for Notices: THE FIFTH THIRD BANK MD 109054 38 Fountain Square Plaza Cincinnati, Ohio 45263 Attn: Mr. Daniel Klus By:__________________________________ Telecopy No. (513) 579-5226 Name: Title: Payment Office: MD 109054 38 Fountain Square Plaza Cincinnati, Ohio 45263 Attn: Ms. Amy Buquo ________________________________________ Line of Credit Commitment: $3,750,000.00 Pro Rata Share of Line of Credit Commitment: 10.34% [SIGNATURE PAGE TO SIXTH AMENDMENT TO LINE OF CREDIT AGREEMENT] CONSENT AND RATIFICATION OF GUARANTY (Line of Credit Agreement) THIS CONSENT AND RATIFICATION OF GUARANTY (the "Consent and Ratification of Guaranty") is made and entered into as of January 30, 2002, by each of the Subsidiaries of Hughes Supply, Inc., a Florida corporation (the "Borrower"), listed on the signature pages hereof (the foregoing corporations, individually a "Guarantor" and collectively the "Guarantors") in favor of SUNTRUST BANK, successor by merger to SunTrust Bank, Central Florida, National Association, individually and as administrative agent (the "Administrative Agent"), BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., individually and as syndication agent (the "Syndication Agent"), and each other bank or other financial institution (collectively, the "Lenders") now or hereafter becoming party to the Line of Credit Agreement (as hereinafter defined; the Lenders, the Administrative Agent and the Syndication Agent are hereinafter collectively referred to herein as the "Guaranteed Parties"). W I T N E S S E T H : WHEREAS, the Borrower, the Lenders, the Administrative Agent and the Syndication Agent have entered into that certain Line of Credit Agreement, dated as of January 26, 1999, as amended by that certain First Amendment to Line of Credit Agreement, dated as of September 29, 1999, that certain Second Amendment to Line of Credit Agreement, dated as of May 29, 2000, that certain Third Amendment to Line of Credit Agreement, dated as of December 13, 2000, that certain Fourth Amendment to Line of Credit Agreement, dated as of December 20, 2000, that certain Fifth Amendment to Line of Credit Agreement, dated as of May 31, 2001, and that certain Sixth Amendment to Line of Credit Agreement, dated as of the date hereof (as amended and as hereafter amended, restated, supplemented or otherwise modified from time to time, the "Line of Credit Agreement"; capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Line of Credit Agreement), pursuant to which the Lenders made available to the Borrower certain credit facilities subject to the terms and conditions set forth therein; WHEREAS, the Guarantors have made and entered into that certain Subsidiary Guaranty Agreement, dated as of January 26, 1999, as supplemented by that certain First Supplement to Subsidiary Guaranty Agreement, dated as of August 31, 1999, by that Second Supplement to Subsidiary Guaranty Agreement, dated as of April 4, 2000, and by that Supplement to Subsidiary Guaranty Agreement, dated as of May 31, 2001, (as so supplemented and as hereafter amended, restated, supplemented or otherwise modified from time to time, the "Guaranty"), in favor of the Guaranteed Parties, pursuant to which the Guarantors absolutely, unconditionally, jointly and severally, guaranteed to the Guaranteed Parties, the full and prompt payment and performance of all obligations, liabilities and covenants of the Borrower under the Line of Credit Agreement, Line of Credit Notes and the other Credit Documents; WHEREAS, as a condition precedent to extending the Line of Credit Termination Date and otherwise modifying the Line of Credit Agreement pursuant to that certain Sixth Amendment to Line of Credit Agreement, dated as of the date hereof (the "Sixth Amendment"), the Guaranteed Parties have required the Guarantors to execute this Consent and Ratification of Guaranty in connection with the execution and delivery of the Sixth Amendment, and the Guarantors wish to fulfill such condition precedent because the modifications contained in the Sixth Amendment shall be beneficial to the Guarantors; NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the Guarantors hereby consent and agree as follows: 1. The Guarantors hereby consent to the execution and delivery by the Borrower of the Sixth Amendment and jointly and severally ratify and confirm the terms of the Guaranty with respect to the indebtedness now or hereafter outstanding under the Line of Credit Agreement as amended to the date hereof and all promissory notes issued thereunder. The Guarantors acknowledge that, notwithstanding anything to the contrary contained herein or in any other document evidencing any indebtedness of the Borrower to the Guaranteed Parties or any other obligation of the Borrower, or any actions now or hereafter taken by the Guaranteed Parties with respect to any obligation of the Borrower, the Guaranty (i) is and shall continue to be a primary obligation of the Guarantors, (ii) is and shall continue to be an absolute, unconditional, joint and several, continuing and irrevocable guaranty of payment, and (iii) is and shall continue to be in full force and effect in accordance with its terms, until all amounts payable by the Borrower in favor of the Guaranteed Parties and their successors and assigns under the Line of Credit Agreement shall have been paid in full. Nothing contained herein to the contrary shall release, discharge, modify, change or affect the original liability of the Guarantors under the Guaranty. As of the date hereof, each Guarantor represents and warrants that it has no defense, offset, or counterclaim against the Guaranteed Parties. 2. Each Guarantor represents and warrants that, as of the date hereof and after giving effect to the transactions contemplated by the Sixth Amendment, this Consent and Ratification of Guaranty and the other Credit Documents, (i) the assets of such Guarantor, at fair valuation and based on their present fair saleable value, will exceed such Guarantor's debts, including contingent liabilities, (ii) the remaining capital of each Guarantor will not be unreasonably small to conduct such Guarantor's business, and (iii) no Guarantor will have incurred debts, or have intended to incur debts, beyond its ability to pay such debts as they mature. For purposes of this paragraph, "debt" means any liability on a claim, and "claim" means (a) the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (b) the right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. [remainder of page intentionally left blank] IN WITNESS WHEREOF, the Guarantors have executed this Consent and Ratification of Guaranty as of the date first above written. GUARANTORS: Address: CAROLINA PUMP & SUPPLY CORP. 20 North Orange Avenue CAYESTEEL, INC. Suite 200 CF FLUID CONTROLS, INC. Orlando, FL 32801 CHAD SUPPLY, INC. Attn: J. Stephen Zepf COASTAL WHOLESALE, INC. DOMINION PIPE & SUPPLY CO. DOUGLAS LEONHARDT & ASSOCIATES, INC. ELASCO AGENCY SALES, INC. ELECTRIC LABORATORIES AND SALES CORPORATION FES MERGER CORP., INC. GAYLE SUPPLY COMPANY, INC. GILLELAND CONCRETE PRODUCTS, INC. H VENTURE CORP. HSI ACQUISITION CORPORATION HSI FUSION SERVICES, INC. HSI INDIANA, LLC HSI NORTH CAROLINA, LLC HUGHES WATER & SEWER COMPANY HUGHES SUPPLY MANAGEMENT SERVICES, INC. JUNO INDUSTRIES, INC. KAMEN SUPPLY COMPANY, INC. KINGSTON PIPE INDUSTRIES, INC. MEREX CORPORATION METALS INCORPORATED METALS, INC. - GULF COAST DIVISION MILLS & LUPTON SUPPLY COMPANY MOORE ELECTRIC SUPPLY, INC. MOUNTAIN COUNTRY SUPPLY, INC. OLANDER & BROPHY, INCORPORATED ONE-STOP SUPPLY, INC. PAINE SUPPLY OF JACKSON, INC. PALM POOL PRODUCTS, INC. PANHANDLE PIPE AND SUPPLY CO., INC. REACTION SUPPLY CORPORATION SHRADER HOLDING COMPANY, INC. STAINLESS TUBULAR PRODUCTS, INC. USCO INCORPORATED UNION MERGER CORPORATION U.S. FUSION SERVICES, INC. VIRGINIA WATER & WASTE SUPPLY COMPANY, INC. WCC MERGER CORPORATION WATERWORKS HOLDING COMPANY WATERWORKS SALES COMPANY WHOLESALE ELECTRIC SUPPLY CORPORATION By: ______________________________________ J. Stephen Zepf Treasurer Address: HHH, LLC 1403 Foulk Road, Suite 102 HSI CORP. Wilmington, DE 19803 L&T OF DELAWARE, INC. Z&L ACQUISITION CORP. By: ______________________________________ Gordon Stewart President Address: SOUTHWEST STAINLESS, L.P. 1403 Foulk Road, Suite 102 Wilmington, DE 19803 By: Z&L ACQUISITION CORP., its General Partner By: ____________________________ Gordon Stewart President [SIGNATURE PAGE TO CONSENT AND RATIFICATION OF GUARANTY AGREEMENT] SUPPLEMENT TO SUBSIDIARY GUARANTY AGREEMENT THIS SUPPLEMENT TO SUBSIDIARY GUARANTY AGREEMENT (this "Supplement to Guaranty Agreement"), dated as of January 30, 2002, made jointly and severally by each of the corporations listed on the signature pages hereto (each, an "Additional Guarantor"), in favor of SUNTRUST BANK, a Georgia banking corporation and successor by merger to SunTrust Bank, Central Florida, National Association, BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., a national banking association, PNC BANK, N.A., a national banking association, THE FIFTH THIRD BANK, a national banking association, and such other financial institutions becoming a party hereto from time to time (individually, a "Lender" and collectively, the "Lenders"), SUNTRUST BANK, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), and BANK OF AMERICA, N.A., as syndication agent for the Lenders (in such capacity, the "Syndication Agent"). The Lenders, the Administrative Agent and the Syndication Agent are hereinafter collectively referred to herein as the "Guaranteed Parties". W I T N E S S E T H: WHEREAS, Hughes Supply, Inc., a Florida corporation ("Hughes"), the Lenders, the Administrative Agent and the Syndication Agent are parties to a Line of Credit Agreement, dated as of January 26, 1999, as amended by that certain First Amendment to Line of Credit Agreement dated as of September 29, 1999, that certain Second Amendment to Line of Credit Agreement dated as of May 29, 2000, that certain Third Amendment to Line of Credit Agreement dated as of December 13, 2000, that certain Fourth Amendment to Line of Credit Agreement dated as of December 20, 2000, that certain Fifth Amendment to Line of Credit Agreement, dated as of May 31, 2001, and that certain Sixth Amendment to Line of Credit Agreement, dated as of the date hereof (as so amended and as further amended, restated, supplemented or otherwise modified from time to time, the "Line of Credit Agreement"), pursuant to which the Lenders, ABN AMRO Bank, N.V., a banking corporation organized under the laws of the Netherlands, Wachovia Bank, N.A., a national banking association, and SouthTrust Bank, an Alabama corporation, formerly known as SouthTrust Bank, N.A. made available to Borrower credit facilities subject to the terms and conditions set forth therein; WHEREAS, certain Subsidiaries (the "Subsidiary Guarantors") of Hughes have executed and delivered a Subsidiary Guaranty Agreement, dated as of January 26, 1999 (as amended, restated, supplemented or otherwise modified from time to time, the "Subsidiary Guaranty"), pursuant to which the Subsidiary Guarantors have agreed to guarantee all of the obligations of Hughes under the Line of Credit Agreement and the other Credit Documents (as defined in the Line of Credit Agreement); WHEREAS, Hughes, the Subsidiary Guarantors and the Additional Guarantors share an identity of interests as members of a consolidated group of companies engaged in substantially similar businesses; Hughes provides certain centralized financial, accounting and management services to the Additional Guarantors; the making of the loans will facilitate expansion and enhance the overall financial strength and stability of the Hughes's corporate group, including the Additional Guarantors; and by virtue of intercompany advances and loans, the financial accommodations to Hughes under the Line of Credit Agreement shall inure to the direct and material benefit of the Additional Guarantors; and WHEREAS, it is a condition to the Lenders' continued obligation to make loans to Hughes under the Line of Credit Agreement that each Additional Guarantor execute and deliver to the Administrative Agent on behalf of the Lenders this Supplement to Guaranty Agreement, and each Additional Guarantor desires to execute and deliver this Supplement to Guaranty Agreement to satisfy such condition subsequent; NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make the loans to Hughes under the Line of Credit Agreement, each Additional Guarantor hereby agrees as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein shall have the meanings specified for such terms in the Subsidiary Guaranty. 2. Additional Guarantor. Each Additional Guarantor agrees that it shall be and become a Guarantor for all purposes of the Subsidiary Guaranty and shall be fully liable thereunder to the Administrative Agent and other Guaranteed Parties to the same extent and with the same effect as though such Additional Guarantor had been one of the Guarantors originally executing and delivering the Subsidiary Guaranty. Without limiting the foregoing, each Additional Guarantor hereby jointly and severally (with respect to the guaranties made by the Subsidiary Guarantors under the Subsidiary Guaranty), irrevocably and unconditionally, guarantees the punctual payment when due, whether at stated maturity by acceleration or otherwise, of all Line of Credit Loans and all other Obligations (as defined in the Line of Credit Agreement), including all renewals, extensions, modifications and refinancings thereof, now or hereafter existing, whether for principal, interest, fees, expenses or otherwise, and any and all expenses (including reasonable attorneys' fees actually incurred and reasonable out-of-pocket expenses) incurred by the Guaranteed Parties in enforcing any rights under the Subsidiary Guaranty (as supplemented hereby), subject, however, to the limitations expressly provided in the Subsidiary Guaranty in Section 16 thereof. All references in the Subsidiary Guaranty to "Guarantors" or any "Guarantor" shall be deemed to include each Additional Guarantor as if such Additional Guarantor was one of the original Guarantors executing the Subsidiary Guaranty. 3. Enforceability. This Supplement has been duly authorized, executed and delivered by each Additional Guarantor and constitutes a legal, valid and binding obligation of such Additional Guarantor, enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). 4. Counterparts. This Supplement and any amendments, waivers, consents or supplements may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 5. Effective Upon Delivery. This Supplement shall become effective upon execution by each Additional Guarantor and delivery of this Supplement, as executed, to the Administrative Agent. 6. Governing Law; Appointment of Agent for Service of Process; Submission to Jurisdiction; Waiver of Jury Trial. a. THIS SUPPLEMENT TO GUARANTY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF). b. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SUPPLEMENT TO GUARANTY AGREEMENT RELATED HERETO MAY BE BROUGHT IN THE SUPERIOR COURT OF FULTON COUNTY OF THE STATE OF GEORGIA OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF GEORGIA, AND, BY EXECUTION AND DELIVERY OF THIS SUPPLEMENT TO GUARANTY AGREEMENT, EACH ADDITIONAL GUARANTOR HEREBY CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THE AFORESAID COURTS SOLELY FOR THE PURPOSE OF ADJUDICATING ITS RIGHTS OR THE RIGHTS OF THE ADMINISTRATIVE AGENT OR OTHER GUARANTEED PARTIES WITH RESPECT TO THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH ADDITIONAL GUARANTOR HEREBY IRREVOCABLY DESIGNATES CORPORATION SERVICE COMPANY AS THE DESIGNEE, APPOINTEE AND AGENT OF SUCH ADDITIONAL GUARANTOR TO RECEIVE, FOR AND ON BEHALF OF SUCH ADDITIONAL GUARANTOR, SERVICE OF PROCESS IN SUCH JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY DOCUMENT RELATED HERETO AND SUCH SERVICE SHALL BE DEEMED COMPLETED THIRTY (30) DAYS AFTER MAILING THEREOF TO SAID AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY SUCH LOCAL AGENT AND BY THE SERVER OF PROCESS BY MAIL TO SUCH ADDITIONAL GUARANTOR AT ITS ADDRESS SET FORTH HEREIN, BUT THE FAILURE OF ANY ADDITIONAL GUARANTOR TO RECEIVE SUCH COPY SHALL NOT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. EACH ADDITIONAL GUARANTOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS IN RESPECT OF THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY DOCUMENT RELATED THERETO. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY ADDITIONAL GUARANTOR IN ANY OTHER JURISDICTION. c. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH ADDITIONAL GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR ANY MATTER ARISING IN CONNECTION HEREUNDER OR THEREUNDER. 7. Severability. In case any provision in or obligation under this Supplement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. [Signatures appear on the following page.] IN WITNESS WHEREOF, each Additional Guarantor has caused this Supplement to Guaranty Agreement to be duly executed and delivered to the Administrative Agent by its duly authorized officers as of the date first above written. Address for Notices: ADDITIONAL GUARANTORS: 4925 Kearney Street WATERWORKS HOLDING COMPANY, a Colorado Denver, Colorado 80216 corporation Attention: J. Stephen Zepf By:__________________________________________ Name: Title: 4925 Kearney Street WATERWORKS SALES COMPANY, a Colorado Denver, Colorado 80216 corporation Attention: J. Stephen Zepf By:__________________________________________ Name: Title: 1403 Foulk Road, Suite 102 HHH, LLC, a Delaware limited liability Wilmington, DE 19803 company Attention: Gordon Stewart By:__________________________________________ Name: Title: 1403 Foulk Road, Suite 102 HSI NORTH CAROLINA, LLC, a North Carolina Wilmington, DE 19803 limited liability company Attention: Gordon Stewart By:__________________________________________ Name: Title: 1403 Foulk Road, Suite 102 HSI INDIANA, LLC, an Indiana limited Wilmington, DE 19803 liability company Attention: Gordon Stewart By:__________________________________________ Name: Title: [SIGNATURE PAGE TO SUPPLEMENT TO GUARANTY AGREEMENT] EX-16 4 ex10-16.txt UNCOMMITTED GUIDANCE LINE DEMAND PROMISSORY NOTE Exhibit 10.16 UNCOMMITTED GUIDANCE LINE DEMAND PROMISSORY NOTE $15,000,000.00 March 1, 1999 Atlanta, Georgia FOR VALUE RECEIVED, HUGHES SUPPLY, INC., a Florida corporation (the "Borrower" or the "undersigned"), promises to pay to the order of SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, a national banking association, (the "Lender"), at the principal office of the Lender, at 200 South Orange Avenue, Orlando, Florida 32801, or at such other place as the Lender may designate by notice in writing to the Borrower, in immediately available funds in lawful money of the United States of America, the lesser of (x) the principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00), together with interest on the unpaid principal balance of this Uncommitted Guidance Line Demand Promissory Note (this "Note"), or (y) so much thereof as shall have been from time to time disbursed hereunder in the sole discretion of the Lender, and not theretofore repaid, as shown on the books and records of the Lender, at the rate per annum mutually agreed upon from time to time by Borrower and Lender (the "Interest Rate"), on the sooner of (i) DEMAND or (ii) January 25, 2000, or such later date to which the Bank may extend this Note in writing and in its sole discretion, (the "Termination Date"). Upon the terms of this Note and in compliance with the terms and conditions hereof, the Borrower, from time to time, may request advances hereunder, repay and reborrow up to the maximum aggregate principal amount outstanding at any one time as indicated above, subject to the sole discretion of the Lender. The Borrower acknowledges and agrees that the Lender shall have no obligation to make any advances to the Borrower under this Note, but the Lender may, in its sole discretion, make such advances to the Borrower upon its request. In addition to principal, the Borrower agrees to pay interest on the principal amounts disbursed hereunder from time to time from the date of each disbursement until paid at the Interest Rate on the last day of the interest periods mutually agreed to from time to time by the Borrower and the Lender. Interest shall accrue on the outstanding principal balance from the date hereof up to and through the date on which all principal and interest hereunder is paid in full, and shall be computed on the basis of the actual number of days elapsed in a 360-day year. Such interest is to be paid to the Lender at the Lender's principal office specified above. The Lender shall at all times have a right of set-off against any deposit balances of the Borrower in the possession of the Lender, and the Lender may apply the same against payment of this Note or any other indebtedness of the Borrower to the Lender. The payment of any indebtedness evidenced by this Note prior to the Termination Date or demand shall not affect the enforceability of this Note as to any future, different or other indebtedness incurred hereunder by the Borrower. In the event the indebtedness evidenced by this Note is collected by legal action or through an attorney-at-law, the Lender shall be entitled to recover from the Borrower all costs of collection, including, without limitation, reasonable attorneys' fees if collected by or through an attorney-at-law. The Borrower acknowledges that the actual crediting of the amount of any disbursement under this Note to an account of the Borrower or recording such amount in the books of the Lender shall, in the absence of manifest error, constitute presumptive evidence of such disbursement and that such advance was made and borrowed under this Note. Such account records shall constitute, in the absence of manifest error, presumptive evidence of principal amounts outstanding and the payments made under the Notes at any time and from time to time, provided that the failure of the Lender to record in its books or in such account the type or amount of any advance shall not affect the obligation of the undersigned to repay such amount together with interest thereon in accordance with this Note. Prepayment of this Note in part or in whole is permitted. Failure or forbearance of the Lender to exercise any right hereunder, or otherwise granted by this Note or by law, shall not affect or release the liability of the Borrower hereunder, and shall not constitute a waiver of such right unless so stated by the Lender in writing. THIS NOTE SHALL BE DEEMED TO BE MADE UNDER, AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY, THE LAWS OF THE STATE OF GEORGIA. Time is of the essence of this Note. PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED. Executed under hand of the Borrower as of the day and year first above written. HUGHES SUPPLY, INC. By: _____________________________ J. Stephen Zepf Treasurer UNCOMMITTED SWING LINE DEMAND PROMISSORY NOTE $10,000,000.00 March 1, 1999 Atlanta, Georgia FOR VALUE RECEIVED, HUGHES SUPPLY, INC., a Florida corporation (the "Borrower" or the "undersigned"), promises to pay to the order of SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, a national banking association, (the "Lender"), at the principal office of the Lender, at 200 South Orange Avenue, Orlando, Florida 32801, or at such other place as the Lender may designate by notice in writing to the Borrower, in immediately available funds in lawful money of the United States of America, the lesser of (x) the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00), together with interest on the unpaid principal balance of this Uncommitted Swing Line Demand Promissory Note (this "Note"), or (y) so much thereof as shall have been from time to time disbursed hereunder in the sole discretion of the Lender, and not theretofore repaid, as shown on the books and records of the Lender, at the rate per annum mutually agreed upon from time to time by Borrower and Lender (the "Interest Rate"), on the sooner of (i) DEMAND or (ii) January 25, 2000, or such later date to which the Bank may extend this Note in writing and in its sole discretion, (the "Termination Date"). Upon the terms of this Note and in compliance with the terms and conditions hereof, the Borrower, from time to time, may request advances hereunder, repay and reborrow up to the maximum aggregate principal amount outstanding at any one time as indicated above, subject to the sole discretion of the Lender. The Borrower acknowledges and agrees that the Lender shall have no obligation to make any advances to the Borrower under this Note, but the Lender may, in its sole discretion, make such advances to the Borrower upon its request. In addition to principal, the Borrower agrees to pay interest on the principal amounts disbursed hereunder from time to time from the date of each disbursement until paid at the Interest Rate on the last day of the interest periods mutually agreed to from time to time by the Borrower and the Lender. Interest shall accrue on the outstanding principal balance from the date hereof up to and through the date on which all principal and interest hereunder is paid in full, and shall be computed on the basis of the actual number of days elapsed in a 360-day year. Such interest is to be paid to the Lender at the Lender's principal office specified above. The Lender shall at all times have a right of set-off against any deposit balances of the Borrower in the possession of the Lender, and the Lender may apply the same against payment of this Note or any other indebtedness of the Borrower to the Lender. The payment of any indebtedness evidenced by this Note prior to the Termination