-----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, IHyfwFfyQKOQzGdEjf3ij4lSiHHacjx+XJXLe0gzm+cED4/Y4V0jyf726ibTQ31+ C1W+gKmO8MLjPnTITlLTuQ== 0001169232-04-002229.txt : 20040414 0001169232-04-002229.hdr.sgml : 20040414 20040414153458 ACCESSION NUMBER: 0001169232-04-002229 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20040130 FILED AS OF DATE: 20040414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUGHES SUPPLY INC CENTRAL INDEX KEY: 0000049029 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] IRS NUMBER: 590559446 STATE OF INCORPORATION: FL FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08772 FILM NUMBER: 04732987 BUSINESS ADDRESS: STREET 1: CORPORATE OFFICE STREET 2: ONE HUGHES WAY CITY: ORLANDO STATE: FL ZIP: 32805 BUSINESS PHONE: 4078414755 MAIL ADDRESS: STREET 1: CORPORATE OFFICE STREET 2: ONE HUGHES WAY CITY: ORLANDO STATE: FL ZIP: 32805 10-K 1 d59199_10k.txt ANNUAL REPORT 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 30, 2004 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.) One Hughes Way Orlando, Florida 32805 (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 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. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes |X| No The aggregate market value of the registrant's voting stock held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter ($35.35 per share as of August 1, 2003): $784,386,134. There were 30,631,377 shares of the registrant's Common Stock ($1.00 par value) outstanding as of April 9, 2004. DOCUMENTS INCORPORATED BY REFERENCE Designated portions of the Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be held on May 20, 2004 are incorporated by reference in Part III of this Report. Page 1 of 75 TABLE OF CONTENTS
Item Page PART I Item 1. Business.................................................................. 3 Item 2. Properties................................................................ 16 Item 3. Legal Proceedings......................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders....................... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 17 Item 6. Selected Financial Data................................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 34 Item 8. Financial Statements and Supplementary Data............................... 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 66 Item 9A. Controls and Procedures................................................... 66 PART III Item 10. Directors and Executive Officers of Hughes Supply......................... 66 Item 11. Executive Compensation ................................................... 66 Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 66 Item 13. Certain Relationships and Related Transactions ........................... 66 Item 14. Principal Accountant Fees and Services.................................... 66 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......... 66 Signatures................................................................ 74 Index of Exhibits Filed with this Report.................................. 75
Page 2 of 75 PART I ITEM 1. BUSINESS Forward-Looking Statements Some of the statements set forth or incorporated by reference in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions created by those sections. When used in this report and the information incorporated by reference herein, the words "believe," "anticipate," "estimate," "expect," "may," "will," "should," "plan," "intend," "project" or phrases such as "will be well-positioned to," "will benefit," "will gain" and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, our expectations may not prove to be correct. Actual results or events may differ significantly from those indicated in our forward-looking statements as a result of various important factors, as discussed in the section entitled "Risk Factors" in this Item 1. We assume no obligation to publicly update or revise our forward-looking statements, except to the extent required by law. The following should be read in conjunction with our consolidated financial statements and the notes thereto filed as part of this report. Fiscal Year Our fiscal year is a 52- or 53-week period ending on the last Friday in January. Fiscal year 2004 and fiscal year 2002 contained 52 weeks while fiscal year 2003 contained 53 weeks. The additional week in fiscal year 2003 was included in the first quarter. Our Business Founded in 1928, we are one of the nation's largest diversified wholesale distributors of construction, repair and maintenance-related products. We distribute over 350,000 products to more than 100,000 customers through our 486 branches located in 38 states. Our customers include electrical, plumbing and mechanical contractors; public utilities; property management companies; municipalities; and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States. These geographic regions include 13 of the 15 fastest growing states in the United States. We are organized on a product line basis into six reportable segments: Water & Sewer; Plumbing/Heating, Ventilating and Air Conditioning (HVAC); Maintenance, Repair and Operations (MRO); Utilities; Electrical; and Industrial Pipe, Valves and Fittings (PVF). We include in an "All Other" category our Building Materials, Fire Protection and Mechanical Industrial product lines. Our segments are complementary, enabling us to be a single-source provider and providing us with opportunities to secure a larger share of our customers' business. Our customers use our products for commercial, residential, industrial and public infrastructure construction projects, and related maintenance, repair and operations. We believe that the diversity of the end-markets we serve and our broad offering of replacement, repair and maintenance products help lessen the impact on us of the seasonality and cyclicality that affect the construction industry as a whole. Page 3 of 75 We believe that more than 75 years of experience delivering superior customer service, the depth and breadth of our product offerings and our sales force's extensive technical expertise, have enabled us to become and remain a market leader in our businesses. The following table illustrates our estimated domestic market position in each of our product lines (based on net sales), the end-markets served and the principal products sold:
Product Market End Markets Lines Position Served Principal Products - ------------------ ------------------ ---------------------- ------------------------------------------------- Water & Sewer #2 Nationally Residential, Piping products, fire hydrants, water meters Commercial, storm drains, precast concrete vaults Public Infrastructure - -------------------------------------------------------------------------------------------------------------------- Plumbing/HVAC #2 Nationally Residential, Plumbing fixtures and related fittings, plumbing Commercial, accessories and supplies, HVAC equipment Industrial and parts - -------------------------------------------------------------------------------------------------------------------- MRO #1 Nationally Commercial Plumbing and electrical supplies, appliances and in Apartment parts, hardware, HVAC equipment and parts MRO Market - -------------------------------------------------------------------------------------------------------------------- Utilities #2 Nationally Public Infrastructure Electrical transmission and distribution equipment, wire and cable, tools and fasteners, energy products - -------------------------------------------------------------------------------------------------------------------- Electrical Southeast Residential, Wire management products, electrical Region Market Commercial, distribution equipment, wire and cable, Leader Industrial automation equipment - -------------------------------------------------------------------------------------------------------------------- Industrial PVF Southwest Industrial Pipes, valves, flanges, fittings, plate, sheet, Region Market tubing Leader - -------------------------------------------------------------------------------------------------------------------- All Other Not Commercial, Building materials, fire protection products, Applicable Residential, mechanical industrial products Industrial, Pubic Infrastructure
Our Industry Based on industry data and management estimates, we believe that the U.S. wholesale construction, repair and maintenance distribution market collectively generated approximately $200 billion of revenues in 2003 and is highly fragmented. We are one of the largest diversified wholesale distributors in the United States (based on net sales), and we have less than a 2% overall market share. Spending in the U.S. construction, repair and maintenance industries generally follows trends in the domestic economy, although different factors affect the level of spending in various market segments, which can result in significantly different growth rates across those segments. We believe that the following industry trends will benefit our business: o Continued Population Growth in Core Markets. According to U.S. Department of Commerce estimates, 13 of the 15 fastest growing states, from which we derive nearly 80% of our consolidated net sales will account for 75% of the net population change in the United States from 1995 to 2025. We believe that this growth will lead to new residential and commercial construction and will require additions and improvements to public infrastructure. o Recovery in Commercial and Industrial Activity. Although commercial and industrial spending has declined significantly over the past several years and the industry continues to face near-term pressure, we believe that if the domestic economy continues to expand, this end-market will recover. Because of our largely fixed cost operating structure, we believe that growth in this sector will be a significant profitability driver for us. o Increased Market Share Opportunities for National MRO Distributors. We believe that the continuing consolidation of large property management companies and the continuing growth in group purchasing organizations will benefit MRO distributors that can provide single-source purchasing and national same- or next-day delivery capabilities. We believe that we are well-positioned to capitalize on these trends as well as additional opportunities in the property management, lodging and hospitality, healthcare, education and government services markets. Page 4 of 75 o Increased Spending on Domestic Public Infrastructure Projects. According to a 2002 report by the Congressional Budget Office, in order to replace and/or maintain aging public water and wastewater infrastructure, federal, state and local governments will need to spend an aggregate of approximately $300 billion over the next decade. We also anticipate significant spending over the next decade to upgrade electric transmission and distribution systems in the United States. We believe that the power grid failure in 2003 affecting much of the eastern United States illustrated the consequences of underinvestment in these systems. The Electric Power Research Institute estimated in a