Date or demand shall not affect the enforceability of this Note as to any future, different or other indebtedness incurred hereunder by the Borrower. In the event the indebtedness evidenced by this Note is collected by legal action or through an attorney-at-law, the Lender shall be entitled to recover from the Borrower all costs of collection, including, without limitation, reasonable attorneys' fees if collected by or through an attorney-at-law. The Borrower acknowledges that the actual crediting of the amount of any disbursement under this Note to an account of the Borrower or recording such amount in the books of the Lender shall, in the absence of manifest error, constitute presumptive evidence of such disbursement and that such advance was made and borrowed under this Note. Such account records shall constitute, in the absence of manifest error, presumptive evidence of principal amounts outstanding and the payments made under the Notes at any time and from time to time, provided that the failure of the Lender to record in its books or in such account the type or amount of any advance shall not affect the obligation of the undersigned to repay such amount together with interest thereon in accordance with this Note. Prepayment of this Note in part or in whole is permitted. Failure or forbearance of the Lender to exercise any right hereunder, or otherwise granted by this Note or by law, shall not affect or release the liability of the Borrower hereunder, and shall not constitute a waiver of such right unless so stated by the Lender in writing. THIS NOTE SHALL BE DEEMED TO BE MADE UNDER, AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY, THE LAWS OF THE STATE OF GEORGIA. Time is of the essence of this Note. PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED. Executed under hand of the Borrower as of the day and year first above written. HUGHES SUPPLY, INC. By: _____________________________ J. Stephen Zepf Treasurer SUBSIDIARY GUARANTY AGREEMENT (Uncommitted Swing Line Note and Uncommitted Guidance Line Note) THIS SUBSIDIARY GUARANTY AGREEMENT (this "Guaranty"), dated as of March 1, 1999 made by each of the subsidiaries of Hughes Supply, Inc., a Florida corporation ("Hughes"), listed on the signature pages hereof, together with all other subsidiaries of Hughes that hereafter become parties hereto (individually, a "Guarantor" and collectively, the "Guarantors"), in favor of SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION (the "Lender"); W I T N E S S E T H: WHEREAS, Hughes executed and delivered that certain Uncommitted Swing Line Note dated as of the date hereof, in favor of Lender, in the principal amount of $10,000,000.00 (as hereafter amended, restated, renewed, extended, supplemented or otherwise modified from time to time, the "Swing Line Note"), and that certain Uncommitted Guidance Line Note dated as the date hereof, in favor of Lender, in the principal amount of $15,000,000.00 (as hereafter amended, restated, renewed, extended supplemented or otherwise modified from time to time, the "Guidance Line Note", and together with the Swing Line Note, the "Notes"); WHEREAS, Hughes owns, directly or indirectly, all or a majority of the outstanding capital stock of each of the Guarantors; WHEREAS, Hughes and the Guarantors share an identity of interest as members of a consolidated group of companies engaged in substantially similar businesses with Hughes providing certain centralized financial, accounting and management services to each of the Guarantors by virtue of intercompany advances and loans such that financial accommodations to Hughes under the Notes shall inure to the direct and material benefit of the Guarantors; and WHEREAS, the making of loans evidenced by the Notes will facilitate expansion and enhance the overall financial strength and stability of Hughes's entire corporate group, including the Guarantors; and WHEREAS, it is a condition precedent to Lender making any loan under the Notes, in its sole discretion, that the Guarantors enter into this Guaranty to satisfy such condition precedent; NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to make loans to Hughes under the Notes, the Guarantors hereby jointly and severally agree as follows: SECTION 1. Guaranty. The Guarantors hereby jointly and severally, irrevocably and unconditionally, guarantee the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all indebtedness and all other obligations owing by Hughes to the Lender under the Notes, including all renewals, extensions, modifications and refinancings thereof, now or hereafter owing, whether for principal, interest, fees, expenses or otherwise, and any and all reasonable out-of-pocket expenses (including reasonable attorneys' fees actually incurred and expenses) incurred by the Lender in enforcing any rights under this Guaranty (collectively, the "Guaranteed Obligations"), including without limitation, all interest which, but for the filing of a petition in bankruptcy with respect to Hughes, would accrue on any principal portion of the Guaranteed Obligations. Any and all payments by the Guarantors hereunder shall be made free and clear of and without deduction for any set-off, counterclaim, or withholding so that, in each case, the Lender will receive, after giving effect to any present or future taxes, levies, imposts, duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including without limitation, income, receipts, excise, property, sales, transfer, license, payroll, withholding, social security and franchise taxes now or hereafter imposed or levied by the United States of America, or any state, local or foreign government or by any department, agency or other political subdivision or taxing authority thereof or therein and all interest, penalties, additions to tax and similar liabilities with respect thereto (collectively, the "Taxes"), (but excluding Taxes imposed on overall net income of the Lender), the full amount that it would otherwise be entitled to receive with respect to the Guaranteed Obligations (but without duplication of amounts for Taxes already included in the Guaranteed Obligations). The Guarantors acknowledge and agree that this is a guarantee of payment when due, and not of collection, and that this Guaranty may be enforced up to the full amount of the Guaranteed Obligations without proceeding against Hughes, against any security for the Guaranteed Obligations, against any other Guarantor or under any other guaranty covering any portion of the Guaranteed Obligations. SECTION 2. Guaranty Absolute. The Guarantors guarantee that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Guaranty and the Notes, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Lender with respect thereto. The liability of each Guarantor under this Guaranty shall be absolute and unconditional in accordance with its terms and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation, the following (whether or not such Guarantor consents thereto or has notice thereof): (a) any change in the time, place or manner of payment of, or in any other term of, all or any of the Guaranteed Obligations, any waiver, indulgence, renewal, extension, amendment or modification of or addition, consent or supplement to or deletion from or any other action or inaction under or in respect of the Notes, or any other documents, instruments or agreements relating to the Guaranteed Obligations or any other instrument or agreement referred to therein or any assignment or transfer of any thereof; (b) any lack of validity or enforceability of the Notes or any other document, instrument or agreement referred to therein or any assignment or transfer of any thereof; (c) any furnishing to the Lender of any security for the Guaranteed Obligations, or any sale, exchange, release or surrender of, or realization on, any security for the Guaranteed Obligations; (d) any settlement or compromise of any of the Guaranteed Obligations, any security therefor, or any liability of any other party with respect to the Guaranteed Obligations, or any subordination of the payment of the Guaranteed Obligations to the payment of any other liability of Hughes; (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Guarantor or Hughes, or any action taken with respect to this Guaranty by any trustee or receiver, or by any court, in any such proceeding; (f) any nonperfection of any security interest or lien on any collateral, or any amendment or waiver of or consent to departure from any guaranty or security, for all or any of the Guaranteed Obligations; (g) any application of sums paid by Hughes or any other person or entity with respect to the liabilities of Hughes to the Lender, regardless of what liabilities of Hughes remain unpaid;. (h) any act or failure to act by the Lender which may adversely affect a Guarantor's subrogation rights, if any, against Hughes to recover payments made under this Guaranty; and (i) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Guarantor. If claim is ever made upon the Lender for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations, and the Lender repays all or part of said amount by reason of (a) any judgment, decree or order of any court or administrative body having jurisdiction over the Lender or any of its property, or (b) any settlement or compromise of any such claim effected by the Lender with any such claimant (including Hughes or a trustee in bankruptcy for Hughes), then and in such event the Guarantors agree that any such judgment, decree, order, settlement or compromise shall be binding on it, 7 notwithstanding any revocation hereof or the cancellation of the Notes, or any other instrument evidencing any liability of Hughes, and the Guarantors shall be and remain liable to the Lender for the amounts so repaid or recovered to the same extent as if such amount had never originally been paid to the Lender. SECTION 3. Waiver. The Guarantors hereby waive notice of acceptance of this Guaranty, notice of any liability to which it may apply, and further waive presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking of other action by the Lender against, and any other notice to, Hughes or any other party liable with respect to the Guaranteed Obligations (including the Guarantors or any other Person executing a guaranty of the obligations of Hughes). SECTION 4. Waiver of Subrogation. Upon the making by any Guarantor of any payment hereunder for the account of Hughes, such Guarantor shall be subrogated to the rights of the payee against Hughes with respect to such payment; provided that such Guarantor shall not enforce any right or receive any payment by way of subrogation until all of the Guaranteed Obligations have been paid in full. If, prior to the payment in full of the Guaranteed Obligations, any amount shall be paid to any Guarantor on account of such subrogation, reimbursement, contribution or setoff rights, such amount shall be held in trust for the benefit of the Lender and any other holders of the Guaranteed Obligations and shall forthwith be paid to the Lender to be credited and applied upon the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of the Notes or to be held by the Lender as collateral security for any Guaranteed Obligations thereafter existing. SECTION 5. Contribution. For the purpose of establishing rights and obligations of contribution among Hughes and the Guarantors for the benefit of themselves and for the benefit of the Lender, the Guarantors hereby agree and Hughes acknowledges the following contribution provisions: (a) Indemnity and Subrogation. In addition to all such rights of indemnity and subrogation as the Guarantors may have under applicable law (but subject subsection (c) below), Hughes agrees that (i) in the event a payment shall be made by any Guarantor under this Guaranty in respect of the obligations of Hughes under the terms of the Notes, Hughes shall indemnify such Guarantor for the full amount of such payment and (ii) in the event any assets of any Guarantor shall be sold pursuant to any stock pledge agreement or similar instrument or agreement to satisfy a claim of the Lender, Hughes shall indemnify such Guarantor in an amount equal to the greater of the book value or the fair market value of the assets so sold. Each Guarantor has subordinated its rights to subrogation, pursuant to Section 4 of this Guaranty. (b) Contribution and Subrogation. Each Guarantor agrees (subject to subsection (c) below) that in the event a payment shall be made by any Guarantor under this Guaranty or assets of any Guarantor shall be sold pursuant to any stock pledge agreement or similar instrument or agreement to satisfy a claim of the Lender, and such Guarantor (the 8 "Claiming Guarantor") shall not have been indemnified by Hughes as provided in subsection (a) above, each other Guarantor (a "Contributing Guarantor") shall indemnify the Claiming Guarantor in an amount equal to the amount of such payment or the greater of the book value or the fair market value of such assets, as the case may be, multiplied by a fraction, the numerator of which shall be as of the date of determination, the total shareholder's equity of such date as determined in accordance with GAAP (the "Consolidated Net Worth") of the Contributing Guarantor on the date hereof, and the denominator of which shall be the sum of the Consolidated Net Worth of all the Guarantors on the date hereof. Any Contributing Guarantor making any payment to a Claiming Guarantor pursuant to this subsection (b) shall be subrogated to the rights of such Claiming Guarantor under subsection (a) to the extent of such payment. (c) Subordination. Notwithstanding any provision of this Guaranty to the contrary, (i) all rights of the Guarantors under subsection (a) or (b) and all other rights of indemnity or contribution under applicable law or otherwise shall be fully subordinated to the indefeasible payment in full of the Guaranteed Obligations, and (ii) no such rights shall be exercised until all of the Guaranteed Obligations shall have been irrevocably paid in full. If any amount shall be paid to any Guarantor on account of such indemnity or contribution rights at any time when all of the Guaranteed Obligations shall not have been paid in full, such amount shall be held in trust for the benefit of the Lender and shall forthwith be paid to the Lender to be credited and applied upon the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of the Notes. No failure on the part of Hughes or any Guarantor to make the payments required by subsection (a) or (b) (or any other payments required under applicable law or otherwise) shall in any respect limit the obligations and liabilities of any Guarantor with respect to this Guaranty, and each Guarantor shall remain liable for the full amount of the obligations of such Guarantor under this Guaranty. (d) Allocation. If at any time there exists more than one Claiming Guarantor with respect to this Guaranty, then payment from other Guarantors pursuant to this Section 5 shall be allocated among such Claiming Guarantors in proportion to the total amount of money paid for or on account of the Guaranteed Obligations by each such Claiming Guarantor pursuant to the Guaranty. (e) Preservation of Rights. This Section 5 shall not limit or affect any right which any Guarantor may have against any other Person that is not a party hereto. (f) Subsidiary Payment. The amount of contribution payable under this Section 5 by any Guarantor with respect to the Guaranty shall be reduced by the amount of any contribution paid hereunder by a Subsidiary (as hereinafter defined) of such Guarantor with respect to the Guaranty. The term "Subsidiary" shall mean, with respect to any Person, any corporation or other entity (including, without limitation, partnerships, joint ventures, and associations) regardless of its jurisdiction of organization or formation, at least a majority of the total combined voting power of all classes of voting stock or other ownership interests of which 9 shall, at the time as of which any determination is being made, be owned by such Person, either directly or indirectly through one or more other Subsidiaries. (g) Asset Sale. If all of the stock of any Guarantor shall be sold or otherwise disposed of (including by merger or consolidation) in an asset sale not prohibited by the Notes or otherwise consented to by the Lender under the Notes, the agreements of such Guarantor hereunder shall automatically be discharged and released without any further action by such Guarantor and shall be assumed in full by the corporation which prior to such asset sale or consent owned the stock of such Guarantor, effective as of the time of such asset sale or consent. Hughes shall cause any such corporation which is not a Guarantor to become a party to this Guaranty unless otherwise agreed in writing by the Lender. (h) Equitable Allocation. If as a result of any reorganization, recapitalization or other corporate change in Hughes or any of its Subsidiaries, or as a result of any amendment, waiver or modification of the terms and conditions governing the Guaranty or any of the Guaranteed Obligations, or for any other reason, the contributions under this Section 5 become inequitable, the parties hereto shall promptly modify and amend this Section 5 to provide for an equitable allocation of contributions. All such modifications and amendments shall be in writing and signed by all parties hereto. (i) Asset of Party to Which Contribution and Indemnification Are Owing. The parties hereto acknowledge that the right to contribution and indemnification hereunder shall each constitute an asset in favor of the party to which such contribution or indemnification is owing. SECTION 6. Severability. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 7. Successors and Assigns; Amendments. This Guaranty shall be binding upon each party hereto and its respective successors and assigns and shall inure to the benefit of the parties hereto, the Lender and its respective successors and assigns. None of any Guarantor's rights or any interest therein under this Section 7 may be assigned or transferred without the written consent of the Lender. In the event of any such transfer or assignment of rights by any Guarantor, the rights and privileges herein conferred upon that Guarantor shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This Section 7 shall not be amended without the prior written consent of the Lender. SECTION 8. Notices. All notices and other communications provided for hereunder shall be given (i) in the case of the Lender, at the address specified for the Lender in 10 the Notes, and (ii) in the case of the Guarantors, at the respective addresses specified for such Guarantors in this Guaranty. SECTION 9. No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other further notice or demand in any similar or other circumstances or constitute a waiver of the rights of the Lender to any other or further action in any circumstances without notice or demand. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 10. Right Of Set Off. In addition to and not in limitation of all rights of offset that the Lender may have under applicable law, the Lender shall, upon the occurrence of any Event of Default (as defined in the Notes) and whether or not the Lender has made any demand or the Guaranteed Obligations are matured, have the right to appropriate and apply to the payment of the Guaranteed Obligations, all deposits of any Guarantor (general or special, time or demand, provisional or final) then or thereafter held by and other indebtedness or property then or thereafter owing by the Lender to any Guarantor, whether or not related to this Guaranty or any transaction hereunder. The Lender shall promptly notify the relevant Guarantor of any offset hereunder. SECTION 11. Continuing Guaranty; Transfer Of Obligations. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until payment in full of the Guaranteed Obligations and all other amounts payable under this Guaranty, (ii) be binding upon each Guarantor, its successors and assigns, and (iii) inure to the benefit of and be enforceable by and for the benefit of the Lender, its successors, transferees and assigns. SECTION 12. Governing Law; Appointment Of Agent For Service Of Process; Submission To Jurisdiction; Waiver of Jury Trial. (a) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF). (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY OR OTHERWISE RELATED HERETO MAY BE BROUGHT IN THE SUPERIOR COURT OF FULTON COUNTY OF THE STATE OF GEORGIA OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF GEORGIA, AND, BY EXECUTION AND DELIVERY OF THIS GUARANTY, EACH GUARANTOR HEREBY CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THE AFORESAID COURTS SOLELY FOR THE PURPOSE OF 11 ADJUDICATING ITS RIGHTS OR THE RIGHTS OF THE LENDER WITH RESPECT TO THIS GUARANTY OR ANY DOCUMENT RELATED HERETO. EACH GUARANTOR HEREBY IRREVOCABLY DESIGNATES CORPORATION SERVICE COMPANY AS THE DESIGNEE, APPOINTEE AND AGENT OF SUCH GUARANTOR TO RECEIVE, FOR AND ON BEHALF OF SUCH GUARANTOR, SERVICE OF PROCESS IN SUCH JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY OR ANY DOCUMENT RELATED HERETO AND SUCH SERVICE SHALL BE DEEMED COMPLETED THIRTY DAYS AFTER MAILING THEREOF TO SAID AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY SUCH LOCAL AGENT AND BY THE SERVER OF PROCESS BY MAIL TO THE RESPECTIVE GUARANTOR AT ITS ADDRESS SET FORTH HEREIN, BUT THE FAILURE OF SUCH GUARANTOR TO RECEIVE SUCH COPY SHALL NOT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. EACH GUARANTOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS IN RESPECT OF THIS GUARANTY OR ANY DOCUMENT RELATED THERETO. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY GUARANTOR IN ANY OTHER JURISDICTION. (c) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY OR ANY OTHER CREDIT DOCUMENT OR ANY MATTER ARISING IN CONNECTION HEREUNDER OR THEREUNDER. SECTION 13. Subordination Of Hughes's Obligations To the Guarantors. As an independent covenant, each Guarantor hereby expressly covenants and agrees for the benefit of the Lender that all obligations and liabilities of Hughes to such Guarantor of whatsoever description including, without limitation, all intercompany receivables of such Guarantor from Hughes ("Junior Claims") shall be subordinate and junior in right of payment to all obligations of Hughes to the Lender under the terms of the Notes ("Senior Claims"). If an Event of Default shall occur, then, unless and until such Event of Default shall have been cured, waived, or shall have ceased to exist, no direct or indirect payment (in cash, property, securities by setoff or otherwise) shall be made by Hughes to any Guarantor on account of or in any manner in respect of any Junior Claim except such payments and distributions the proceeds of which shall be applied to the payment of Senior Claims. 