November 2003 report that if the electric transmission and distribution industry invested an additional $25 billion each year, U.S. businesses would generate an additional $100 billion of gross domestic product annually through more efficient facility operations. o Industry Consolidation. The highly fragmented nature of our industry is leading to consolidation because larger distributors can more cost-effectively and efficiently meet customers' needs, due in large part to greater information technology capabilities, financial capacity, purchasing power, national coverage and operating leverage compared to smaller competitors. In addition, larger distributors have the resources necessary to meet the demands of professional customers, such as a broad product offering from industry-leading manufacturers, better overall product expertise and value-added services. We believe that with our strong competitive position, size, geographic reach and experienced management team, we are well positioned to continue to benefit from consolidation trends within the wholesale distribution industry. Our Competitive Strengths We believe that the following competitive strengths are the key to our success: o Respected Industry Leader in a Highly Fragmented Market. As one of the largest and most well-recognized wholesale distributors of construction, repair and maintenance-related products in the United States, we have advantages over our smaller competitors. We enjoy economies of scale, such as significant purchasing power with our vendors; a broad offering of products and services; the resources to invest in state-of-the-art information technology and other operating systems to offer value-added services to our customers; and the geographic presence to service national accounts. o Comprehensive Product Offering and Loyal Customer Base. As part of our emphasis on superior customer service, we offer more than 350,000 products, providing us with a competitive advantage over smaller distributors that focus on a narrower product range. We believe that our broad product offering provides us opportunities to be a single-source supplier to our customers and to participate in multiple phases of construction projects and related repair and maintenance work. We complement our product offering with customer-driven, value-added services, such as integrated supply, kitting, assembly and fabrication services. We believe that our operating history of over 75 years, our broad product and service offering, our highly knowledgeable sales force, our local market focus, our well-known brand name and our reputation for superior customer service have been critical to our ability to shift our customers' purchasing decision away from one based primarily on price to one also built on expertise, trust, loyalty and service. o Highly Knowledgeable Sales Force. We have approximately 2,100 sales personnel who work directly with our branches. The members of our sales force are highly knowledgeable technical professionals, many of whom have engineering or other technical backgrounds. As a result, our customers work directly with sales personnel who have relevant expertise in our customers' particular disciplines. We believe that our technical expertise and our collaborative working relationship with our customers as well as our delivery capabilities distinguishes us from many of our competitors, including large retailers of home improvement products, which we believe are not well-equipped to provide the depth of technical expertise and service that professional customers require. o Strong Purchasing Power. Because of our size and market position, we have significant purchasing power with our vendors. We use our preferred vendor program, which currently includes approximately 650 vendors, to concentrate a significant portion of our purchasing with a core group that views us as a strategic partner and offers us higher discounts and greater rebates than we have or would have achieved through more diffuse purchasing practices. These discounts and volume rebates enable us to respond effectively to competitive pressures in our local markets. Page 5 of 75 o Highly Experienced and Proven Senior Management Team. We believe that our senior management team's experience with rapidly growing and market-leading distribution companies is a competitive advantage as we seek to expand our business. In April 2001, Tom Morgan joined our company as President and Chief Operating Officer, and in May 2003, he became our Chief Executive Officer. Prior to joining us, Mr. Morgan was chief executive officer of U.S. Office Products and spent 22 years at Genuine Parts, an automotive and office products distributor. Since his arrival, Mr. Morgan has recruited a new senior management team, including David Bearman, our Executive Vice President and Chief Financial Officer, who joined us in March 2003. Mr. Bearman's experience includes serving as chief financial officer of Cardinal Health, a pharmaceutical distribution company, from 1989 to 1998, and more than 20 years' prior experience at General Electric Company, where he served as chief financial officer of four different GE subsidiaries. Our Business Strategy We intend to become the leading wholesale distributor of construction, repair and maintenance-related products in the United States. In pursuing that goal, we expect to significantly increase our earnings and return on invested capital, which we believe will lead to increased shareholder value. Our multi-year strategy focuses on (1) structural changes to our core businesses designed to increase revenues while improving our efficiency in managing operating costs, working capital and fixed assets; (2) organic growth and (3) strategic acquisitions. The key elements of our strategy are to: o Focus on Best-in-Class Distribution. Our operating strategy is to buy, operate and sell as one integrated, streamlined organization. Specific actions taken or to be taken include the following: o The implementation of an integrated, company-wide, industry-leading distribution platform to ensure that our logistics and customer support functions operate on a common system, which is part of the information technology framework we collectively refer to as Hughes Unified; o The establishment of a world class purchasing system that will provide us with additional purchasing leverage resulting in improved margins and will enhance our working capital efficiency by improving fill rates and inventory turnover; o The development and implementation of best-in-class financial systems with a particular emphasis on enhanced management of our accounts receivable and accounts payable to gain transactional efficiencies and on data warehousing to ensure that we are capturing relevant and timely information about our customers and vendors; o The rationalization of our branches, particularly in our Plumbing/HVAC, Electrical, and Building Materials businesses, to maximize branch profitability while continuing to provide our customers with convenient access to our broad product offering; o The strengthening of our position in the supply chain by further integrating our business with that of our vendors through the use of electronic data interfaces and other technology links and with the businesses of our customers by providing value-added services, such as integrated supply, kitting, assembly and fabrication services and o The continued execution of best-in-class marketing programs, targeting both customers and vendors, which are designed to build on the Hughes brand name, to increase incremental revenues, improve customer retention and enhance business relationships across the supply chain. o Capitalize on Organic Growth Opportunities. We believe that there is significant potential for organic growth in each of our business segments, with particular opportunities in our MRO, Water & Sewer and Utilities businesses. We intend to capture additional MRO business by continuing to expand our geographic footprint, further developing our MRO-specific, web-based catalog business and targeting national accounts serving the property management, lodging and hospitality, healthcare, education and government services markets. In our Water & Sewer business, in addition to capitalizing on population growth trends and the resulting infrastructure needs, federal and state mandates requiring drainage and storm water management compliance present significant opportunities for us. In our Utilities business, we also believe there are opportunities for us to develop enhanced relationships with municipal, cooperative and investor-owned electric utility companies that, in order to gain efficiencies and reduce inventories, are relying more on wholesale distributors for procurement services. Page 6 of 75 o Pursue Strategic Acquisitions. In addition to our organic growth, we continue to pursue selective acquisitions of companies that complement our current portfolio of businesses. In evaluating acquisition candidates, we seek companies that are market leaders; possess good operations management; serve high growth end-markets; generate high returns on invested capital; expand our geographic footprint; provide the opportunity to realize operating and administrative cost savings and reduce our exposure to the seasonality and cyclicality of new construction markets. Our acquisitions of Century Maintenance Supply, Inc. (MRO), and Marden Susco, LLC (Water & Sewer) in fiscal year 2004 and our acquisition of Utiliserve Holdings, Inc. and its subsidiaries (Utilities) in fiscal year 2003 demonstrate our ability to identify and consummate acquisitions of companies that meet our selective criteria. We also evaluate our current product lines against these criteria and will make changes to our portfolio, as we deem appropriate. Our Businesses We distribute products and offer services in the following major product categories, which correspond to our reportable operating segments. A summary of net sales, operating income, assets and accounts payable for our operating segments is presented in Note 16 to the consolidated financial statements in Item 8, which is incorporated herein by reference. Water & Sewer We provide a complete line of water, sewer and storm-drain products to serve the needs of both contractors and municipalities in all aspects of the water and wastewater industries. Our waterline products transmit potable and non-potable water from the source to treatment plants, storage towers and pumping stations and ultimately to homes and businesses. Also included in this product category is our concrete business, which complements our Water & Sewer business by manufacturing prefabricated concrete vaults used for sewer and storm drain applications. Because all commercial and residential structures require water and sewer systems, we consider our Water & Sewer business to be a leading indicator of future construction activity. Our Water & Sewer business operates primarily in the southeastern and southwestern United States through 109 branches located in 22 states. Products and Services. The products in our Water & Sewer segment include waterworks products such as piping, fire hydrants, storm drains, backflow