12 In the event of a Proceeding (as hereinafter defined), all Senior Claims shall first be paid in full before any direct or indirect payment or distribution (in cash, property, securities by setoff or otherwise) shall be made to any Guarantor on account of or in any manner in respect of any Junior Claim except such payments and distributions the proceeds of which shall be applied to the payment of Senior Claims. For the purposes of the previous sentence, "Proceeding" means Hughes or any Guarantor shall commence a voluntary case concerning itself under The Bankruptcy Code of 1978, as amended and in effect from time to time (11 U.S.C. ss. 101 et seq.; the "Bankruptcy Code"). or any other applicable bankruptcy laws; or any involuntary case is commenced against Hughes or any Guarantor; or a custodian (as defined in the Bankruptcy Code or any other applicable bankruptcy laws) is appointed for, or takes charge of, all or any substantial part of the property of Hughes or any Guarantor, or Hughes or any Guarantor commences any other proceedings under any reorganization arrangement, adjustment of debt, relief of debtor, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Hughes or any Guarantor, or any such proceeding is commenced against Hughes or any Guarantor, or Hughes or any Guarantor is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or Hughes or any Guarantor suffers any appointment of any custodian or the like for it or any substantial part of its property; or Hughes or any Guarantor makes a general assignment for the benefit of creditors; or Hughes or any Guarantor shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or Hughes or any Guarantor shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or Hughes or any Guarantor shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate action shall be taken by Hughes or any Guarantor for the purpose of effecting any of the foregoing. In the event any direct or indirect payment or distribution is made to a Guarantor in contravention of this Section 13, such payment or distribution shall be deemed received in trust for the benefit of the Lender and shall be immediately paid over to the Lender for application against the Guaranteed Obligations in accordance with the terms of the Notes. Each Guarantor agrees to execute such additional documents as the Lender may reasonably request to evidence the subordination provided for in this Section 13. SECTION 14. Judgment Currency. (a) The Guarantors' obligations hereunder to make payments in a particular currency (the "Obligation Currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than the Obligation Currency, except to the extent that such tender or recovery results in the effective receipt by the Lender of the full amount of the Obligation Currency expressed to be payable under this Guaranty or the Notes. If for the purpose of obtaining or enforcing judgment against any Guarantor in any court or in any jurisdiction, it becomes necessary to convert into or from any currency other than the Obligation Currency (such other currency being hereinafter referred to as the "Judgment Currency") an amount due in the Obligation Currency, the conversion shall be made, at the currency equivalent determined, in 13 each case, as on the day immediately preceding the day on which the judgment is given (such day being any day other than Saturday, Sunday and a day on which commercial banks are required to be closed for business in Atlanta, Georgia, or Orlando, Florida being hereafter referred to as the "Judgment Currency Conversion Date"). (b) If there is a change in the rate of exchange prevailing between the Judgment Currency Conversion Date and the date of actual payment of the amount due, the Guarantors covenant and agree to pay, or cause to be paid, such additional amounts, if any (but in any event not a lesser amount), as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the rate of exchange prevailing on the date of payment, will produce the amount of the Obligation Currency which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial award at the rate of exchange prevailing on the Judgment Currency Conversion Date. (c) For purposes of determining the currency equivalent for this Section, such amounts shall include any premium and costs payable in connection with the purchase of the Obligation Currency. (d) If the Obligation Currency is the lawful money of the United States of America. ("U.S. Dollars"), the currency equivalent shall be the Dollar Equivalent. For purposes of this Guaranty, the term "Dollar Equivalent" shall mean, with respect to any monetary amount in a currency other than U.S. Dollars, at any time for the determination thereof, the amount of U.S. Dollars obtained by converting such currency involved in such computation into U.S. Dollars at the spot rate for the purchase of U.S. Dollars with the applicable currency as quoted by the Lender at 11:00 a.m. (local time for the Lender) on the date of determination thereof specified herein or, if the date of determination thereof is not otherwise specified herein, on the date two applicable Business Days prior to such determination. For purposes of this Guaranty, the term "Business Day" shall mean any day other than Saturday, Sunday and a day on which commercial banks are required to be closed for business in Atlanta, Georgia, or Orlando, Florida. SECTION 15. Automatic Acceleration in Certain Events. Upon the occurrence of an Event of Default as defined in the Notes, all Guaranteed Obligations shall automatically become immediately due and payable by the Guarantors, without notice or other action on the part of the Lender, and regardless of whether payment of the Guaranteed Obligations by Hughes has then been accelerated. In addition, if any event of the types described in the Notes should occur with respect to any Guarantor, then the Guaranteed Obligations shall automatically become immediately due and payable by such Guarantor, without notice or other action on the part of the Lender, and regardless of whether payment of the Guaranteed Obligations by Hughes has then been accelerated. SECTION 16. Savings Clause. (a) It is the intent of each Guarantor and the Lender that each Guarantor's maximum obligations hereunder shall be, but not in excess of: 14 (i) in a case or proceeding commenced by or against such Guarantor under the Bankruptcy Code on or within one year from the date on which any of the Guaranteed Obligations are incurred, the maximum amount which would not otherwise cause the Guaranteed Obligations (or any other obligations of such Guarantor to the Lender) to be avoidable or unenforceable against such Guarantor under (A) Section 548 of the Bankruptcy Code or (B) any state fraudulent transfer or fraudulent conveyance act or statute applied in such case or proceeding by virtue of Section 544 of the Bankruptcy Code; or (ii) in a case or proceeding commenced by or against such Guarantor under the Bankruptcy Code subsequent to one year from the date on which any of the Guaranteed Obligations are incurred, the maximum amount which would not otherwise cause the Guaranteed Obligations (or any other obligations of the Guarantor to the Lender) to be avoidable or unenforceable against such Guarantor under any state fraudulent transfer or fraudulent conveyance act or statute applied in any such case or proceeding by virtue of Section 544 of the Bankruptcy Code; or (iii) in a case or proceeding commenced by or against such Guarantor under any law, statute or regulation other than the Bankruptcy Code (including, without limitation, any other bankruptcy, reorganization, arrangement, moratorium, readjustment of debt, dissolution, liquidation or similar debtor relief laws), the maximum amount which would not otherwise cause the Guaranteed Obligations (or any other obligations of such Guarantor to the Lender) to be avoidable or unenforceable against such Guarantor under such law, statute or regulation including, without limitation, any state fraudulent transfer or fraudulent conveyance act or statute applied in any such case or proceeding. (The substantive laws under which the possible avoidance or unenforceability of the Guaranteed Obligations (or any other obligations of such Guarantor to the Lender) shall be determined in any such case or proceeding shall hereinafter be referred to as the "Avoidance Provisions"). (b) To the end set forth in Section 16(a), but only to the extent that the Guaranteed Obligations would otherwise be subject to avoidance under the Avoidance Provisions if such Guarantor is not deemed to have received valuable consideration, fair value or reasonably equivalent value for the Guaranteed Obligations, or if the Guaranteed Obligations would render the Guarantor insolvent, or leave the Guarantor with an unreasonably small capital to conduct its business, or cause the Guarantor to have incurred debts (or to have intended to have incurred debts) beyond its ability to pay such debts as they mature, in each case as of the time any of the Guaranteed Obligations are deemed to have been incurred under the Avoidance Provisions and after giving effect to contribution as among Guarantors, the maximum Guaranteed Obligations for which such Guarantor shall be liable hereunder shall be reduced to that amount which, after giving effect thereto, would not cause the Guaranteed Obligations (or any other obligations of such Guarantor to the Lender), as so reduced, to be subject to avoidance under the Avoidance Provisions. This Section 16(b) is intended solely to preserve the rights of the Lender hereunder to the maximum extent that would not cause the Guaranteed Obligations of any Guarantor to be subject to avoidance under the 15 Avoidance Provisions, and neither such Guarantor nor any other Person shall have any right or claim under this Section 16 as against the Lender that would not otherwise be available to such Person under the Avoidance Provisions. (c) None of the provisions of this Section 16 are intended in any manner to alter the obligations of any holder of subordinated debt or the rights of the holders of "senior indebtedness" as provided by the terms of the subordinated debt. Accordingly, it is the intent of each of the Guarantors that, in the event that any payment or distribution is made with respect to the subordinated debt prior to the payment in full of the Guaranteed Obligations by virtue of the provisions of this Section 16, in any case or proceeding of the kinds described in clauses (i)-(iii) of Section 16(a), the holders of the subordinated debt shall be obligated to pay or deliver such payment or distribution to or for the benefit of the Lender. Furthermore, in respect of the Avoidance Provisions, it is the intent of each Guarantor that the subrogation rights of the holders of subordinated debt with respect to the obligations of the Guarantor under this Guaranty, be subject in all respects to the provisions of Section 16(b). SECTION 17. Information. Each of the Guarantors assumes all responsibility for being and keeping itself informed of Hughes's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that such Guarantor assumes and incurs hereunder, and agrees that none of the Lender will have any duty to advise any of the Guarantors of information known to it or any of them regarding such circumstances or risks. SECTION 18. Survival. All agreements, representations and warranties made herein shall survive the execution and delivery of this Guaranty and of the Notes. SECTION 19. Counterparts. This Guaranty and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. SECTION 20. Currency of Payment. All payments to be made by the Guarantors hereunder shall be made in the relevant currency or currencies in which the Guaranteed Obligations are denominated in immediately available funds. If any Guarantor is unable for any reason to effect payment of any of the Guaranteed Obligations in the currency in which such Guaranteed Obligations are denominated, the Lender may, at their option, require such payment to be made in the Dollar Equivalent of such currency. If in any case where any of the Guarantors shall make any such payment in the Dollar Equivalent, the Guarantors agree to hold the Lender harmless from any loss incurred by the Lender arising from any change in the 16 value of Dollars in relation to such currency between the date such payment became due and the date of payment thereof. SECTION 21. Additional Guarantors. Upon execution and delivery by any Subsidiary of Hughes of a supplement to that certain guaranty dated as of January 26, 1999 (the Revolver Guaranty"), made by each of the material subsidiaries of Hughes, listed on the signature pages thereto, in favor of Lender, individually and as Administrative Agent, First Union National Bank, individually and as Documentation Agent, Nationsbank, N.A., individually and as Syndication Agent, Southtrust Bank, National Association, individually and as Co-Agent, or to that certain guaranty dated as of January 26, 1999 (the "Line of Credit Guaranty") made by each of the material subsidiaries of Hughes, listed on the signature pages thereof, in favor of Lender, individually and as Administrative Agent, First Union National Bank, individually and as Documentation Agent, Nationsbank, N.A., individually and as Syndication Agent, Southtrust Bank, National Association, individually and as Co-Agent, such subsidiary shall also execute and deliver to Lender an instrument in the form of Annex 1, such Subsidiary of Hughes shall become a Guarantor hereunder with the same force and effect as if originally named a Guarantor herein (each an "Additional Guarantor"). The execution and delivery of any such instrument shall not require the consent of any Guarantor hereunder. The rights and obligations of each Guarantor hereunder shall remain in full force and effect notwithstanding the addition of any Additional Guarantor as a party to this Guaranty. 17 IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be duly executed and delivered by their respective duly authorized officers as of the date first above written. GUARANTORS: Address: ALLIED METALS, INC. 20 North Orange Avenue APPCO PROCESS EQUIPMENT COMPANY Suite 200 ATLANTIC PUMP & EQUIPMENT COMPANY OF Orlando, FL 32801 MIAMI, INC. Attn: J. Stephen Zepf ATLANTIC PUMP & EQUIPMENT COMPANY OF WEST PALM BEACH, INC. CAROLINA PUMP & SUPPLY CORP. CHAD SUPPLY, INC. COASTAL WHOLESALE, INC. DOUGLAS LEONHARDT & ASSOCIATES, INC. DOMINION PIPE FABRICATORS, INCORPORATED DOMINION PIPE & SUPPLY CO. ELASCO AGENCY SALES, INC. ELEC-TEL SUPPLY COMPANY ELECTRIC LABORATORIES AND SALES CORPORATION FES MERGER CORP., INC. FLORIDA PIPE & SUPPLY COMPANY GAYLE SUPPLY COMPANY, INC. GILLELAND CONCRETE PRODUCTS, INC. GPEC, INC. H VENTURE CORP. HSI ACQUISITION CORPORATION HUGHES WATER & SUPPLY COMPANY HUGHES SUPPLY MANAGEMENT SERVICES, INC. INTERNATIONAL SUPPLY COMPANY J. I. SERVICES CORPORATION J & J, INC. JUNO INDUSTRIES, INC. KAMEN MERGER CORP. MEREX CORPORATION METALS INCORPORATED METALS, INC. - GULF COAST DIVISION MILLS & LUPTON SUPPLY COMPANY MOORE ELECTRIC SUPPLY, INC. MOUNTAIN COUNTRY SUPPLY, INC. OLANDER & BROPHY, INCORPORATED ONE-STOP SUPPLY, INC. PAINE SUPPLY OF JACKSON, INC. PALM POOL PRODUCTS, INC. PANHANDLE PIPE AND SUPPLY CO., INC. PORT CITY ELECTRICAL SUPPLY, INC. R & G PLUMBING SUPPLY, INC. SAN ANTONIO PLUMBING DISTRIBUTORS, INC. SHRADER HOLDING COMPANY, INC. STAINLESS TUBULAR PRODUCTS, INC. SUNBELT SUPPLY COMPANY USCO INCORPORATED UNION MERGER CORPORATION U.S. FUSION SERVICES, INC. VIRGINIA WATER & WASTE SUPPLY COMPANY, INC. WCC MERGER CORPORATION WHOLESALE ELECTRIC SUPPLY CORPORATION By: ________________________________________ J. Stephen Zepf Treasurer Address: HHH, INC. 1403 Foulk Road, Suite 102 Z&L ACQUISITION CORP. OF DELAWARE, INC. Wilmington, DE 19803 L&T OF DELAWARE, INC. Z&L ACQUISITION CORP. By:________________________________________ Gordon Stewart President Address: HSI CORP. 1403 Foulk Road, Suite 101 Wilmington, DE 19803 By:________________________________________ Gordon Stewart President Address: SOUTHWEST STAINLESS, L.P. 1403 Foulk Road, Suite 102 Wilmington, DE 19803 By: Z&L ACQUISITION CORP., its General Partner By:_________________________________ Gordon Stewart President [SIGNATURE PAGE TO SUBSIDIARY GUARANTY AGREEMENT] SECTION 5 AND 21 OF THE FOREGOING GUARANTY ACKNOWLEDGED AND AGREED TO: HUGHES SUPPLY, INC. By:_____________________________ J. Stephen Zepf Treasurer ANNEX I SUPPLEMENT TO SUBSIDIARY GUARANTY AGREEMENT THIS SUPPLEMENT TO SUBSIDIARY GUARANTY AGREEMENT (this "Supplement to Guaranty Agreement"), dated as of __________________, made by ______________________, a ________ corporation (the "Additional Guarantor"), in favor of SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION (the "Lender"); W I T N E S S E T H: WHEREAS, Hughes executed and delivered that certain Uncommitted Swing Line Note dated as of March 1, 1999, in favor of Lender, in the principal amount of $10,000,000.00 (as hereafter amended, restated, renewed, extended, supplemented or otherwise modified from time to time, the "Swing Line Note"), and that certain Uncommitted Guidance Line Note dated as of March 1, 1999, in favor of Lender, in the principal amount of $15,000,000.00 (as hereafter amended, restated, renewed, extended, supplemented or otherwise modified from time to time, the "Guidance Line Note", and together with the Swing Line Note, the "Notes"); WHEREAS, certain Subsidiaries (the "Subsidiary Guarantors") of Hughes have executed and delivered a Subsidiary Guaranty Agreement, dated as of March 1, 1999 (as amended, restated, supplemented or otherwise modified from time to time, the "Subsidiary Guaranty"), pursuant to which the Subsidiary Guarantors have agreed to guarantee all of the obligations of Hughes under the Notes; WHEREAS, Hughes, the Subsidiary Guarantors and the Additional Guarantor share an identity of interests as members of a consolidated group of companies engaged in substantially similar businesses; Hughes provides certain centralized financial, accounting and management services to the Additional Guarantor; the making of the loans will facilitate expansion and enhance the overall financial strength and stability of Hughes's corporate group, including the Additional Guarantor; and by virtue of intercompany advances and loans, the financial accommodations to Hughes under the Notes shall inure to the direct and material benefit of Guarantors; and WHEREAS, it is a condition subsequent to the Lender's making loans, in its sole discretion, to Hughes evidenced by the Notes that the Additional Guarantor execute and deliver to the Lender this Supplement to Guaranty Agreement, and the Additional Guarantor desires to execute and deliver this Supplement to Guaranty Agreement to satisfy such condition subsequent; NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to make the loans to Hughes under the Notes, the Additional Guarantor hereby agrees as follows: SECTION 2. Defined Terms. Capitalized terms not otherwise defined herein shall have the meanings specified for such terms in the Subsidiary Guaranty. SECTION 3. Additional Guarantor. The Additional Guarantor agrees that it shall be and become a Guarantor for all purposes of the Subsidiary Guaranty and shall be fully liable thereunder to the Lender to the same extent and with the same effect as though the Additional Guarantor had been one of the Guarantors originally executing and delivering the Subsidiary Guaranty. Without limiting the foregoing, the Additional Guarantor hereby jointly and severally (with respect to the guaranties made by the Subsidiary Guarantors under the Subsidiary Guaranty), irrevocably and unconditionally, guarantees the punctual payment when due, whether at stated maturity by acceleration or otherwise, of all indebtedness and all other obligations, including all renewals, extensions, modifications and refinancings thereof, now or hereafter existing, whether for principal, interest, fees, expenses or otherwise, and any and all expenses (including reasonable attorneys' fees actually incurred and reasonable out-of-pocket expenses) incurred by the Lender in enforcing any rights under the Subsidiary Guaranty (as supplemented hereby), subject, however, to the limitations expressly provided in the Subsidiary Guaranty in Section 16 thereof. All references in the Subsidiary Guaranty to "Guarantors" or any "Guarantor" shall be deemed to include and to refer to the Additional Guarantor. 3. Enforceability. This Supplement has been duly authorized, executed and delivered by Additional Guarantor and constitutes a legal, valid and binding obligation of Additional Guarantor, enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). 4. Counterparts. This Supplement and any amendments, waivers, consents or supplements may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 5. Effective Upon Delivery. This Supplement shall become effective upon execution by Additional Guarantor and delivery of this Supplement, as executed, to the Lender. 6. Governing Law; Appointment of Agent for Service of Process; Submission to Jurisdiction; Waiver of Jury Trial. (a) THIS SUPPLEMENT TO GUARANTY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF). (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SUPPLEMENT TO GUARANTY AGREEMENT RELATED HERETO MAY BE BROUGHT IN THE SUPERIOR COURT OF FULTON COUNTY OF THE STATE OF GEORGIA OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF GEORGIA, AND, BY EXECUTION AND DELIVERY OF THIS SUPPLEMENT TO GUARANTY AGREEMENT, THE ADDITIONAL GUARANTOR HEREBY CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THE AFORESAID COURTS SOLELY FOR THE PURPOSE OF ADJUDICATING ITS RIGHTS OR THE RIGHTS OF THE LENDER WITH RESPECT TO THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE ADDITIONAL GUARANTOR HEREBY IRREVOCABLY DESIGNATES CORPORATION SERVICE COMPANY AS THE DESIGNEE, APPOINTEE AND AGENT OF THE ADDITIONAL GUARANTOR TO RECEIVE, FOR AND ON BEHALF OF THE ADDITIONAL GUARANTOR, SERVICE OF PROCESS IN SUCH JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY DOCUMENT RELATED HERETO AND SUCH SERVICE SHALL BE DEEMED COMPLETED THIRTY (30) DAYS AFTER MAILING THEREOF TO SAID AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY SUCH LOCAL AGENT AND BY THE SERVER OF PROCESS BY MAIL TO THE ADDITIONAL GUARANTOR AT ITS ADDRESS SET FORTH HEREIN, BUT THE FAILURE OF THE ADDITIONAL GUARANTOR TO RECEIVE SUCH COPY SHALL NOT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE ADDITIONAL GUARANTOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS IN RESPECT OF THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY DOCUMENT RELATED THERETO. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE ADDITIONAL GUARANTOR IN ANY OTHER JURISDICTION. 3 (c) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE ADDITIONAL GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS SUPPLEMENT TO GUARANTY AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR ANY MATTER ARISING IN CONNECTION HEREUNDER OR THEREUNDER. 7. Severability. In case any provision in or obligation under this Supplement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 4 IN WITNESS WHEREOF, the Additional Guarantor has caused this Supplement to Guaranty Agreement to be duly executed and delivered to the Lender under seal by its duly authorized officers as of the date first above written. Address for Notices: ADDITIONAL GUARANTOR: _______________________________ By:____________________________ Title:______________________ AMENDMENT TO UNCOMMITTED GUIDANCE AND SWING LINE DEMAND PROMISSORY NOTE February 11, 2002 Mr. Robert Hillier Hughes Supply, Inc. 20 N. Orange Ave., Suite 510 Orlando, FL 32801 Dear Robert: This letter serves as official notice that as of June 30, 2001, the maturity date on the $10,000,000 Swing Line provided by SunTrust Bank, Inc. (the Bank) was extended to June 30, 2002. Concurrently, the $15,000,000 Guidance Line provided by the Bank has also been extended to June 30, 2002, with these funds now appropriated to a split-trac operating lease agreement. According to the Swing Line and Guidance Line Notes, the Bank may extend the Notes in writing and at its sole discretion. If you should have any questions or need assistance please call me at (407) 237-4752. Sincerely, Sarah D. Hudson Associate SunTrust Bank, Inc. EX-13 5 ex-13.txt CONSOLIDATED STATEMENTS OF INCOME Consolidated Statements of Income (in thousands, except per share data)
Fiscal Years Ended ----------------------------------------- January 25, January 26, January 28, 2002 2001 2000 - ----------------------------------------------------------------------------------- Net Sales $ 3,037,708 $ 3,310,163 $ 2,994,877 Cost of Sales 2,343,788 2,566,706 2,320,604 - ----------------------------------------------------------------------------------- Gross Profit 693,920 743,457 674,273 - ----------------------------------------------------------------------------------- Operating Expenses: Selling, general and administrative 550,943 579,234 508,009 Depreciation and amortization 31,093 32,551 29,808 Provision for doubtful accounts 11,065 10,626 4,064 Impairment of long-lived assets 734 15,557 -- - ----------------------------------------------------------------------------------- Total operating expenses 593,835 637,968 541,881 - ----------------------------------------------------------------------------------- Operating Income 100,085 105,489 132,392 - ----------------------------------------------------------------------------------- Non-Operating Income (Expenses): Interest and other income 10,546 7,476 9,015 Interest expense (35,945) (43,288) (31,805) Gain on sale of pool and spa business -- 11,000 -- - ----------------------------------------------------------------------------------- (25,399) (24,812) (22,790) - ----------------------------------------------------------------------------------- Income Before Income Taxes 74,686 80,677 109,602 Income Taxes 30,621 34,162 43,731 - ----------------------------------------------------------------------------------- Net Income $ 44,065 $ 46,515 $ 65,871 =================================================================================== Earnings Per Share: Basic $ 1.90 $ 2.00 $ 2.82 =================================================================================== Diluted $ 1.88 $ 1.97 $ 2.80 =================================================================================== Average Shares Outstanding: Basic 23,175 23,238 23,398 =================================================================================== Diluted 23,424 23,584 23,547 ===================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 10 Consolidated Balance Sheets (in thousands, except share and per share data)
January 25, January 26, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 6,817 $ 22,449 Accounts receivable, less allowance for doubtful accounts of $8,388 and $6,106 387,953 435,607 Inventories 396,441 441,789 Deferred income taxes 15,420 18,524 Other current assets 56,809 68,940 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 863,440 987,309 Property and Equipment 145,702 152,079 Goodwill 263,808 249,826 Other Assets 20,312 17,481 - ------------------------------------------------------------------------------------------------------------------------- $ 1,293,262 $ 1,406,695 ========================================================================================================================= Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $ 19,175 $ 15,274 Accounts payable 188,447 221,771 Accrued compensation and benefits 32,790 32,762 Other current liabilities 34,753 38,372 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 275,165 308,179 Long-Term Debt 403,671 516,168 Deferred Income Taxes 13,872 6,704 Other Noncurrent Liabilities 6,081 5,609 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 698,789 836,660 - ------------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 8) Shareholders' Equity: Preferred stock, no par value; 10,000,000 shares authorized; none issued; preferences, limitations and relative rights to be established by the Board of Directors -- -- Common stock, par value $1 per share; 100,000,000 shares authorized; 23,774,600 and 24,211,485 shares issued 23,775 24,211 Capital in excess of par value 217,609 228,103 Retained earnings 367,726 337,149 Treasury stock, 24,251 and 576,783 shares, at cost (531) (13,307) Unearned compensation related to outstanding restricted stock (14,106) (6,121) - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 594,473 570,035 - ------------------------------------------------------------------------------------------------------------------------- $ 1,293,262 $ 1,406,695 =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 11 Consolidated Statements of Shareholders' Equity (in thousands, except per share data)