prevention devices, water meters, irrigation products, concrete sewer products and concrete electrical and telephone vaults. In addition, we offer specialized industry services including leak detection, water system audits, hot tapping, manhole rehabilitation, line stopping, control valve testing and repair and engineered plant products and services. Customers. The Water & Sewer product line primarily serves the residential, commercial and public infrastructure markets with customers including underground utility contractors, utility companies, telecommunications companies, site developers, municipalities and government agencies such as the U.S. Department of Transportation. Competition. We believe that we are the second largest distributor of water and sewer products in the United States. Our primary competitors in the water and sewer market include National Waterworks, Inc. and Ferguson Enterprises, Inc. (a subsidiary of Wolseley plc) on a national level and other regional and local distributors. Plumbing/HVAC We are one of the nation's largest distributors of plumbing supplies, offering complete inventories for one-stop service. Our plumbing products are sold primarily to contractors and homebuilders for bathroom and kitchen installation. Also included in this segment is our HVAC business, which distributes air conditioning and heating equipment. Our HVAC products are sold to contractors for the installation and repair of central air conditioners, furnaces and refrigeration systems. Our plumbing/HVAC business operates primarily in the southeastern and southwestern United States through 149 branches located in 17 states. Products and Services. The products in the Plumbing/HVAC product line include residential and commercial water heaters, furnaces, heat pumps, pipes and fittings, air conditioning units, plumbing fixtures, faucets and accessories, pumps and sprinkler heads, mechanical valves and repair parts. In addition, our dedicated technical personnel provide complete plastics fabrication, pipe cutting and threading, project management, procurement and field services. Customers. The Plumbing/HVAC product line serves the residential, commercial and industrial markets with customers including plumbing, mechanical, HVAC and remodeling contractors; homebuilders; commercial and industrial purchasing agents; and municipalities. Page 7 of 75 Competition. We believe that we are the second largest distributor of plumbing products in the United States. Our primary national competitors in the Plumbing/HVAC market include Ferguson Enterprises, Noland Company, Hajoca Corporation, Winholesale, Inc. and Watsco Inc. MRO Following our acquisition of Century Maintenance Supply, Inc. ("Century") on December 19, 2003, we are the nation's largest MRO products supplier in the apartment MRO industry. Currently, there are approximately 20 million apartment units in the United States that continually require routine maintenance and repair in order to retain existing tenants and attract new ones. Historically, the apartment MRO market has been less cyclical than new construction markets as maintenance work is required regardless of economic and/or weather conditions. With our full range of MRO supplies that are available to be shipped for same or next-day delivery, we are able to provide our customers with the items they need quickly and efficiently. Our MRO business operates throughout the United States currently through 66 branches located in 28 states. Products and Services. The products in our MRO product line include the items needed to maintain an apartment unit or complex in good working condition, such as plumbing and electrical supplies, appliances and parts, hardware, door and window parts, HVAC equipment and parts, pool supplies, lawn and garden and janitorial supplies. Our services include custom cutting and building of products such as mini-blinds, drawers and screens; lock re-keying for bulk lock orders and customer-specific activities, such as seminars and customized ordering. Customers. The MRO product line primarily serves the multi-family housing market with customers that include local, regional and national property management companies that either own or manage apartment complexes. Competition. We believe our primary competitors in the apartment MRO market include Home Depot Supply, Wilmar Industries, Inc. (a subsidiary of Interline Brands, Inc.) on a national level, and other local wholesale and retail hardware and home improvement stores. Utilities We are one of the nation's largest distributors of transmission and distribution products to electric utility companies. We believe that there are opportunities for us to develop enhanced relationships with municipal, cooperative and investor-owned electric utility companies, which we believe the wholesale distribution industry historically has underserved. As utility companies seek ways to gain efficiencies in costs and working capital, they are increasingly turning to wholesale distributors for purchasing and inventory management services. In addition to broad and deep inventories, we offer supply chain management services that lower costs and improve service levels. Our Utilities business operates primarily in the southeastern, southwestern and midwestern United States through 36 branches, serving utility customers in approximately 25 states. Products and Services. The products in our Utilities product line include electrical distribution equipment, wire and cable, energy products, electrical meters and pole line hardware. In addition, we offer value-added services that include warehouse