Common Stock Treasury Stock Capital in ------------------ ------------------ Excess of Retained Unearned Shares Dollars Shares Dollars Par Value Earnings Compensation Total - ----------------------------------------------------------------------------------------------------------------------------- Balance at January 29, 1999 24,184 $ 24,184 -- $ -- $ 219,558 $ 242,730 $ (2,516) $ 483,956 Net income -- -- -- -- -- 65,871 -- 65,871 Cash dividends--$.34 per share -- -- -- -- -- (7,990) -- (7,990) Purchase of treasury stock -- -- (921) (21,229) -- -- -- (21,229) Shares issued under stock option and bonus plans 29 29 36 811 472 (378) -- 934 Purchase and retirement of common shares (7) (7) -- -- (57) (89) -- (153) Issuance of restricted stock, net of cancellations 43 43 216 4,984 1,311 -- (6,338) -- Amortization of unearned restricted stock -- -- -- -- -- -- 1,055 1,055 - ----------------------------------------------------------------------------------------------------------------------------- Balance at January 28, 2000 24,249 $ 24,249 (669) $(15,434) $ 221,284 $ 300,144 $ (7,799) $ 522,444 Net income -- -- -- -- -- 46,515 -- 46,515 Cash dividends--$.34 per share -- -- -- -- -- (8,088) -- (8,088) Shares issued under stock option and bonus plans -- -- 92 2,127 -- (425) -- 1,702 Purchase and retirement of common shares (32) (32) -- -- (319) (1,002) -- (1,353) Issuance of restricted stock, net of cancellations (6) (6) -- -- (135) 5 136 -- Amortization of unearned restricted stock -- -- -- -- -- -- 1,542 1,542 Consideration for bestroute.com acquisition -- -- -- -- 7,273 -- -- 7,273 - ----------------------------------------------------------------------------------------------------------------------------- Balance at January 26, 2001 24,211 $ 24,211 (577) $(13,307) $ 228,103 $ 337,149 $ (6,121) $ 570,035 Net income -- -- -- -- -- 44,065 -- 44,065 Cash dividends--$.34 per share -- -- -- -- -- (7,964) -- (7,964) Purchase of treasury stock -- -- (395) (7,537) -- -- -- (7,537) Shares issued under stock option and bonus plans -- -- 266 5,634 300 (1,726) -- 4,208 Purchase and retirement of common shares (90) (90) -- -- (854) (1,111) -- (2,055) Retirement of treasury stock (343) (343) 343 7,488 (3,160) (3,985) -- -- Issuance of restricted stock, net of cancellations (3) (3) 339 7,191 493 1,298 (9,498) (519) Amortization of unearned restricted stock -- -- -- -- -- -- 1,513 1,513 Cancellation of stock rights issued to bestroute.com -- -- -- -- (7,273) -- -- (7,273) - ----------------------------------------------------------------------------------------------------------------------------- Balance at January 25, 2002 23,775 $ 23,775 (24) $ (531) $ 217,609 $ 367,726 $(14,106) $ 594,473 =============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 12 Consolidated Statements of Cash Flows (in thousands)
Fiscal Years Ended ------------------------------------- January 25, January 26, January 28, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 44,065 $ 46,515 $ 65,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,093 32,551 29,808 Provision for doubtful accounts 11,065 10,626 4,064 Impairment of long-lived assets 734 15,557 -- Gain on sale of pool and spa business -- (11,000) -- Deferred income taxes 10,442 (7,766) 564 Other 372 3,968 (441) Changes in assets and liabilities, net of businesses acquired or sold: Accounts receivable 50,087 (43,224) (35,768) Inventories 55,019 34,567 (67,594) Other current assets (11,953) 1,795 (11,588) Other assets (1,831) (7,776) (4,006) Accounts payable (39,555) (23,926) 48,375 Accrued compensation and benefits (921) 4,433 4,046 Other current liabilities (4,326) 9,484 (50) Other noncurrent liabilities 472 344 168 - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 144,763 66,148 33,449 - ------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (16,850) (23,871) (30,740) Proceeds from sale of property and equipment 8,673 1,772 4,892 Business acquisitions, net of cash (32,007) (34,086) (88,905) Purchase of bestroute.com stock rights (7,273) -- -- Proceeds from sale of pool and spa business 25,000 22,972 -- Investments in affiliated entities -- (5,757) (3,750) - ------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (22,457) (38,970) (118,503) - ------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under short-term debt arrangements (100,328) (153,900) 132,797 Proceeds from issuance of long-term debt -- 150,000 -- Principal payments on other debt (23,809) (2,476) (14,724) Purchase of treasury shares (7,537) -- (21,229) Dividends paid (7,946) (8,083) (8,042) Other 1,682 (270) 242 - ------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (137,938) (14,729) 89,044 - ------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (15,632) 12,449 3,990 Cash and Cash Equivalents, Beginning of Year 22,449 10,000 6,010 - ------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 6,817 $ 22,449 $ 10,000 ========================================================================================================================= Supplemental Disclosure of Cash Flows Information: Income taxes paid $ 36,642 $ 36,601 $ 49,079 Interest paid 35,814 44,429 29,636 Property and equipment acquired with debt 6,946 -- -- =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 13 Notes to Consolidated Financial Statements (in thousands, except share and per share data) Note 1--Description of Business and Summary of Significant Accounting Policies Organization Hughes Supply, Inc. and its subsidiaries (the "Company") is a diversified wholesale distributor of construction and industrial materials, equipment and supplies to commercial construction, residential construction, industrial and public infrastructure markets in North America. The Company distributes over 240,000 products, representing five major product categories, through 439 wholesale branches located in 34 states and Mexico. The Company's principal customers are electrical, plumbing and mechanical contractors, electric utility customers, property management companies, municipalities and industrial companies. Industrial companies include businesses in the petrochemical, food and beverage, pulp and paper, mining, pharmaceutical and marine industries. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated. Results of operations of companies acquired and accounted for using the purchase method of accounting are included from their respective dates of acquisition. Fiscal Year The Company's fiscal year ends on the last Friday in January. Fiscal years 2002, 2001 and 2000 each consisted of 52 weeks. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Allowance for Doubtful Accounts The Company evaluates the collectibility of accounts receivable based on numerous factors, including past transaction history with customers and their credit worthiness. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This estimate is periodically adjusted when the Company becomes aware of a specific customer's inability to meet its financial obligations (e.g. bankruptcy, etc.), or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a slowdown in the markets in which the Company operates may result in higher than expected uncollectible accounts, and therefore, the need to revise estimates for bad debts. Provision for doubtful accounts totaled $11,065, $10,626 and $4,064 in fiscal 2002, 2001 and 2000, respectively. To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, the allowance for doubtful accounts could differ significantly, resulting in either higher or lower future provisions for doubtful accounts. Inventories Inventories are carried at the lower of cost or market. The cost of substantially all inventories is determined by the average cost method. The Company evaluates its inventory value at the end of each quarter to ensure that it is carried at the lower of cost or market. This evaluation includes an analysis of a branch's physical inventory results over the last two years, a review of potential dead stock and an overall consolidated analysis of potential excess inventory items. An inventory provision is recorded monthly to provide for any potential write-downs of the Company's inventory to market value or for projected historical shortages. Periodically, the branch's perpetual inventory records are adjusted to reflect permanent declines in market value. At January 25, 2002 and January 26, 2001, inventory reserves totaled $9,849 and $10,379, respectively. To the extent historical physical inventory results are not indicative of future results and if unexpected future events impact, either favorably or unfavorably, the saleability of the Company's products, the Company's inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions. Property and Equipment Property and equipment are recorded at cost and depreciated using both straight-line and declining-balance methods based on the following estimated useful lives of the assets: Buildings and improvements 5-40 years Transportation equipment 2- 7 years Furniture, fixtures and equipment 2-12 years Maintenance and repair costs are charged to expense as incurred and renewals and improvements that extend the useful lives of 14 assets are capitalized. Gains or losses are reflected in income upon disposition. Interest costs related to assets under construction are capitalized during the construction period. Depreciation of property and equipment totaled $18,073, $19,565 and $18,486 in fiscal 2002, 2001 and 2000, respectively. Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions and is being amortized on a straight-line basis over periods ranging from 15 to 40 years. At January 25, 2002 and January 26, 2001, goodwill totaled $263,808 and $249,826, respectively, net of accumulated amortization of $40,296 and $31,821, respectively. Amortization of goodwill totaled $9,229, $9,295 and $7,797 in fiscal 2002, 2001 and 2000, respectively. Other Assets The Company capitalizes certain software development costs, which are being amortized on a straight-line basis over the estimated useful lives of the software, ranging from 3 to 7 years. At January 25, 2002 and January 26, 2001, capitalized software development costs totaled $9,775 and $8,680, respectively, net of accumulated amortization of $10,404 and $7,709, respectively. Amortization of capitalized software development costs totaled $3,595, $3,550 and $3,385 in fiscal 2002, 2001 and 2000, respectively. Impairment of Long-Lived Assets The Company periodically evaluates the net realizable value of long-lived assets, including goodwill, other intangible assets and property and equipment, relying on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Impairment is assessed by evaluating the estimated undiscounted cash flows over the asset's remaining life. If estimated cash flows are insufficient to recover the investment, an impairment loss is recognized. Self-Insurance The Company is self-insured for certain losses relating to workers' compensation, automobile, general and product liability claims. The Company also maintains stop loss coverages to limit the exposure arising from such claims. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon the Company's estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and the Company's historical loss development experience. To the extent the projected future development of the losses resulting from workers' compensation, automobile, general and product liability claims incurred as of January 25, 2002 differs from the actual development of such losses in future periods, the Company's insurance reserves could differ significantly, resulting in either higher or lower future insurance expense. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these instruments. The fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. Effective in February 2001, the Company adopted Statement of Financial Accounting Standards ("FAS") 133, Accounting for Derivative Instruments and Hedging Activities. FAS 133 was amended by FAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Both FAS 133 and FAS 138 require that an entity record all derivatives as either assets or liabilities in the consolidated balance sheets at fair value and measure those instruments at fair value and to reflect changes in fair value of those instruments as either components of comprehensive income or in net income depending on the types of instruments. The adoption of these standards did not have an impact on the Company's consolidated financial statements. Revenue Recognition The Company recognizes revenues from product sales when shipment occurs and title to the goods is passed to the customer. Concentration of Credit Risk The majority of the Company's sales are credit sales which are made primarily to customers whose ability to pay is dependent upon the economic strength of the construction industry in the areas where they operate. Concentration of credit risk with respect to trade accounts receivable is limited by the large number of customers comprising the Company's customer base and the fact that no one customer comprises more than 1% of annual net sales. The Company performs ongoing credit evaluations of its customers and in certain situations obtains collateral sufficient to protect its credit position. The Company maintains reserves for potential credit losses. Advertising Advertising costs are charged to expense as incurred. Advertising expenses totaled $5,333, $6,482 and $6,471 in fiscal 2002, 2001 and 2000, respectively. 15 Notes to Consolidated Financial Statements (continued) (in thousands, except share and per share data) Shipping and Handling Fees and Costs The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are included in cost of sales. Shipping and handling costs associated with outbound freight are included in selling, general and administrative expenses and totaled $19,690, $24,445 and $18,857 in fiscal 2002, 2001 and 2000, respectively. Income Taxes Income taxes are recorded for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. An assessment is made as to whether or not a valuation allowance is required to offset deferred tax assets. Stock-Based Compensation The Company measures compensation expense for employee and director stock options as the aggregate difference between the market and exercise prices of the options on the date that both the number of shares the grantee is entitled to receive and the purchase price are known. Compensation expense associated with restricted stock grants is equal to the market value of the shares on the date of grant and is recorded pro rata over the required holding period. Pro forma information relating to the fair value of stock-based compensation is presented in Note 9 to the consolidated financial statements. Comprehensive Income The Company does not have any significant components of comprehensive income. Reclassifications Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentation. These reclassifications had no net impact on previously reported results of operations. Recent Accounting Pronouncements FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets, were issued in July 2001. FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. FAS 141 also specifies the criteria which must be met in order for certain acquired intangible assets to be recorded separately from goodwill. FAS 142 is effective for the Company beginning with the Company's first quarter of fiscal 2003. Under FAS 142, all of the Company's goodwill will no longer be amortized but rather will be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. In fiscal 2002, amortization of goodwill totaled $9,229. This new approach requires the use of valuation techniques and methodologies significantly different than the present undiscounted cash flow policy being followed by the Company. In connection with the adoption of FAS 142, the Company's conclusions about the valuation and recoverability of goodwill may change. The new approach may result in impairment charges and reductions in the carrying amount of goodwill on the consolidated balance sheets upon adoption. Subsequent to the initial adoption of FAS 142, the Company may be subject to earnings volatility if additional goodwill impairment occurs at a future date. The Company is in the process of performing the goodwill evaluation required under FAS 142 and has not yet determined the impact that will result from adoption. FAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001. FAS 143, which is effective for the Company beginning in fiscal 2004, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company does not expect the adoption of FAS 143 to have a material impact on its consolidated financial statements. FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001. FAS 144, which is effective beginning with the Company's first quarter of fiscal 2003, establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The Company does not expect the adoption of FAS 144 to have a material impact on its consolidated financial statements. Note 2--Business Combinations and Divestiture In fiscal 2000, the Company invested $1,750 in bestroute.com ("bestroute"), an e-commerce company founded in 1999 to provide hard to find inventory items to wholesale distributors and end-users via the internet. During fiscal 2001, the Company was required to fund an additional $6,250 to bestroute as certain operating thresholds were met. In September 2000, the Company acquired the remaining 51.0% interest of bestroute in a transaction where the other members of bestroute received 723,183 stock rights of the Company. Under the terms of the 16 agreement, the stock rights were exercisable by the holders on or after February 1, 2001 and granted the holders the right to convert their bestroute holdings into the Company's common stock. The agreement also provided a call provision under which the Company had the ability to call the stock rights in exchange for shares of the Company's common stock. The exercise of a portion of the stock rights issued was contingent upon bestroute meeting its operating plan and demonstrating continued viability as a business. In the fourth quarter of fiscal 2001, bestroute was not able to meet its operating plan and incurred operating losses of $2,136. These losses were attributed to bestroute's inability to gain market acceptance and generate revenues sufficient to cover its operating costs. As a result of these continued losses and viability concerns, the Company discontinued bestroute's operations and on March 2, 2001, the Company and the holders of the stock rights entered into an agreement to cancel 347,541 of the stock rights and redeem the remaining rights for $7,273 in cash. During fiscal 2002, 2001 and 2000, the Company acquired several other wholesale distributors of materials to the construction and industrial markets that were accounted for as purchases. These acquisitions, individually and in the aggregate, did not have a material effect on the consolidated financial statements. Results of operations of these companies from their respective dates of acquisition have been included in the consolidated financial statements. The assets acquired and liabilities assumed for acquisitions recorded using the purchase method of accounting are summarized below: Fiscal Years Ended ----------------------------- 2002 2001 2000 - ------------------------------------------------------------- Fair value of: Assets acquired $ 47,976 $ 58,182 $125,536 Liabilities assumed (16,635) (12,466) (37,510) - ------------------------------------------------------------- Purchase price $ 31,341 $ 45,716 $ 88,026 ============================================================= Consideration in fiscal 2001 for bestroute included 723,183 stock rights with a fair value of $7,273. There was no stock consideration issued during fiscal 2002 and 2000. In January 2001, the Company completed the sale of the assets of its pool and spa business for $47,972 subject to working capital adjustments. The Company received cash proceeds of $22,972 with the remaining $25,000 of the consideration in the form of a short-term note receivable. The note receivable bore interest at a fixed rate of 7.0% and was fully collected in fiscal 2002. In fiscal 2001, the Company recorded a pre-tax gain of $11,000 in connection with the sale. The pool and spa business was engaged in the wholesale distribution of swimming pool and spa equipment and supplies. Net sales and income before income taxes for the pool and spa business were approximately $144,000 and $8,800, respectively, in fiscal 2001. Note 3--Impairment of Long-Lived Assets In the fourth quarter of fiscal 2002, the Company recorded an impairment loss of $734 related to goodwill on one entity in its Plumbing/HVAC operations. In fiscal 2001, the Company experienced continued operating losses in its e-commerce ventures and international operations. As a result of these losses and based on an analysis of future profitability and anticipated customer demand for these businesses, the Company recorded an impairment charge totaling $15,557 relating to the write-down of long-lived assets. This charge included the write-off of goodwill and other assets totaling $12,924 related to the Company's e-commerce investments, and a charge totaling $2,633 primarily related to the write-off of goodwill in the Company's international operations. Note 4--Property and Equipment Property and equipment consist of the following: 2002 2001 - ------------------------------------------------------------- Land $ 34,735 $ 34,784 Buildings and improvements 116,595 115,568 Transportation equipment 20,611 31,446 Furniture, fixtures and equipment 71,743 69,991 Construction in progress 10,306 3,476 - ------------------------------------------------------------- 253,990 255,265 Less accumulated depreciation (108,288) (103,186) - ------------------------------------------------------------- $ 145,702 $ 152,079 ============================================================= 17 Notes to Consolidated Financial Statements (continued) (in thousands, except share and per share data) Note 5--Long-Term Debt Long-term debt consists of the following: 2002 2001 - ----------------------------------------------------------------------- 8.27% senior notes, due 2003 $ 19,000 $ 19,000 8.27% senior notes, due 2005 22,400 28,000 8.42% senior notes, due 2007 103,000 103,000 7.96% senior notes, due 2011 88,666 98,000 7.14% senior notes, due 2012 40,000 40,000 7.19% senior notes, due 2012 40,000 40,000 6.74% senior notes, due 2013 50,000 50,000 Unsecured bank notes under $275,000 revolving credit agreement, payable January 25, 2004, (interest rate of 2.3% at January 25, 2002) 16,142 79,000 Commercial paper 36,409 74,101 Other notes payable (varying interest rates of 2.8% to 9.8% at January 25, 2002 with due dates from 2002 to 2016) 7,229 341 - ----------------------------------------------------------------------- 422,846 531,442 Less current portion (19,175) (15,274) - ----------------------------------------------------------------------- $ 403,671 $ 516,168 ======================================================================= On January 15, 2002, the Company's line of credit agreement was amended to decrease borrowing capacity from $75,000 to $36,250. The Company's current borrowing capacity under its revolving credit agreement and its line of credit agreement (the "credit agreement") totaled $311,250 (subject to borrowing limitations under the credit agreement)--$275,000 under its revolving credit agreement as long-term debt due January 25, 2004 and $36,250 under its line of credit agreement, as amended, which matures on July 31, 2002. Under the credit agreement, interest is payable at market rates plus applicable margins. Facility fees of .25% and .225% are paid on the total of the revolving credit agreement and line of credit agreement, respectively. The Company has two short-term lines of credit with an aggregate borrowing capacity of $25,000. On June 30, 2001, these lines of credit were amended to extend the maturity dates to June 30, 2002. At January 25, 2002, approximately $222 was outstanding under these lines of credit. There were no amounts outstanding at January 26, 2001. On June 22, 2001, the Company entered into an agreement ("lease facility agreement") with Atlantic Financial Group, Ltd. ("AFG"), certain financial parties as lenders and SunTrust Bank as agent ("SunTrust") in which AFG and SunTrust agreed to fund up to $40,000 for the acquisition and development of real property projects chosen by the Company, including up to $25,000 for the Company's new corporate headquarters building in Orlando, Florida ("Orlando property") which is expected to cost approximately $23,000. Also on June 22, 2001, the Company entered into an agreement with AFG, certain financial parties as lenders and SunTrust as agent for the construction of a new warehouse in Miami, Florida ("Miami property"). Pursuant to this agreement, AFG and SunTrust agreed to fund up to $15,000 for the construction of this facility, which is expected to cost approximately $13,000. Orlando Property Under the terms of the loan agreement ("Orlando loan agreement") between AFG and SunTrust for the Orlando property, AFG was required to fund the lease facility through a nominal equity investment, with the remainder funded through non-recourse borrowings from SunTrust. Concurrent with the execution of the Orlando loan agreement, the Company executed a master lease agreement ("Orlando lease agreement") with AFG under which the Company will lease the Orlando property for a five-year term, including the construction period and a lease period. The Orlando lease agreement requires interest only payments that begin at the earlier of the completion of construction, which is expected in September 2003, or eighteen months following the acquisition of the Orlando property, which is expected to occur in April 2002. Payments are interest only at LIBOR rates plus applicable credit spreads (currently estimated to be 150 basis points). Although AFG has partially funded the lease facility through equity contributions, AFG does not have sufficient residual equity at risk. Accordingly, the Company has included the assets and liabilities related to AFG's Orlando loan agreement in the consolidated balance sheet at January 25, 2002. The outstanding borrowings and related assets of approximately $1,130 are reflected in long-term debt and construction in progress. At the end of the lease term, the Company has the option to renew the lease for up to two additional five-year periods, or to purchase the building for a price including the outstanding lease balance. If the Company elects not to renew the lease or purchase the building, the Company may elect to remarket the property and arrange the sale of the building to a third party. Under the remarketing option, the Company has guaranteed approximately 85% of the total original cost as the residual fair value of the building. Miami Property Under the terms of the loan agreement ("Miami loan agreement") between AFG and SunTrust for the Miami property, AFG was required to fund the Miami property through an equity investment of approximately 20% with the remainder funded through non-recourse borrowings from SunTrust. Concurrent with the 18 execution of the Miami loan agreement, the Company executed a master lease agreement (the "Miami lease agreement") with AFG. Under the terms of the Miami lease agreement, the Company will lease the Miami property with rent payments scheduled to begin in January 2003. Rent payments for the first four years are interest only at a rate based on LIBOR plus applicable credit spreads (currently estimated to be 150 basis points). Beginning in the fifth year, rents are re-amortized and rates for the remainder of the term increase to 12.5% plus applicable consumer price index adjustments. During the first four years of the Miami lease agreement, the Company may elect to purchase the property for the existing lease balance or convert it into the Company's lease facility agreement referenced above. Although AFG has sufficient equity at risk with respect to the Miami property, the assets and liabilities related to AFG's Miami loan agreement have been included in the consolidated balance sheet at January 25, 2002 based on the required consolidation of the assets and liabilities related to AFG's lease facility referenced above. The outstanding borrowings and related assets of approximately $5,459 are reflected in long-term debt and construction in progress. On December 21, 2000, the Company issued $150,000 of senior notes in a private placement. Of the total $150,000 of senior notes, $103,000 bears interest at 8.42% and are payable in five annual principal payments beginning November 30, 2003. The remaining $19,000 and $28,000 of senior notes bear interest at 8.27% and are payable in one annual principal payment on November 30, 2003 and five annual principal payments beginning November 30, 2001, respectively. During fiscal 2002, the Company paid $5,600 on these senior notes. Proceeds from the sale of the senior notes were used to reduce indebtedness under the Company's credit agreement. The Company has a commercial paper program backed by its line of credit agreement. The weighted-average interest rate on outstanding commercial paper borrowings of $36,409 and $74,101 as of January 25, 2002 and January 26, 2001 was 2.9% and 6.7%, respectively. The Company has the ability and intent to refinance short-term borrowings on a long-term basis. Accordingly, all of the commercial paper borrowings at January 25, 2002 and January 26, 2001 have been classified as long-term debt. The Company's debt agreements contain covenants that require the Company, among other things, to maintain certain financial ratios and minimum net worth levels. The covenants also restrict the Company's activities regarding investments, liens, borrowing and leasing, and payment of dividends other than stock. Under the dividend covenant, approximately $160,547 was available at January 25, 2002 for payment of dividends. Maturities of long-term debt for each of the five years subsequent to January 25, 2002 and in the aggregate are as follows: Fiscal Years Ending - -------------------------------------------------------------- 2003 $ 19,175 2004 115,777 2005 44,191 2006 44,105 2007 38,505 Thereafter 161,093 - -------------------------------------------------------------- $422,846 ============================================================== The fair values of long-term debt approximated $431,870 and $539,287 and the related carrying values were $422,846 and $531,442 at January 25, 2002 and January 26, 2001, respectively. Note 6--Income Taxes The consolidated provision for income taxes consists of the following: Fiscal Years Ended - -------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------- Currently payable: Federal $17,811 $37,515 $36,763 State 2,321 4,315 5,553 - -------------------------------------------------------------- 20,132 41,830 42,316 Deferred: Federal 10,998 (7,007) 1,241 State (509) (661) 174 - -------------------------------------------------------------- 10,489 (7,668) 1,415 - -------------------------------------------------------------- $30,621 $34,162 $43,731 ============================================================== 19 Notes to Consolidated Financial Statements (continued) (in thousands, except share and per share data) The following is a reconciliation of tax computed at the statutory federal rate to the income tax expense in the consolidated statements of income:
Fiscal Years Ended ------------------------------------------------------- 2002 2001 2000 ------------------------------------------------------- Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------------------- Tax computed at statutory federal rate $26,140 35.0% $28,237 35.0% $ 38,361 35.0% Effect of: State and local income tax, net of federal income tax benefit 1,509 2.0 2,377 2.9 3,722 3.4 Nondeductible expenses 2,336 3.1 3,548 4.4 2,740 2.5 Other, net 636 0.9 -- -- (1,092) (1.0) - ------------------------------------------------------------------------------------------------------------------------- $30,621 41.0% $34,162 42.3% $ 43,731 39.9% =========================================================================================================================
The components of deferred tax assets and liabilities at January 25, 2002 and January 26, 2001 are as follows: 2002 2001 - ------------------------------------------------------------- Deferred tax assets: Allowance for doubtful accounts $ 2,016 $ 2,339 Inventories 5,621 5,144 Property and equipment 700 -- Accrued vacation 2,481 2,230 Other accrued liabilities 2,843 7,549 State net operating losses 2,086 1,166 Deferred compensation 3,498 4,011 Other -- 3,692 - ------------------------------------------------------------- Gross deferred tax assets 19,245 26,131 Valuation allowance (72) (698) - ------------------------------------------------------------- Total deferred tax assets 19,173 25,433 - ------------------------------------------------------------- Deferred tax liabilities: Capitalized software development costs 2,793 3,717 Goodwill and intangible assets 7,165 5,559 Deferred gain and prepaid expenses 7,554 3,466 Property and equipment -- 871 Other 113 -- - ------------------------------------------------------------- Total deferred tax liabilities 17,625 13,613 - ------------------------------------------------------------- Net deferred tax assets $ 1,548 $11,820 ============================================================= At January 25, 2002, the Company had state net operating loss carryforwards of $2,086, which expire between 2006 and 2022. A valuation allowance has been provided on certain of the state net operating losses at January 25, 2002 as full realization of these assets is not considered more likely than not. Note 7--Employee Benefit Plans Profit Sharing Plan The Company has a 401(k) profit sharing plan, which provides benefits for substantially all employees of the Company who meet minimum age and length of service requirements. Prior to August 1, 1999, employee contributions of not less than 2% to not more than 3% of each eligible employee's compensation were matched (in cash or stock) 50% by the Company. The maximum percentage of each eligible employee's contribution to be matched by the Company was increased from 3% to 4% on August 1, 1999, from 4% to 5% on February 1, 2000, and from 5% to 6% on February 1, 2001. Additional annual contributions may be made at the discretion of the Board of Directors. Amounts charged to expense for this plan totaled $5,004, $4,294 and $2,883 in fiscal 2002, 2001 and 2000, respectively. Bonus Plans The Company has bonus plans, based on profitability formulas, which provide incentive compensation for key officers and employees. Amounts charged to expense for bonuses to executive officers totaled $1,285, $1,410 and $1,914 in fiscal 2002, 2001 and 2000, respectively. Supplemental Executive Retirement Plan The Company has a defined benefit retirement plan, which provides supplemental benefits for certain key executive officers, generally for periods up to 15 years, upon retirement, disability or death. The obligations are not funded separately from the Company's general assets. At January 25, 2002, the liability under the plan, as determined in accordance with FAS 87, Employers' Accounting for Pensions, was $4,649. At January 26, 2001, the liability was $4,110. The liability in each year is recorded in other noncurrent liabilities. Amounts charged to expense under the plan totaled $539, $663 and $543 in fiscal 2002, 2001 and 2000, respectively. Note 8--Commitments and Contingencies Lease Commitments The Company occupies certain properties and operates certain equipment and vehicles under leases that expire at various dates through the year 2011. Rent expense under these leases totaled 20 $51,649, $51,073 and $42,792 in fiscal 2002, 2001 and 2000, respectively. The Company leases several buildings and properties from certain related parties, including the Company's chairman and chief executive officer, two members of the Board of Directors, and an executive officer. The leases generally provide that all expenses related to the properties are to be paid by the Company. Rents paid under these leases totaled $2,063, $1,945 and $1,841 in fiscal 2002, 2001 and 2000, respectively. Aggregate minimum annual rental payments, under non-cancelable operating leases, including those discussed above, as of January 25, 2002 are as follows: Fiscal Years Ending - -------------------------------------------------------------- 2003 $ 42,632 2004 32,467 2005 25,554 2006 17,322 2007 9,239 Thereafter 12,710 - -------------------------------------------------------------- $139,924 ============================================================== Guarantee of Affiliate The Company has provided a financial guarantee totaling $1,470 at January 25, 2002 related to a construction loan for its equity investment. Legal Matters The Company is involved in various legal proceedings arising in the normal course of its business. In the opinion of management, none of the proceedings are material in relation to the Company's consolidated operations, cash flows or financial position. Note 9--Stock Option Plans Stock Plans The Company's two active stock plans include the 1997 Executive Stock Plan (the "1997 Stock Plan") and the Directors' Stock Option Plan. These stock plans authorize the granting of both incentive and non-incentive stock options for an aggregate of 2,052,500 shares of common stock, including 1,750,000 shares to key employees and 302,500 shares to directors. Under these plans, options are granted at prices not less than the market value on the date of grant, and the maximum term of an option may not exceed ten years. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. Options may be granted from time to time until December 31, 2006 with respect to the 1997 Stock Plan or May 24, 2003 with respect to the Directors' Stock Option Plan. An option becomes exercisable at such times and in such installments as set forth by the compensation committee of the Board of Directors (the "compensation committee") or by the Directors' Stock Option Plan. Under the 1997 Stock Plan, the Company can grant up to 875,000 shares of the authorized options as restricted stock to certain key employees. These shares are subject to certain transfer restrictions, and vesting may be dependent upon continued employment, the satisfaction of performance objectives, or both. During fiscal 2002, the Company granted certain key executives 410,000 restricted shares in accordance with a stock performance award under the 1997 Stock Plan. The shares were awarded in five separate tranches as the Company's stock price achieved certain levels as determined by the compensation committee. At January 25, 2002, all such stock price achievement levels had been met. The shares vest five years from the award date, and are subject to certain other vesting and forfeiture provisions contained in the 1997 Stock Plan. The market value of the restricted shares was $10,735 at the date of the grant and was recorded as unearned compensation, a component of shareholders' equity. This amount is being charged to expense over the respective vesting period and totaled $749 in fiscal 2002. During fiscal 2002 and 2000, the Company granted certain employees 11,000 and 261,921 shares of restricted stock, with market values at the date of grant of $319 and $6,415, respectively. There were no restricted stock grants made to employees during fiscal 2001. In fiscal 2002, 2001 and 2000, the Company also cancelled 84,709, 6,000 and 2,400, respectively, of the restricted shares granted, with market values at the date of grant of $1,545, $141 and $77, respectively, according to the provisions of the grant. The market value of the restricted stock at the date of grant was recorded as unearned compensation, a component of shareholders' equity, and is being charged to expense over the respective vesting periods. In fiscal 2002, 2001 and 2000, this expense totaled $764, $1,542 and $1,055, respectively. The 1997 Stock Plan also permits the granting of stock appreciation rights ("SARs") to holders of options. Such rights permit the option holder to surrender an exercisable option, in whole or in part, on any date that the fair market value of the Company's common stock exceeds the option price for the stock and receive payment in common stock or, if the Board of Directors approves, in cash or any combination of cash and common stock. Such payment would be equal to the excess of the fair market value of the shares under the surrendered option over the option price 21 Notes to Consolidated Financial Statements (continued) (in thousands, except share and per share data) for such shares. The change in value of SARs would be reflected in income based upon the market value of the stock. No SARs have been granted or issued through January 25, 2002. Stock Options Stock option activity and information about the Company's stock options for the 1997 Stock Plan and the Directors' Stock Plan are as follows: Weighted- Shares Average Subject Option To Option Price - -------------------------------------------------------------- Under option, January 29, 1999 (435,810 shares exercisable) 756,010 $21.55 Granted 40,500 24.93 Exercised (51,900) 11.89 Cancelled (11,463) 28.24 - -------------------------------------------------------------- Under option, January 28, 2000 (426,947 shares exercisable) 733,147 22.32 Granted 502,000 18.75 Exercised (83,420) 8.62 Cancelled (27,838) 24.72 - -------------------------------------------------------------- Under option, January 26, 2001 (1,098,789 shares exercisable) 1,123,889 21.21 Granted 167,500 20.71 Exercised (255,425) 14.63 Cancelled (80,600) 26.91 - -------------------------------------------------------------- Under option, January 25, 2002 (695,664 shares exercisable) 955,364 $22.40 ============================================================== There were 319,398 shares available for the granting of stock options and restricted shares at January 25, 2002. Outstanding options at January 25, 2002 have expiration dates ranging from August 17, 2004 to November 15, 2011. The following table summarizes information about stock options outstanding at January 25, 2002: Weighted- Weighted- Average Average Remaining Range of Options Exercise Contractual Exercise Prices Outstanding Price Life (Years) - --------------------------------------------------------------- $12.83-$15.35 84,500 $13.99 5 16.00- 18.75 466,250 17.41 8 21.00- 25.67 152,639 22.81 9 26.30- 35.63 251,975 33.28 6 - --------------------------------------------------------------- $12.83-$35.63 955,364 $22.16 7 =============================================================== Stock-Based Compensation The Company accounts for its stock option plans using the intrinsic value based method of accounting, under which no compensation expense has been recognized for stock option awards granted at fair market value. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Fiscal Years Ended ------------------------------- 2002 2001 2000 - --------------------------------------------------------------- Net income: As reported $44,065 $46,515 $65,871 Pro forma 43,485 43,163 64,770 - --------------------------------------------------------------- Earnings per share: As reported--basic $ 1.90 $ 2.00 $ 2.82 Pro forma--basic 1.88 1.86 2.77 As reported--diluted $ 1.88 $ 1.97 $ 2.80 Pro forma--diluted 1.86 1.83 2.75 =============================================================== The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yields of 1.5%, 1.3% and 1.3% for fiscal 2002, 2001 and 2000, respectively; expected volatility of 38.3%, 36.0% and 35.0% for fiscal 2002, 2001 and 2000, respectively; risk-free interest rates of 4.7%, 6.7% and 6.7% for fiscal 2002, 2001 and 2000, respectively; and expected lives of 8 years for fiscal 2002, 2001 and 2000. The weighted-average fair value of options granted during the year was $9.16, $8.77 and $11.48 in fiscal 2002, 2001 and 2000, respectively. The pro forma calculations do not include the effects of options granted prior to fiscal 1996. Accordingly, the impact is not necessarily indicative of the effects on reported net income in future years. Note 10--Capital Stock Treasury Stock On March 15, 1999, the Company's Board of Directors authorized the Company to repurchase up to 2,500,000 shares of its outstanding common stock to be used for general corporate purposes. Since March 15, 1999, the Company has repurchased 1,315,800 shares at an average price of $21.86 per share, of which 394,700 shares at an average price of $19.10 per share were repurchased in fiscal 2002, and 921,100 shares at an average price of $23.05 per share were repurchased in fiscal 2000. No shares were repurchased in fiscal 2001. 22 Preferred Stock The Company's Board of Directors established Series A Junior Participating Preferred Stock ("Series A Stock") consisting of 75,000 shares. Each share of Series A Stock will be entitled to 1,000 votes on all matters submitted to a vote of shareholders. Series A Stock is not redeemable or convertible into any other security. Each share of Series A Stock shall have a minimum cumulative preferential quarterly dividend rate equal to the greater of $1.00 per share or 1,000 times the aggregate per share amount of the dividend declared on common stock in the related quarter. In the event of liquidation, shares of Series A Stock will be entitled to the greater of $1,000 per share plus any accrued and unpaid dividends or 1,000 times the payment to be made per share of common stock. No shares of Series A Stock are presently outstanding, and no shares are expected to be issued except in connection with the shareholder rights plan referred to below. The Company has a shareholder rights plan. Under the plan, the Company distributed to shareholders a dividend of one right per share of the Company's common stock. When exercisable, each right will permit the holder to purchase from the Company one one-thousandth of a share (a "unit") of Series A Stock at a purchase price of $200 per unit. The rights generally become exercisable if a person or group acquires 15% or more of the Company's common stock or commences a tender offer that could result in such person or group owning 15% or more of the Company's common stock. If certain subsequent events occur after the rights first become exercisable, the rights may become exercisable for the purchase of shares of common stock of the Company, or of an acquiring company, having a value equal to two times the exercise price of the right. In general, the rights may be redeemed by the Company at $.01 per right at any time prior to the later of (a) ten days after 20% or more of the Company's stock is acquired by a person or group and (b) the first date of a public announcement that a person or group has acquired 15% or more of the Company's stock. The rights expire on June 2, 2008 unless terminated earlier in accordance with the shareholder rights plan. Note 11--Earnings Per Share Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share includes the additional dilutive effect of the Company's potential common shares, which includes certain employee and director stock options, unvested shares of restricted stock and stock rights issued in connection with the bestroute acquisition in fiscal 2001. The following summarizes the incremental shares from these potentially dilutive common shares, calculated using the treasury method, as included in the calculation of diluted weighted-average shares: ` Fiscal Years Ended - ------------------------------------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------------------- Basic weighted-average number of shares 23,175,025 23,238,025 23,398,204 Incremental shares resulting from: Stock options 96,062 56,244 108,142 Restricted stock 84,986 47,363 40,272 Stock rights issued in connection with the bestroute acquisition 67,550 242,386 -- ========================================================================= Diluted weighted-average number of shares 23,423,623 23,584,018 23,546,618 ========================================================================= Options to purchase 362,114, 1,166,490 and 544,802 shares of common stock at average exercise prices of approximately $32.10, $23.77 and $29.83 were not included in the computation of diluted earnings per share for fiscal 2002, 2001 and 2000, respectively, because their effect would have been anti-dilutive. Note 12--Segment Information The Company's operations are organized on a product basis into five stand-alone Groups: Electrical; Plumbing/HVAC; Industrial; Building Materials; and Water & Sewer. The Electrical Group includes the Company's electrical and electric utility products; the Plumbing/HVAC Group includes the Company's plumbing/ HVAC products and its international business; the Industrial Group includes the Company's industrial pipe, valves and fittings products; the Building Materials Group includes the Company's building materials products and maintenance supplies; and the Water & Sewer Group includes the Company's water and sewer, fire protection and concrete products. The "Corporate & Other" category includes corporate level expenses not allocated to the Company's operating Groups along with revenues and expenses for bestroute. This is the basis management uses for making operating decisions and assessing performance and is on a basis consistent with how business activities are reported internally to management. Intersegment sales are excluded from net sales presented for each Group. Income before income taxes includes certain corporate expense allocations for employee benefits, interest expense, corporate capital charges, and property/casualty insurance. These allocations are based on consumption or at a standard rate determined by management. 23 Notes to Consolidated Financial Statements (continued) (in thousands, except share and per share data) In connection with the Company's reorganization at the beginning of fiscal 2001, certain administrative groups and assets were realigned on a Group basis. Additionally, in 2001, the Company changed its method of allocating certain costs (e.g., interest expense, rent expense, corporate capital charges, and depreciation and amortization, etc.) to the Groups, which has also impacted the comparability of prior year information. Accordingly, comparative financial information for fiscal 2000 has only been presented for net sales and gross profit, which were not impacted by the allocation method changes. In fiscal 2002, various functions previously performed on a decentralized basis, including accounting and credit, are now performed at the Corporate level. As a result of this change, in fiscal 2001, operating expenses totaling $17,180 have been reclassified from the operating Groups to Corporate. The following table presents net sales and other financial information by Group for fiscal 2002 and 2001. When comparable, information for fiscal 2000 has also been presented.
Plumbing/ Building Water & Corporate Electrical HVAC(1) Industrial Materials(1) Sewer & Other Total - --------------------------------------------------------------------------------------------------------------------------- Net sales 2002 $575,460 $ 900,996 $330,375 $293,348 $937,446 $ 83 $3,037,708 2001 606,268 1,045,997 315,315 409,684 932,870 29 3,310,163 2000 576,739 992,522 299,590 388,169 737,857 -- 2,994,877 =========================================================================================================================== Gross profit 2002 $111,222 $ 213,003 $ 82,823 $ 89,663 $197,700 $ (491) $ 693,920 2001 117,263 236,229 82,463 118,045 190,384 (927) 743,457 2000 105,492 242,055 69,668 102,938 154,120 -- 674,273 =========================================================================================================================== Depreciation and amortization 2002 $ 2,510 $ 6,940 $ 2,752 $ 3,320 $ 8,492 $ 7,079 $ 31,093 2001 2,416 7,592 2,876 4,033 7,650 7,984 32,551 =========================================================================================================================== Provision for doubtful accounts 2002 $ 659 $ 6,281 $ 255 $ 87 $ 3,384 $ 399 $ 11,065 2001 1,185 5,145 356 733 2,839 368 10,626 =========================================================================================================================== Impairment of long-lived assets 2002 $ -- $ 734 $ -- $ -- $ -- $ -- $ 734 2001 -- 2,217 -- -- 416 12,924 15,557 =========================================================================================================================== Interest and other income 2002 $ 1,154 $ 3,095 $ 142 $ 1,127 $ 3,647 $ 1,381 $ 10,546 2001 1,357 3,596 355 1,982 3,727 (3,541) 7,476 =========================================================================================================================== Interest expense 2002 $ 872 $ 6,941 $ 9,181 $ 3,194 $ 15,757 $ -- $ 35,945 2001 2,926 9,891 10,170 5,678 14,623 -- 43,288 =========================================================================================================================== Gain on sale of pool and spa business 2001 $ -- $ -- $ -- $ 11,000 $ -- $ -- $ 11,000 =========================================================================================================================== Income (loss) before income taxes 2002 $ 27,523 $ 11,210 $ 20,023 $ 15,397 $ 41,662 $(41,129) $ 74,686 2001 28,940 8,240 20,393 27,084 44,294 (48,274) 80,677 ===========================================================================================================================
(1) Results of operations for the pool and spa business, which was sold in January 2001, were included in the Plumbing/HVAC and Building Materials Groups in fiscal 2001 and 2000. In addition, prior year amounts have been restated to reflect the transfer of branches between the Plumbing/HVAC and Building Materials Groups, which resulted from the sale of the pool and spa business. 24 The following table includes the Company's investment in accounts receivable, less allowance for doubtful accounts, and inventories, for each Group at January 25, 2002 and January 26, 2001:
2002 2001 ------------------------------------------------------------------------- Accounts Group Accounts Group Receivable Inventories Assets Receivable Inventories Assets - ----------------------------------------------------------------------------------------------------- Electrical $ 71,436 $ 48,527 $ 119,963 $ 82,883 $ 59,170 $ 142,053 Plumbing/HVAC 98,178 129,163 227,341 127,265 149,170 276,435 Industrial 42,971 103,663 146,634 42,734 111,355 154,089 Building Materials 31,556 27,881 59,437 35,253 36,144 71,397 Water & Sewer 143,812 87,207 231,019 147,465 82,729 230,194 Corporate & Other -- -- -- 7 3,221 3,228 - ----------------------------------------------------------------------------------------------------- $ 387,953 $ 396,441 784,394 $435,607 $441,789 877,396 =================================================== ===================== Cash and cash equivalents 6,817 22,449 Deferred income taxes 15,420 18,524 Other current assets 56,809 68,940 Property and equipment 145,702 152,079 Goodwill 263,808 249,826 Other assets 20,312 17,481 - ----------------------------------------------------------------------------------------------------- Total assets $1,293,262 $1,406,695 =====================================================================================================
25 Notes to Consolidated Financial Statements (continued) (in thousands, except share and per share data) Note 13--Quarterly Financial Information (Unaudited) The following is a summary of the unaudited results of operations for each quarter in fiscal 2002 and 2001:
First Second Third Fourth Full Year - --------------------------------------------------------------------------------------------------------- Fiscal 2002 Net sales $ 775,149 $ 806,317 $ 790,042 $ 666,200 $ 3,037,708 Gross profit 174,882 179,803 181,788 157,447 693,920 Net income 6,417 14,667 17,742 5,239 44,065 - --------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ .28 $ .63 $ .77 $ .23 $ 1.90 Diluted .27 .63 .76 .22 1.88 - --------------------------------------------------------------------------------------------------------- Average shares outstanding (in thousands): Basic 23,297 23,170 23,145 23,089 23,175 Diluted 23,603 23,270 23,356 23,395 23,424 - --------------------------------------------------------------------------------------------------------- Market price per share: High $ 18.78 $ 26.30 $ 27.35 $ 31.62 $ 31.62 Low 13.44 15.12 19.55 23.24 13.44 - --------------------------------------------------------------------------------------------------------- Dividends per share $ .085 $ .085 $ .085 $ .085 $ .34 ========================================================================================================= Fiscal 2001 Net sales $ 831,171 $ 874,056 $ 863,283 $ 741,653 $ 3,310,163 Gross profit 184,885 198,232 196,290 164,050 743,457 Net income (loss) 14,428 22,347 18,842 (9,102) 46,515 - --------------------------------------------------------------------------------------------------------- Earnings (loss) per share: Basic $ .62 $ .96 $ .80 $ (.39) $ 2.00 Diluted .62 .96 .80 (.39) 1.97 - --------------------------------------------------------------------------------------------------------- Average shares outstanding (in thousands): Basic 23,223 23,236 23,511 23,258 23,238 Diluted 23,229 23,333 23,617 23,258 23,584 - --------------------------------------------------------------------------------------------------------- Market price per share: High $ 18.75 $ 20.56 $ 21.30 $ 18.75 $ 21.30 Low 15.13 15.00 16.18 14.41 14.41 - --------------------------------------------------------------------------------------------------------- Dividends per share $ .085 $ .085 $ .085 $ .085 $ .34 =========================================================================================================
During the fourth quarter of fiscal 2001, the Company recorded a charge totaling $15,557 for the impairment of long-lived assets, principally related to the discontinued operations of bestroute and another e-commerce venture and the write-off of goodwill for its international operations. Due to an economic slowdown which affected the Company's primary markets during late fiscal 2001, the Company determined that an increase in the provision for doubtful accounts was necessary. During the fourth quarter of fiscal 2001, the Company recorded a charge of $5,116 to reflect the estimated bad debts at January 26, 2001. Partially offsetting these charges is a gain of $11,000 recorded on the sale of the Company's pool and spa business in January 2001. 26 Report of Independent Certified Public Accountants To the Shareholders and Board of Directors of Hughes Supply, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Hughes Supply, Inc. and its subsidiaries at January 25, 2002 and January 26, 2001, and the results of their operations and their cash flows for each of the three years in the period ended January 25, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Orlando, Florida March 14, 2002 Management's Responsibility for Financial Statements The consolidated financial statements and related information included in this Annual Report were prepared in conformity with generally accepted accounting principles. Management is responsible for the integrity of the financial statements and for the related information. Management has included in the Company's consolidated financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances. The responsibility of the Company's independent accountants is to express an opinion on the fairness of the consolidated financial statements. Their opinion is based on an audit conducted in accordance with generally accepted auditing standards as further described in their report. The Audit Committee of the Board of Directors is composed of three non-management directors. The Committee meets periodically with financial management, internal auditors and the independent accountants to review internal accounting control, auditing and financial reporting matters. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion and analysis of certain significant factors, which have affected the financial condition of Hughes Supply, Inc. and its subsidiaries (the "Company") as of January 25, 2002, and the results of operations for fiscal 2002 and 2001. This information should be read in conjunction with the Company's consolidated financial information provided on pages 10 to 26 of this Annual Report. Forward-Looking Statements Certain statements set forth in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by such sections. When used in this report, the words "believe," "anticipate," "estimate," "expect," "may," "will," "should," "plan," "intend," "potential," "predict," "forecast" and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results or events may differ significantly from those indicated in such forward-looking statements as a result of various important factors. These factors include, but are not limited to, changes in general economic conditions, the growth rate of the market for the Company's products and services, the ability to maintain favorable vendor arrangements and relationships, competitive product and pricing pressures, commodity price fluctuations as well as other risks and uncertainties that may be described in the Company's Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. The Company assumes no obligation to publicly update or revise its forward-looking statements. Organization The Company is a diversified wholesale distributor of construction and industrial materials, equipment and supplies to commercial construction, residential construction, industrial and public infrastructure markets in North America. Operating in 34 states and Mexico, the Company distributes over 240,000 products through its 439 wholesale branches. The Company's operations are managed in five strategic business units ("Groups"), which are built around five broad product categories. These Groups represent the Company's reportable segments and are: Electrical; Plumbing/HVAC; Industrial; Building Materials; and Water & Sewer. The Corporate & Other category includes corporate level expenses not allocated to the Company's operating Groups along with revenues and expenses for the Company's e-commerce venture. Results of Operations Net Sales Comparable Branch Sales Methodology In the fourth quarter of fiscal 2002, the Company adopted a new comparable branch sales methodology, which differs from its previous same-store methodology. Historically, the Company calculated and disclosed same-store sales, which included (a) branches open for all fiscal years presented, (b) branches newly-opened and operating in an existing market of the Company in the current or prior fiscal years and (c) branches closed where other branches were going to maintain the existing market. Same-store sales also included activity associated with splitting a branch between two Groups and from combining two branches in the same market place. Under the new methodology, comparable branch sales will exclude sales related to (a) acquired and newly-opened branches until operating results are included in the consolidated financial statements for all periods in the current and prior fiscal years, (b) branch combinations and splits unless within the same Group and physical location and (c) closed and divested branches until operating results have been excluded for all fiscal years presented. All prior year amounts have been restated to reflect the change in methodology. Consolidated Net Sales and Comparable Branch Sales Discussion In fiscal 2002, net sales for the Company were $3.0 billion, an 8% decrease from fiscal 2001 net sales of $3.3 billion. Approximately $156.3 million of the decrease was attributable to a 5% comparable branch sales decline from fiscal 2001. The comparable branch sales decrease was primarily driven by a general slowdown in the economy in fiscal 2002, combined with deflationary pricing pressure in stainless steel, nickel alloy, PVC and certain other commodity-based products. An additional $144.0 million of the overall net sales decrease was due to the divestiture of the Company's pool and spa business in January 2001. Of the total $144.0 million net sales decrease, approximately $27.9 million and $116.1 million related to the Plumbing/HVAC and Building Materials Groups, respectively. The remaining net sales decrease of approximately $55.5 million resulted from combining and closing of certain non-performing branches and elimination or consolidation of customers and services. During fiscal 2002, the Company closed or decided to close 43 under-performing branches. The above net sales decreases were partially offset by acquired and newly-opened branches, which had net sales of $83.3 million in fiscal 2002. 28 In fiscal 2001, consolidated net sales were $3.3 billion, an 11% increase over fiscal 2000 net sales of $3.0 billion. Approximately $309.5 million of the increase was attributable to a 12% comparable branch sales increase with the remainder of the increase attributable to acquired and newly-opened branches. The 2001 comparable branch sales increase was primarily attributable to increased infrastructure spending by municipalities in the Water & Sewer Group, favorable commodity pricing in stainless steel and nickel alloy products, and increased market penetration in the Building Materials Group. Consolidated and comparable branch net sales by Group were as follows (in thousands):
Consolidated Net Sales Comparable Branch Sales(1) ------------------------------------------------------------------------------ 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------ Electrical $ 575,460 $ 606,268 $ 576,739 $ 557,898 $ 595,924 $ 564,932 Plumbing/HVAC(2) 900,996 1,045,997 992,522 809,863 876,766 816,634 Industrial 330,375 315,315 299,590 327,092 306,517 288,860 Building Materials(2) 293,348 409,684 388,169 265,591 272,861 257,195 Water & Sewer 937,446 932,870 737,857 848,296 912,949 727,848 Corporate & Other 83 29 -- -- -- -- - ------------------------------------------------------------------------------------------------------ $3,037,708 $3,310,163 $2,994,877 $2,808,740 $2,965,017 $2,655,469 ======================================================================================================
(1) Prior year amounts have been restated to conform with the new comparable branch sales methodology as discussed above. (2) Results of operations for the pool and spa business, which was sold in January 2001, were included in the Plumbing/HVAC and Building Materials Groups in fiscal 2001 and 2000. In addition, prior year amounts have been restated to reflect the transfer of branches between the Plumbing/HVAC and Building Materials Groups, which resulted from the sale of the pool and spa business. The following sets forth factors impacting comparable branch sales for the Company's operating Groups: Electrical In fiscal 2002, comparable branch sales for the Electrical Group decreased $38.0 million or 6%. The decrease was primarily due to softening prices of certain commodity driven items coupled with an overall weakness in the electrical construction market as a result of a general slowdown in the U.S. economy. This Group supplied materials for several large infrastructure projects in fiscal 2001 with no corresponding activity in fiscal 2002. These decreases were partially offset by strong commercial activity in the Southwestern U.S. market and increased sales of utility products in the Midwestern U.S. market. In fiscal 2001, comparable branch sales were $595.9 million, a $31.0 million or 5% increase from fiscal 2000. The increase was primarily due to commercial construction activity related to several large infrastructure projects. Plumbing/HVAC In fiscal 2002, comparable branch sales for the Plumbing/HVAC Group declined $66.9 million or 8%. The overall comparable branch sales decline was primarily due to a slowdown in the commercial construction markets in the Western U.S. Sales performance was further impacted by a slowdown in international business resulting from the completion of a large oil and gas pipeline project in fiscal 2001 with no corresponding activity in fiscal 2002. Net sales for the Company's international business decreased $20.0 million compared to fiscal 2001. In fiscal 2001, comparable branch sales were $876.8 million, a $60.1 million or 7% increase from fiscal 2000. The growth in comparable branch sales resulted from improved strength of the construction market. Industrial In fiscal 2002, comparable branch sales for the Industrial Group increased $20.6 million or 7% as a result of strong sales to customers in the chemical, petrochemical, power generation and gas utility industries. Comparable branch sales were also favorably impacted by several large petrochemical plant rehabilitation and energy and power plant installation projects. The increase was partially offset by declining prices for certain commodity-based products, including stainless steel and nickel alloy products. In recent months, the Company has been informed of several large power generation projects which have been postponed. These postponements are expected to reduce sales levels in the near term. In fiscal 2001, comparable branch sales were $306.5 million, a $17.7 million or 6% increase from fiscal 2000. The increase was the result of commodity price increases in stainless steel and 29 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) nickel alloy products. Fiscal 2000 was negatively impacted by declines in such commodity-based products. Building Materials In fiscal 2002, comparable branch sales for the Building Materials Group decreased $7.3 million or 3%. This decrease was primarily attributable to sales of complementary building materials products that were lost as a result of the divestiture of the pool and spa business. In fiscal 2001, comparable branch sales were $272.9 million, a $15.7 million or 6% increase from fiscal 2000. The increase was primarily due to improved market penetration in pool and spa products, demand for construction rental materials, and expansion of appliance product lines in the maintenance supply branches. Water & Sewer Overall sales for the Water & Sewer Group were flat in fiscal 2002 when compared to fiscal 2001, while comparable branch sales declined $64.7 million or 7%. The comparable branch sales decrease was primarily attributable to (a) the completion of several large infrastructure projects for municipalities in fiscal 2001 which did not recur in fiscal 2002 and (b) declining commodity prices for certain PVC and domestic steel products. The comparable branch sales decline was offset by sales from an acquisition completed in the spring of fiscal 2002. In fiscal 2001, comparable branch sales for the Water & Sewer Group were $912.9 million, a $185.1 million or 25% increase from fiscal 2000. This increase was primarily due to improved market penetration, increased spending on infrastructure projects by municipalities, and a general increase in overall activity through all water and sewer markets. Gross Profit and Gross Margin Gross margins were 22.8% in fiscal 2002 and 22.5% in both fiscal 2001 and 2000. The 30 basis point improvement in gross margin was largely due to a shift in sales mix, with a higher proportion of out-of-stock sales in fiscal 2002 as compared to direct shipments, which typically generate lower margins. Gross margins were also favorably impacted by company-wide inventory improvement initiatives implemented in fiscal 2002, which resulted in enhanced purchasing power. In fiscal 2001, the favorable impact of stainless steel and nickel alloy commodity price increases were offset by competitive market pressures in certain other product groups. This resulted in fiscal 2001 gross margin being at the same level as fiscal 2000. Gross profit and gross margin by Group were as follows (in thousands): Gross Profit Gross Margin ---------------------------------------------------------- 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------- Electrical $111,222 $117,263 $105,492 19.3% 19.3% 18.3% Plumbing/HVAC 213,003 236,229 242,055 23.6 22.6 24.4 Industrial 82,823 82,463 69,668 25.1 26.2 23.3 Building Materials 89,663 118,045 102,938 30.6 28.8 26.5 Water & Sewer 197,700 190,384 154,120 21.1 20.4 20.9 Corporate & Other (491) (927) -- -- -- -- - ------------------------------------------------------------------------------- $693,920 $743,457 $674,273 22.8% 22.5% 22.5% =============================================================================== Electrical Overall, gross margin remained flat in fiscal 2002 as declines in commodity prices offset margin improvements achieved through enhanced purchasing power. In fiscal 2001, gross margin increased approximately 100 basis points primarily as a result of a shift in sales mix to higher margin products, with the remainder being attributable to enhanced purchasing power. This enhanced purchasing power was due to increased volume and concentration of supply sources as part of the Company's preferred vendor program. Plumbing/HVAC Gross margin increased approximately 100 basis points in fiscal 2002 primarily due to the Company's efforts to improve margin on certain products and to a decline in lower-margin international business. In fiscal 2001, gross margin decreased approximately 180 basis points as a result of the impact of lower commodity prices on plumbing products and increased sales in its lower-margin international branches. There was also an erosion of margins as the Company sought to protect market share in certain geographic areas from aggressive price competition. 30 Industrial In fiscal 2002, gross margin decreased approximately 110 basis points as a result of declining prices for certain commodity-based products, including stainless steel and nickel alloy products. The Company anticipates prices related to commodity-based products to increase only modestly in fiscal 2003, which could yield slightly higher margins as inventories purchased during declining price environments are depleted. In fiscal 2001, gross margin increased approximately 290 basis points. As noted above, gross profit and gross margin within this Group are closely tied to the pricing of certain commodity-based products, primarily stainless steel and nickel alloy products. The increases in the price of these commodity items improved the Company's gross margin for these products in the first half of fiscal 2001. Prices for these products started to decline in the second half of the year, thereby causing a reduction in gross margins in the third and fourth quarter of fiscal 2001. Building Materials Gross margin increased approximately 180 and 230 basis points in fiscal 2002 and 2001, respectively. The increase in fiscal 2002 was driven primarily by a sales mix that included more high-margin fabricated products and to the divestiture of the pool and spa business, which generated lower gross margins compared to gross margins as a whole for the Building Materials Group. The 230 basis point increase in fiscal 2001 was primarily due to a shift in sales mix resulting from equipment rentals and increased emphasis on the replacement market, which tends to yield higher gross margins. The remainder of the increase was largely due to improved purchasing power. Water & Sewer Gross margin increased approximately 70 basis points in fiscal 2002. This increase was primarily due to a change in sales mix that resulted from fewer large direct shipment orders, which typically generate lower gross margins. In fiscal 2001, gross margin decreased approximately 50 basis points. This decrease was principally attributable to a general increase in large direct shipment orders. Operating Expenses Operating expenses were as follows (in thousands):