integration and outsourcing, substation and transmission and distribution packaging, meter testing and repair, field-testing, tool repair and storm and emergency response. Customers. The Utilities product line primarily serves the public infrastructure markets with customers including various municipal, cooperative and investor-owned electric utilities. Competition. We believe that we are the second largest distributor of electric utilities products in the United States. Our primary competitors in the electric utilities market are Wesco International, Inc. on a national level and various regional independent distributors. Electrical We were founded over 75 years ago as a distributor of electrical supplies. Our Electrical segment provides electrical construction and maintenance products and related services to the commercial, industrial and residential markets. While we have expanded into other product lines and markets, the Electrical segment remains an important part of our business and an essential complement to our other product lines. Our Electrical business operates primarily in the southeastern and southwestern United States through 39 branches located in 5 states. Products and Services. The products and services in our Electrical product line include wire management products, electrical distribution equipment, wire and cable, automation equipment, tools and fasteners, light bulbs, light fixtures, motor controls, energy products, wiring devices, data/communications products and storeroom/job trailer management. Page 8 of 75 Customers. The Electrical product line serves the commercial, residential and industrial markets with customers including electrical contractors, industrial companies, original equipment manufacturers ("OEMs") and commercial businesses. Competition. We believe that we are a market-leading distributor of electrical products in the southeastern United States. Our primary national competitors in the electrical market include Graybar Electric Company, Inc., Consolidated Electrical Distributors, Inc., Rexel, Inc., Wesco International, Inc., GE Supply (a division of General Electric Company), Sonepar USA and numerous smaller electrical distributors. Industrial PVF We believe we offer one of the nation's largest inventories of high quality, specialty stainless and high nickel alloy industrial PVF products for industrial, mechanical and specialty uses. Our extensive depth and breadth of products and key relationships with the world's leading manufacturers enable us to deliver solutions to a wide range of industrial and commercial customers. Our Industrial PVF business operates primarily in the southwestern United States through 35 branches located in 15 states. Products and Services. The products in our Industrial PVF product line include valves, flanges, fittings, pipe, plate, sheet and tubing, all offered in commodity and specialty materials and in various pressure ratings. Services include valve automation and repair, piping fabrication and pipe cutting and grooving. Customers. The Industrial PVF product line primarily serves the industrial markets with customers that include power, petrochemical, food and beverage, pulp and paper, mining, marine and pharmaceutical companies; industrial and mechanical contractors; fabricators; wholesale distributors; exporters and OEMs. Competition. We believe we are a market-leading distributor of industrial PVF products in the southwestern United States. Our primary national competitors in the Industrial PVF market include Wilson Pipe & Supply Inc., McJunkin Corporation, Ferguson Enterprises and Red Man Pipe and Supply Company. All Other (Includes Building Materials, Fire Protection and Mechanical Industrial) Our "All Other" product category includes our Building Materials, Fire Protection and Mechanical Industrial businesses. Building Materials. As one of the nation's largest distributors of construction supplies, we are able to provide our customers with field-tested and proven brand names in a wide range of building materials. Our Building Materials business operates in the southeastern United States through 28 branches located in 5 states. Products. Products in our Building Materials product line include concrete and masonry supplies and accessories, lumber, bridge rail, overhang brackets, erosion control products, bearing pads, tilt-up bracing rental, lifting and bracing inserts, sealants, waterproofing and fireproofing materials, commercial washroom specialties, tools and accessories. Customers. The Building Materials product line primarily serves the commercial, industrial and public infrastructure markets, with customers such as general contractors and subcontractors, including concrete, masonry and road and bridge contractors. Competition. Our primary competitors in the building materials market include National Construction Supply, White Cap Construction Supply, Ram Tool and Supply and numerous smaller distributors. Fire Protection. We are one of the nation's largest distributors of fire protection products offering complete fire protection pre-fabrication capabilities, which allows us to construct, deliver and install entire fire protection systems for our customers. Our Fire Protection branches and fabrication facilities are located strategically within our large network of Water & Sewer branches, giving our customers access to materials for both aboveground and underground applications. Our Fire Protection business operates throughout the United States through 15 branches located in 10 states. Products and Services. Products and services in our Fire Protection