Fiscal Years Ended % of Net Sales ------------------------------------------------------------------ 2002 2001 2000 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- Personnel expenses $373,857 $382,050 $340,377 12.3% 11.5% 11.4% Other selling, general and administrative expenses 177,086 197,184 167,632 5.8 6.0 5.6 Depreciation and amortization 31,093 32,551 29,808 1.0 1.0 1.0 Provision for doubtful accounts 11,065 10,626 4,064 0.4 0.3 0.1 Impairment of long-lived assets 734 15,557 -- -- 0.5 -- - ----------------------------------------------------------------------------------------------------------------------- $593,835 $637,968 $541,881 19.5% 19.3% 18.1% =======================================================================================================================
Operating expenses decreased $44.1 million or 7% in fiscal 2002. As a percentage of net sales, operating expenses increased approximately 20 basis points in fiscal 2002, which was directly due to lower sales volumes experienced by the Company. Approximately $25.5 million of the overall expense decrease was due to the divestiture of the Company's pool and spa business. Impairment of long-lived assets decreased $14.8 million in fiscal 2002 when compared to fiscal 2001. In fiscal 2001, the Company recorded a $15.6 million charge, including the write-off of goodwill and other assets totaling $12.9 million related to the Company's e-commerce initiatives, and a charge totaling approximately $2.7 million primarily related to the write-off of goodwill in the Company's international operations. In fiscal 2002, a goodwill write-off of $0.7 million for the Company's Plumbing/HVAC operations was recorded in the fourth quarter. The remaining operating expense decrease was primarily attributable to the overall net sales decrease and the Company's cost containment initiatives, which were implemented in fiscal 2002. These initiatives included hiring freezes, salary rate limits on merit and promotional increases, the elimination of certain management and staff positions and reductions in both capital spending and discretionary spending items, including overtime, contract labor, travel, entertainment and other variable expenses. The Company will continue to review its operations and identify areas where additional efficiencies may be obtained. In fiscal 2002, the cost saving initiatives noted above were partially offset by costs associated with the closing of 43 under-performing branches, severance costs associated with layoffs and an increase in the provision for doubtful accounts. These branch closures 31 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) resulted in approximately $6.5 million of charges related to severance, lease and other contractual obligations, and additional provisions for doubtful accounts. Excluding severance costs associated with branch closures, the Company recorded $2.7 million of severance expense in fiscal 2002. Approximately $1.5 million of this amount was related to the Company's separation agreement with its former president, with the remainder attributable to the elimination of various other management and staff positions. In fiscal 2001, operating expenses were $638.0 million, an 18% increase from fiscal 2000. Included in fiscal 2001 operating expenses is a $15.6 million charge for the impairment of long-lived assets. Provision for doubtful accounts increased from $4.1 million in fiscal 2000 to $10.6 million in fiscal 2001. The increase was related to an economic slowdown which affected the Company's primary markets, particularly its international business, during late fiscal 2001. The remaining increase in operating expenses was primarily due to higher personnel costs associated with comparable branch sales growth, increased transportation costs brought about by comparable branch sales growth, increased fuel costs, and increased information technology ("IT") spending as the Company initiated its program of upgrading IT systems. Non-Operating Income (Expenses) Interest and other income totaled $10.5 million, $7.5 million and $9.0 million in fiscal 2002, 2001 and 2000, respectively. The increase in fiscal 2002 was due to the elimination of $3.2 million of prior year net losses related to the Company's equity investments combined with interest income of $0.9 million related to a $25.0 million short-term note receivable which was received in connection with the sale of the Company's pool and spa business. These increases were partially offset by $0.7 million of non-operating expenses primarily related to asset write-downs and other expenses from branch closures. The $1.5 million decrease in fiscal 2001 was primarily due to net losses totaling $3.7 million from the Company's equity investments, partially offset by increased income from the collection of service charges on delinquent accounts receivable and other interest income. Interest expense totaled $35.9 million, $43.3 million and $31.8 million in fiscal 2002, 2001 and 2000, respectively. The decrease in fiscal 2002 was due to lower borrowing levels coupled with reduced interest rates. Borrowing levels in fiscal 2002 were reduced as the Company utilized proceeds from the sale of its pool and spa business and working capital improvements program to reduce debt balances. In fiscal 2001, interest expense increased $11.5 million or 36% from fiscal 2000 primarily as a result of higher borrowing levels and interest rates. The higher borrowing levels were primarily due to the Company's (a) higher working capital investments resulting from accelerated sales growth, (b) expansion through business acquisitions, which has been partially funded by debt financing and (c) share repurchases. Non-operating income (expenses) in fiscal 2001 included an $11.0 million pre-tax ($6.7 million after-tax) gain relating to the sale of the Company's pool and spa business, which was sold for $48.0 million in January 2001. The Company received cash proceeds of $23.0 million with the remaining $25.0 million of consideration being received in the form of a short-term note receivable, which was fully collected in fiscal 2002. Income Taxes The Company's effective tax rate was 41.0%, 42.3% and 39.9% in fiscal 2002, 2001 and 2000, respectively. The increase in the fiscal 2001 effective tax rate was due to the elimination of nondeductible goodwill related to the Company's international operations and the sale of its pool and spa business. Net Income Net income totaled $44.1 million, $46.5 million and $65.9 million in fiscal 2002, 2001 and 2000, respectively. Diluted earnings per share totaled $1.88, $1.97 and $2.80 in fiscal 2002, 2001 and 2000, respectively. The factors impacting net income and diluted earnings per share have been enumerated above. Financial Condition Liquidity and Capital Resources The following sets forth certain measures of the Company's liquidity (in thousands): Fiscal Years Ended - -------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------- Cash provided by operating activities $ 144,763 $ 66,148 $ 33,449 Working capital $ 588,275 $ 679,130 $ 657,500 Current ratio 3.1 to 1 3.3 to 1 3.2 to 1 Long-term debt-to-capital 40% 48% 51% ============================================================== In fiscal 2002, net cash provided by operations of $144.8 million was primarily the result of reductions in inventory as part of the Company's inventory management program and lower accounts receivable levels caused by the year over year sales decline in fiscal 2002. In fiscal 2001, net cash provided by operations of $66.1 million was primarily the result of the Company's reduced inventory levels and increases in accrued liabilities, partially offset by increases in accounts receivable, resulting from higher sales volumes. The increase in accrued liabilities was related to the timing of income tax payments. 32 In fiscal 2002, the $90.9 million decrease in working capital was principally driven by lower receivable and inventory balances and a decrease in other current assets. These changes were partially offset by lower accounts payable, which correspond with the reduction in inventory levels. The decrease in inventories reflects company-wide initiatives to reduce inventory levels to be more in line with current market demand. The decrease in other current assets was due to the collection of $25.0 million on the note receivable related to the sale of the Company's pool and spa business, which was partially offset by higher income tax receivables in fiscal 2002. The fiscal 2001 increase of $21.6 million in working capital was primarily attributable to higher cash levels and higher accounts and other receivables, which were partially offset by reduced inventories. Cash on hand increased primarily as a result of the sale of the Company's pool and spa business in January 2001, which generated cash proceeds of $23.0 million. Additionally, in connection with this sale, the Company received a short-term note receivable totaling $25.0 million. The higher level of accounts receivable reflects sales increases over prior year end and slower collection activity resulting from the economic slowdown which started in the second half of fiscal 2001. During fiscal 2001, the Company reduced inventory levels in connection with its cash management programs. Investing Activities Capital expenditures totaled $16.9 million, $23.9 million and $30.7 million in fiscal 2002, 2001 and 2000, respectively. Of these expenditures, approximately $3.9 million, $8.3 million and $14.0 million, respectively, were for new warehouse facilities and approximately $7.6 million, $3.2 million and $5.0 million, respectively, related to IT outlays. The Company continues to closely monitor and control capital expenditures, and instituted a freeze on most new building projects during fiscal 2002. Fiscal 2003 capital expenditures are expected to be approximately $15 million. This excludes approximately $18 million related to the Company's new corporate headquarters facility in Orlando, Florida and a new warehouse in Miami, Florida, as discussed further below. Proceeds from the sale of property and equipment totaled $8.7 million, $1.8 million and $4.9 million in fiscal 2002, 2001 and 2000, respectively. The $6.9 million increase in proceeds during fiscal 2002 was primarily due to the sale and subsequent lease-back of substantially all of the Company's forklift fleet and certain trailers, which generated proceeds of $5.7 million in August 2001. The remaining increase was due to sales of certain land and building assets as a result of closed branches. In fiscal 2000, the Company received proceeds of approximately $2.5 million from the sale and subsequent lease-back of certain computer hardware. Cash payments for business acquisitions totaled $32.0 million, $34.1 million and $88.9 million in fiscal years 2002, 2001 and 2000, respectively. These outlays represent one, three and seven wholesale distributors acquired and accounted for using the purchase method of accounting in fiscal 2002, 2001 and 2000, respectively. On March 2, 2001, in connection with the closure of one of the Company's e-commerce ventures, the Company entered into an agreement with the holders of 723,183 of the Company's stock rights originally issued as consideration for the acquisition. This agreement cancelled 347,541 of the stock rights and enabled the remaining stock rights to be redeemed for $7.3 million in cash. Financing Activities Net payments on the Company's revolving credit agreement totaled $100.3 million and $153.9 million in fiscal 2002 and 2001, respectively, compared to net borrowings of $132.8 million in fiscal 2000. Principal reductions on long-term debt were $23.8 million, $2.5 million and $14.7 million in fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, these amounts were attributable to payments of $15.0 million on the Company's senior notes, $8.6 million on debt assumed as a result of certain business acquisitions and $0.2 million on other notes payable. Dividend payments totaled $8.0 million, $8.1 million and $8.0 million during fiscal 2002, 2001 and 2000, respectively. On January 15, 2002, the Company's line of credit agreement was amended to decrease borrowing capacity from $75.0 million to $36.3 million. The Company's current borrowing capacity under its revolving credit agreement and its line of credit agreement (the "credit agreement") totaled $311.3 million (subject to borrowing limitations under the credit agreement)--$275.0 million under its revolving credit agreement as long-term debt due January 25, 2004 and $36.3 million under its line of credit agreement, as amended, which matures on July 31, 2002. On October 31, 2001, the Company entered into an equipment lease agreement (the "lease agreement") with a financial institution. Under the terms of the lease agreement, the Company leases certain equipment, including vehicles, forklifts and trailers from various companies with fundings provided by the lease agreement. The maximum capacity is $15.0 million and the monthly payments are made to the bank in accordance with the terms of each specific equipment lease. Availability at January 25, 2002 under the lease agreement totaled approximately $14.4 million. 33 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company has two short-term lines of credit with an aggregate borrowing capacity of $25.0 million. On June 30, 2001, these lines of credit were amended to extend the maturity dates to June 30, 2002. On June 22, 2001, the Company entered into an agreement ("lease facility agreement") with Atlantic Financial Group, Ltd. ("AFG"), certain financial parties as lenders and SunTrust Bank as agent ("SunTrust") in which AFG and SunTrust agreed to fund up to $40.0 million for the acquisition and development of real property projects chosen by the Company, including up to $25.0 million for the Company's new corporate headquarters building in Orlando, Florida ("Orlando property") which is expected to cost approximately $23.0 million. Also on June 22, 2001, the Company entered into an agreement with AFG, certain financial parties as lenders and SunTrust as agent for the construction of a new warehouse in Miami, Florida ("Miami property"). Pursuant to this agreement, AFG and SunTrust agreed to fund up to $15.0 million for the construction of this facility, which is expected to cost approximately $13.0 million. Orlando Property Under the terms of the loan agreement ("Orlando loan agreement") between AFG and SunTrust for the Orlando property, AFG was required to fund the lease facility through a nominal equity investment, with the remainder funded through non-recourse borrowings from SunTrust. Concurrent with the execution of the Orlando loan agreement, the Company executed a master lease agreement ("Orlando lease agreement") with AFG under which the Company will lease the Orlando property for a five-year term, including the construction period and a lease period. The Orlando lease agreement requires interest only payments that begin at the earlier of the completion of construction, which is expected in September 2003, or eighteen months following the acquisition of the Orlando property, which is expected to occur in April 2002. Payments are interest only at LIBOR rates plus applicable credit spreads (currently estimated to be 150 basis points). Although AFG has partially funded the lease facility through equity contributions, AFG does not have sufficient residual equity at risk. Accordingly, the Company has included the assets and liabilities related to AFG's Orlando loan agreement in the consolidated balance sheet at January 25, 2002. The outstanding borrowings and related assets of approximately $1.1 million are reflected in long-term debt and construction in progress. At the end of the lease term, the Company has the option to renew the lease for up to two additional five-year periods, or to purchase the building for a price including the outstanding lease balance. If the Company elects not to renew the lease or purchase the building, the Company may elect to remarket the property and arrange the sale of the building to a third party. Under the remarketing option, the Company has guaranteed approximately 85% of the total original cost as the residual fair value of the building. Miami Property Under the terms of the loan agreement ("Miami loan agreement") between AFG and SunTrust for the Miami property, AFG was required to fund the Miami property through an equity investment of 20% with the remainder funded through non-recourse borrowings from SunTrust. Concurrent with the execution of the Miami loan agreement, the Company executed a master lease agreement (the "Miami lease agreement") with AFG. Under the terms of the Miami lease agreement, the Company will lease the Miami property with rent payments scheduled to begin in January 2003. Rent payments for the first four years are interest only at a rate based on LIBOR plus applicable credit spreads (currently estimated to be 150 basis points). Beginning in the fifth year, rents are re-amortized and rates for the remainder of the term increase to 12.5% plus applicable consumer price index adjustments. During the first four years of the Miami lease agreement, the Company may elect to purchase the property for the existing lease balance or convert it into the Company's lease facility agreement referenced above. Although AFG has sufficient equity at risk with respect to the Miami property, the assets and liabilities related to AFG's Miami loan agreement have been included in the consolidated balance sheet at January 25, 2002 based on the required consolidation of the assets and liabilities related to AFG's lease facility referenced above. The outstanding borrowings and related assets of approximately $5.5 million are reflected in long-term debt and construction in progress. On December 21, 2000, the Company issued $150.0 million of senior notes in a private placement. Of the total $150.0 million of senior notes, $103.0 million bears interest at 8.42% and are payable in five annual principal payments beginning November 30, 2003. The remaining $19.0 million and $28.0 million of senior notes bear interest at 8.27% and are payable in one annual principal payment on November 30, 2003 and five annual principal payments beginning November 30, 2001, respectively. Proceeds from the sale of the senior notes were used to reduce indebtedness under the Company's revolving credit agreement. As of January 25, 2002, the Company had approximately $6.8 million of cash and $283.5 million of unused borrowing capacity (subject to borrowing limitations, under long-term debt covenants) to fund ongoing operating requirements and anticipated capital 34 expenditures. The Company believes it has sufficient borrowing capacity and cash on hand to take advantage of growth and business acquisition opportunities and to fund share repurchases in the near term. The Company expects to continue to finance future expansion on a project-by-project basis through additional borrowing or the issuance of common stock. On March 15, 1999, the Company's Board of Directors authorized the Company to repurchase up to 2,500,000 shares of its outstanding common stock to be used for general corporate purposes. Since March 15, 1999, the Company has repurchased 1,315,800 shares at an average price of $21.86 per share, of which 394,700 shares at an average price of $19.10 per share were repurchased in fiscal 2002, and 921,100 shares at an average price of $23.05 per share were repurchased in fiscal 2000. No shares were repurchased in fiscal 2001. Critical Accounting Policies The Company's significant accounting policies are more fully described in the notes to the consolidated financial statements. Certain of the Company's accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. As with all judgments, they are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, current economic trends in the industry, information provided by customers and vendors, information available from other outside sources and management's estimates, as appropriate. The Company's significant accounting policies include: Allowance for Doubtful Accounts The Company evaluates the collectibility of accounts receivable based on numerous factors, including past transaction history with customers and their credit worthiness. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This estimate is periodically adjusted when the Company becomes aware of a specific customer's inability to meet its financial obligations (e.g. bankruptcy, etc.), or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a slowdown in the markets in which the Company operates may result in higher than expected uncollectible accounts, and therefore, the need to revise estimates for bad debts. Provision for doubtful accounts totaled $11.1 million, $10.6 million and $4.1 million in fiscal 2002, 2001 and 2000, respectively. To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, the allowance for doubtful accounts could differ significantly, resulting in either higher or lower future provisions for doubtful accounts. Inventories The Company evaluates its inventory value at the end of each quarter to ensure that it is carried at the lower of cost or market. This evaluation includes an analysis of a branch's physical inventory results over the last two years, a review of potential dead stock, and an overall consolidated analysis of potential excess inventory items. An inventory provision is recorded monthly to provide for any potential write-downs of the Company's inventory to market value or for projected historical shortages. Periodically, the branch's perpetual inventory records are adjusted to reflect permanent declines in market value. To the extent historical physical inventory results are not indicative of future results and if unexpected future events impact, either favorably or unfavorably, the saleability of the Company's products, the inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions. At January 25, 2002 and January 26, 2001, inventory reserves totaled $9.9 million and $10.4 million, respectively. Impairment of Long-Lived Assets The Company periodically evaluates the net realizable value of long-lived assets, including goodwill, other intangible assets and property and equipment, relying on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Impairment is assessed by evaluating the estimated undiscounted cash flows over the asset's remaining life. If estimated cash flows are insufficient to recover the investment, an impairment loss is recognized. In the fourth quarter of fiscal 2002, the Company recorded an impairment loss of $0.7 million related to goodwill on its Plumbing/HVAC operations. In fiscal 2001, the Company experienced continued operating losses in its e-commerce ventures and international operations. As a result of these losses and based on an analysis of future profitability and anticipated customer demand for these businesses, the Company recorded an impairment charge totaling $15.6 million relating to the write-down of long-lived assets. This charge included the write-off of goodwill and other assets totaling $12.9 million related to the Company's e-commerce investments, and a charge totaling approximately $2.7 million primarily related to the write-off of goodwill in the Company's international operations. 35 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Self-Insurance The Company is self-insured for certain losses relating to workers' compensation, automobile, general and product liability claims. The Company also maintains stop loss coverages to limit the exposure arising from such claims. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon the Company's estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and the Company's historical loss development experience. To the extent future projected development of the losses resulting from workers' compensation, automobile, general and product liability claims incurred as of January 25, 2002 differs from the actual development of such losses in future periods, the Company's insurance reserves could differ significantly resulting in either higher or lower future insurance expense. Recent Accounting Pronouncements Effective February 2001, the Company adopted Statement of Financial Accounting Standards ("FAS") 133, Accounting for Derivative Instruments and Hedging Activities. FAS 133 was amended by FAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Both FAS 133 and FAS 138 require that an entity record all derivatives as either assets or liabilities in the consolidated balance sheets at fair value and measure those instruments at fair value and to reflect changes in fair value of those instruments as either components of comprehensive income or in net income depending on the types of instruments. The adoption of these standards did not have an impact on the Company's consolidated financial statements. FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets, were issued in July 2001. FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. FAS 141 also specifies the criteria which must be met in order for certain acquired intangible assets to be recorded separately from goodwill. FAS 142 is effective for the Company beginning with the Company's first quarter of fiscal 2003. Under FAS 142, all the Company's goodwill will no longer be amortized but rather will be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. In fiscal 2002, amortization of goodwill totaled $9,229. This new approach requires the use of valuation techniques and methodologies significantly different than the present undiscounted cash flow policy being followed by the Company. In connection with the adoption of FAS 142, the Company's conclusions about the valuation and recoverability of goodwill may change. The new approach may result in impairment charges and reductions in the carrying amount of goodwill on the consolidated balance sheets upon adoption. Subsequent to the initial adoption of FAS 142, the Company may be subject to earnings volatility if additional goodwill impairment occurs at a future date. The Company is in the process of performing the goodwill evaluation required under FAS 142 and has not yet determined the impact that will result from adoption. FAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001. FAS 143, which is effective for the Company beginning in fiscal 2004, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company does not expect the adoption of FAS 143 to have a material impact on its consolidated financial statements. FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001. FAS 144, which is effective beginning with the Company's first quarter of fiscal 2003, establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The Company does not expect the adoption of FAS 144 to have a material impact on its consolidated financial statements. 36 Quantitative and Qualitative Disclosure About Market Risk The Company is aware of the potentially unfavorable effects inflationary pressures may create through higher asset replacement costs and related depreciation, higher interest rates and higher material costs. In addition, the Company's operating performance is affected by price fluctuations in stainless steel, nickel alloy, copper, aluminum, plastic, lumber and other commodities. The Company seeks to minimize the effects of inflation and changing prices through economies of purchasing and inventory management resulting in cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins. At January 25, 2002, the Company had approximately $59.4 million of outstanding variable-rate debt. Based upon an assumed 10% increase or decrease in interest rates from their January 25, 2002 levels, the market risk with respect to the Company's variable-rate debt would not be material. The Company manages its interest rate risk by maintaining a combination of fixed-rate and variable-rate debt. Management believes that inflation (which has been moderate over the past few years) did not significantly affect the Company's operating results or markets in fiscal 2002, 2001 or 2000. As discussed above, however, the Company's results of operations in fiscal 2002 and 2001 were both favorably and unfavorably impacted by increases and decreases in the pricing of certain commodity-based products. Fiscal 2000 was unfavorably impacted by declines in prices of such commodity-based products. Such commodity price fluctuations have from time to time created cyclicality in the financial performance of the Company and could continue to do so in the future. 37 Selected Financial Data (in thousands, except per share data)
Fiscal Years Ended(1)(2) ---------------------------------------------------- 2002 2001 2000 1999 - --------------------------------------------------------------------------------------------------- STATEMENTS OF INCOME: Net sales $3,037,708 $3,310,163 $2,994,877 $2,536,265 Cost of sales 2,343,788 2,566,706 2,320,604 1,977,266 Gross margin 22.8% 22.5% 22.5% 22.0% - --------------------------------------------------------------------------------------------------- Selling, general and administrative expenses $ 550,943 $ 579,234 $ 508,009 $ 416,642 Percentage of net sales 18.1% 17.5% 17.0% 16.4% Depreciation and amortization 31,093 32,551 29,808 23,269 Provision for doubtful accounts 11,065 10,626 4,064 1,882 Operating income 100,085 105,489 132,392 117,206 Operating margin 3.3% 3.2% 4.4% 4.6% - --------------------------------------------------------------------------------------------------- Interest and other income $ 10,546 $ 18,476 $ 9,015 $ 6,886 Interest expense 35,945 43,288 31,805 25,415 - --------------------------------------------------------------------------------------------------- Income before income taxes $ 74,686 $ 80,677 $ 109,602 $ 98,677 Percentage of net sales 2.5% 2.4% 3.7% 3.9% Income taxes (benefits) 30,621 34,162 43,731 37,234 Net income 44,065 46,515 65,871 61,443 Percentage of net sales 1.5% 1.4% 2.2% 2.4% - --------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.90 $ 2.00 $ 2.82 $ 2.57 Diluted 1.88 1.97 2.80 2.55 - --------------------------------------------------------------------------------------------------- Average shares outstanding: Basic 23,175 23,238 23,398 23,889 Diluted 23,424 23,584 23,547 24,138 - --------------------------------------------------------------------------------------------------- BALANCE SHEETS: Working capital $ 588,275 $ 679,130 $ 657,500 $ 567,435 Total assets 1,293,262 1,406,695 1,377,036 1,128,973 Long-term debt 403,671 516,168 535,000 402,203 Shareholders' equity 594,473 570,035 522,444 483,956 - --------------------------------------------------------------------------------------------------- Current ratio 3.1 to 1 3.3 to 1 3.2 to 1 3.5 to 1 Long-term debt-to-capital 40% 48% 51% 45% Leverage (total assets/shareholders' equity) 2.18 2.47 2.64 2.33 - --------------------------------------------------------------------------------------------------- OTHER: Cash dividends per share $ .34 $ .34 $ .34 $ .33 Shareholders' equity per share 25.03 24.12 22.16 20.01 Return on average assets 3.3% 3.3% 5.3% 5.9% Return on average shareholders' equity 7.6% 8.5% 13.1% 13.6% Capital expenditures 16,850 23,871 30,740 26,921 - ---------------------------------------------------------------------------------------------------
(1) The Company's fiscal year ends on the last Friday in January. (2) All data adjusted for poolings of interests and the three-for-two stock split declared in fiscal 1998. 38
Fiscal Years Ended(1)(2) - ---------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------- $1,945,446 $1,619,362 $1,326,978 $1,065,549 $ 880,977 $ 724,466 $ 690,311 1,519,323 1,276,481 1,052,120 848,698 704,907 583,513 557,380 21.9% 21.2% 20.7% 20.4% 20.0% 19.5% 19.3% - ---------------------------------------------------------------------------------------------- $ 318,923 $ 261,355 $ 218,093 $ 172,828 $ 145,913 $ 119,732 $ 116,317 16.4% 16.1% 16.4% 16.2% 16.6% 16.5% 16.8% 18,727 15,566 11,859 10,131 8,657 7,382 7,987 1,229 1,023 2,203 1,501 2,448 2,028 3,247 87,244 64,937 42,703 32,391 19,052 11,811 5,380 4.5% 4.0% 3.2% 3.0% 2.2% 1.6% .8% - ---------------------------------------------------------------------------------------------- $ 5,837 $ 6,241 $ 5,111 $ 3,206 $ 3,677 $ 4,072 $ 2,696 19,257 14,842 10,440 6,813 6,456 6,087 7,702 - ---------------------------------------------------------------------------------------------- $ 73,824 $ 56,336 $ 37,374 $ 28,784 $ 16,273 $ 9,796 $ 374 3.8% 3.5% 2.8% 2.7% 1.8% 1.4% .1% 26,254 19,282 11,728 7,984 4,710 1,734 (1,359) 47,570 37,054 25,646 20,800 11,563 8,062 1,733 2.4% 2.3% 1.9% 2.0% 1.3% 1.1% .3% - ---------------------------------------------------------------------------------------------- $ 2.37 $ 2.13 $ 1.78 $ 1.54 $ .97 $ .68 $ .15 2.33 2.09 1.75 1.50 .92 .68 .15 - ---------------------------------------------------------------------------------------------- 20,108 17,384 14,418 13,504 11,900 11,899 11,899 20,432 17,719 14,647 13,992 13,675 11,917 11,899 - ---------------------------------------------------------------------------------------------- $ 486,106 $ 350,975 $ 235,113 $ 212,573 $ 171,702 $ 148,919 $ 134,961 965,742 684,056 474,574 418,717 330,526 294,510 276,439 343,197 228,351 139,165 127,166 121,292 103,870 89,921 421,769 299,233 188,926 165,427 116,918 106,597 99,649 - ---------------------------------------------------------------------------------------------- 3.5 to 1 3.3 to 1 2.6 to 1 2.7 to 1 2.9 to 1 2.8 to 1 2.6 to 1 45% 43% 42% 43% 51% 49% 47% 2.29 2.29 2.51 2.53 2.83 2.76 2.77 - ---------------------------------------------------------------------------------------------- $ .31 $ .25 $ .20 $ .15 $ .11 $ .08 $ .16 18.00 15.29 12.64 11.40 9.43 8.71 8.14 5.8% 6.4% 5.7% 5.6% 3.7% 2.8% .6% 13.2% 15.2% 14.5% 14.7% 10.3% 7.8% 1.7% 28,185 16,898 14,713 15,824 9,997 10,335 6,073 - ----------------------------------------------------------------------------------------------
39 Corporate and Shareholder Information Directors David H. Hughes Chairman of the Board and Chief Executive Officer John D. Baker II President and Chief Executive Officer Florida Rock Industries, Inc. Robert N. Blackford Retired Attorney, Holland & Knight LLP H. Corbin Day Chairman Jemison Investment Co., Inc. Vincent S. Hughes Former Vice President Hughes Supply, Inc. Toni Jennings President Jack Jennings and Sons, Inc. William P. Kennedy Chief Executive Officer Nephron Pharmaceuticals Corporation Amos R. McMullian Chairman and Chief Executive Officer Flowers Foods, Inc. Thomas I. Morgan President and Chief Operating Officer Executive Officers and Management David H. Hughes Chairman of the Board and Chief Executive Officer Thomas I. Morgan President and Chief Operating Officer Benjamin P. Butterfield Secretary and General Counsel Jasper L. Holland, Jr. Senior Vice President of Customer Development Clyde E. Hughes III Group President Robert A. Machaby Senior Vice President of Vendor Development Michael L. Stanwood Group President Thomas J. Starnes Senior Vice President of Sales and Marketing John A. Steele Senior Vice President of Operations Thomas M. Ward II Senior Vice President--Chief Information Officer Gradie E. Winstead, Jr. Group President Laura L. Wright Vice President of Human Resources J. Stephen Zepf Chief Financial Officer Transfer Agent and Registrar American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Annual Meeting Tuesday, May 21, 2002 at 10:00 a.m., local time Hughes Supply, Inc. 20 North Orange Avenue Suite 200 Orlando, Florida 32801 Independent Accountants PricewaterhouseCoopers LLP 390 North Orange Avenue Suite 2400 Orlando, Florida 32801 Corporate Headquarters Hughes Supply, Inc. 20 North Orange Avenue Orlando, Florida 32801 Telephone: (407) 841-4755 The shares of Hughes Supply, Inc. common stock are traded on the New York Stock Exchange under the symbol "HUG." The approximate number of shareholders of record as of March 27, 2002 was 915. A copy of the Hughes Supply, Inc. Annual Report on Form 10-K as filed with the Securities and Exchange Commission will be made available without charge, upon written request. Requests should be directed to: J. Stephen Zepf Chief Financial Officer Hughes Supply, Inc. Post Office Box 2273 Orlando, Florida 32802 40 EX-21.1 6 ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Subsidiaries of the Registrant Set forth below is a listing, by name and jurisdiction of incorporation, of each corporation which is, as of the date of this Report, a subsidiary of the Registrant. Unless otherwise indicated, each such corporation is a 100% owned subsidiary of the Registrant. 1) Allstate Pool Business, L.P., a Delaware limited partnership. 2) Allstate Pool Supplies, Inc., a Delaware corporation. 3) Atlantic Pump & Equipment Company of Miami, Inc., a Florida corporation. 3) Atlantic Pump & Equipment Company of West Palm Beach, Inc., a Florida corporation. 4) Bestroute.com, LLC. - a New York limited liability corporation. 5) Carolina Pump & Supply Corporation, a Rhode Island corporation. 6) Cayesteel, Inc., a Georgia corporation, a 100% owned subsidiary of WCC Merger Corporation. 7) CF Fluid Controls, Inc., a Texas corporation. 8) Chad Supply, Inc., a Florida corporation. 9) Coastal Wholesale, Inc., a Florida corporation. 10) Dominion Pipe & Supply Corporation, a Virginia corporation. 11) Dominion Pipe Fabricators, Inc., a Virginia corporation. 12) Douglas Leonhardt & Associates, Inc., a North Carolina corporation. 13) ELASCO Agency Sales, Inc., an Illinois corporation. 14) Elec-Tel Supply Company, a Georgia corporation. 15) Electric Laboratories and Sales Corporation, a Delaware corporation. 16) FES Merger Corporation, Inc., a Florida corporation. 17) Gayle Supply Company, Inc., an Alabama corporation. Subsidiaries of the Registrant (continued) EXHIBIT 21.1 18) Gilleland Concrete Products, Inc., a Georgia corporation. 19) H Venture Corporation, a Florida corporation. 20) HHH, LLC., a Delaware limited liability corporation. 21) HSI Acquisition Corporation, an Ohio corporation. 22) HSI Bestroute Investment, Inc., a Florida corporation. 23) HSI Corp., a Delaware corporation. 24) HSI Fusion Services, Inc., a Florida corporation. 25) HSI Indiana, LLC., - a Indiana limited liability corporation. 26) HSI North Carolina LLC., a North Carolina limited liability corporation. 27) Hughes Supply IP, Inc., a Delaware corporation. 25) Hughes Supply Foundation, Inc., a Florida not-for-profit corporation. 28) Hughes Supply Management Services, Inc., a Delaware corporation. 29) Hughes Supply Shared Services, Inc. - a Delaware corporation. 28) Hughes Water & Sewer Company, a West Virginia corporation. 29) Juno Industries, Inc., a Florida corporation. 30) Kamen Supply Company, Inc., a Kansas corporation. 31) Kingston Pipe Industries, Inc., a Rhode Island corporation. 32) L & T of Delaware, Inc., a Delaware corporation. 33) Merex Corporation, a Texas corporation. 34) Merex De Mexico, Sociedad Anonima De Capital Variable, a Mexico corporation, 75% owned. Subsidiaries of the Registrant (continued) 35) Merex Diesel Power, Sociedad Anonima De Capital Variable, a Mexico corporation, 75% owned. EXHIBIT 21.1 36) Metals Inc., an Oklahoma corporation. 37) Metals, Inc. - Gulf Coast Division, an Oklahoma corporation. 38) Mills & Lupton Supply Company, a Tennessee corporation. 39) Moore Electric Supply, Inc., a North Carolina corporation. 40) Mountain Country Supply, Inc., an Arizona corporation. 41) Olander & Brophy, Inc., a Pennsylvania corporation. 42) One Stop Supply, Inc., a Tennessee corporation. 43) Paine Supply of Jackson, Inc., a Mississippi corporation. 44) Palm Pool Products, Inc., a Michigan corporation. 45) Panhandle Pipe & Supply Company, Inc., a West Virginia corporation. 46) Port City Electrical Supply, Inc., a Georgia corporation. 47) R & G Plumbing Supply, Inc., an Alabama corporation. 48) Reaction Supply Corporation, a California corporation. 49) Shrader Holding Company, Inc., an Arkansas corporation. 50) Southwest Stainless, L.P., a Delaware limited partnership. 51) Stainless Tubular Products, Inc., an Oklahoma corporation. 52) Union Merger Corporation, a North Carolina corporation. 53) USCO Inc., a North Carolina corporation. 54) U.S. Fusion Services, Inc., a Louisiana corporation. Subsidiaries of the Registrant (continued) 55) Virginia Water & Waste Supply Company, Inc., a Virginia corporation. 56) Waterworks Sales Company, a Colorado corporation. 57) Waterworks Holding Co., a Colorado corporation. EXHIBIT 21.1 58) Warner Waterworks Sales Company of Wyoming, a Wyoming corporation. 59) WCC Merger Corporation, a Georgia corporation. 60) Wholesale Electric Supply Corporation, a New York corporation. 61) World-Wide Travel Network, Inc., a Florida corporation. 62) Z&L Acquisition Corporation, a Delaware corporation. EX-23.1 7 ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 Consent of Independent Certified Public Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-78323, 33-9082, 33-26468, 33-33701, 333-19007, 333-27935, 333-35059, 333-57977, 333-57979, 333-40666, 333-40664 and 333-40658) and in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-65825 and 333-80249) of Hughes Supply, Inc. of our report dated March 14, 2002, appearing on page 27 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Orlando, Florida April 19, 2002 EX-99.1 8 ex99-1.txt LOCATION OF FACILITIES Exhibit 99.1 As of March 31, 2002, the Company operated 434 branches in 34 states and Mexico. In addition, the Company operates six central distribution centers. The following table presents the number of the Company's branches and distribution centers by Group:
Plumbing Building Water & State/Country Electrical & HVAC Industrial Materials Sewer Total - ------------------------------------------------------------------------------------------------------------------------- Alaska -- -- -- -- 1 1 Alabama 2 8 1 1 5 17 Arkansas -- -- -- -- 2 2 Arizona -- 11 -- 1 6 18 California -- -- 1 -- 6 7 Colorado -- 5 -- -- 3 8 Delaware -- -- -- -- 1 1 Florida 24 34 -- 27 17 102 Georgia 11 19 3 9 7 49 Illinois 4 -- 1 -- -- 5 Indiana -- 1 -- -- 4 5 Kansas -- 2 -- -- -- 2 Kentucky -- 3 -- 1 1 5 Louisiana -- 1 4 1 -- 6 Maryland -- 4 -- -- 5 9 Michigan 1 -- -- -- -- 1 Missouri -- -- 1 -- -- 1 Mississippi -- 9 -- -- 1 10 Montana -- -- -- -- 2 2 Mexico -- 1 -- -- -- 1 North Carolina 3 19 1 5 11 39 New Jersey -- -- 2 -- -- 2 New Mexico 2 2 Nevada -- -- -- -- 1 1 Ohio 1 8 -- 2 8 19 Oklahoma -- -- 2 -- -- 2 Pennsylvania -- 3 -- -- -- 3 Rhode Island -- -- -- -- 1 1 South Carolina 5 10 -- 4 5 24 Tennessee 1 6 1 3 5 16 Texas 3 21 15 2 13 54 Utah -- -- 1 -- -- 1 Virginia -- 5 1 3 5 14 Washington -- -- 1 -- 5 6 West Virginia -- -- -- -- 4 4 - ------------------------------------------------------------------------------------------------------------------------- Total 55 170 35 59 121 440 =========================================================================================================================
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