product line include sprinkler heads and devices, steel pipe and fittings, backflow prevention devices, valves, hydrants, air compressors and fabrication. Customers. The Fire Protection product line serves fire protection contractors, subcontractors and builders in the commercial, residential and industrial markets. Page 9 of 75 Competition. Our primary national competitors in the fire protection market include Pacific Fire Safety (a division of Ferguson Enterprises), Viking Fire Group and Reliable Automatic Sprinkler Company, Inc. Mechanical Industrial. Our Mechanical Industrial business offers a complete inventory of valves, actuators and accessories, and a variety of consulting services. Our Mechanical Industrial business operates in the southeastern United States through 9 branches located in 3 states. Products and Services. Products and services in our Mechanical Industrial product line include carbon, stainless and thermoplastic pipe, valves, fittings and accessories; steam traps; actuators; valve positioners; gauges; sanitary piping systems; valve automation and repair; high density polyethylene (hdpe) pipe fabrication and field installation and pipe cutting and grooving. Customers. The Mechanical Industrial product line serves the commercial and industrial markets, with customers including fabricators, OEMs, industrial subcontractors, mechanical contractors, exporters, purchasing agents, maintenance departments, engineering departments and planners. Competition. Our primary competitors in the mechanical industrial market include Ferguson Enterprises, McJunkin Corporation, Winholesale, Inc. and Home Depot Supply. Our Customers We currently serve over 100,000 active customers who are typically professionals who choose their vendors primarily on the basis of product availability, relationships with and expertise of sales personnel, price and the quality and scope of services offered. Additionally, professional customers generally buy in large volumes, are repeat buyers because of their involvement in longer-term projects and require specialized services. We do not market our products to retail consumers. We differentiate ourselves with the depth and breadth of products offered and services provided, including fabrication, integrated supply, kitting, design assistance, material specifications, scheduled job site delivery, follow-up job site visits to ensure satisfaction and technical product services (including blueprint take-off and computerized order quotes). Vendors To be the best customer service company in each of the industries we serve, we must offer the depth and breadth of products our customers need, often on a special order basis. To accomplish this, we purchase from over 10,000 vendors; however, approximately 1,000 vendors provided products comprising over 90% of our consolidated net sales for the fiscal years 2004, 2003 and 2002. No single vendor accounted for more than 5% of our total purchases during the fiscal years 2004, 2003 and 2002. We have a centralized vendor development department, which is dedicated to fostering key vendor relationships, consolidating purchasing volume and refining agreements with our vendors. Key initiatives in this area include: o Vendor and Purchasing Consolidation. Our vendor and purchasing consolidation efforts have resulted in significantly higher rebate income over the past several years. In addition to providing higher rebate income, our vendor consolidation efforts for products such as steel pipe (62 vendors to 7 vendors), light bulb products (3 vendors to 1 vendor) and pvc pressure fittings (5 vendors to 1 vendor) have increased efficiency by simplifying administrative processes and improving service levels from our vendors, without sacrificing service to our customers. o Preferred Vendor Program. Our preferred vendor program, which includes approximately 650 vendors, has resulted in stronger, more strategic relationships with a more concentrated group of vendors. It leverages our existing vendor relationships by helping to increase sales of our vendors' products through various initiatives, including sales promotions and cooperative marketing efforts. o Electronic Data Interchange (EDI). We have converted the number of vendors with which we electronically exchange a full set of transactions such as purchase orders, acknowledgements and invoices from 11 in fiscal 2003 to more than 700 in fiscal 2004. This conversion has resulted in reduced manual efforts and increased data reliability and accuracy. These initiatives require minimal investment and provide significant opportunities for improved customer service and supply chain efficiencies. We expect that the continued development of these vendor initiatives, together with the implementation of our integrated distribution platform and a state-of-the-art purchasing system, will significantly improve profitability, supply chain efficiencies and customer service, while helping us achieve our goal of efficiently buying, operating and selling as one streamlined company. Page 10 of 75 Distribution and Logistics Our distribution network consists of 486 branches and six central distribution centers in the United States. The efficient operation of our distribution network is critical in providing quality service to our customer base. Our central distribution centers and branches use warehouse management technology to optimize receiving, inventory control and picking, packing and shipping functions. Our purchasing agents in our branches use a computerized inventory system to monitor stock levels, while central distribution centers in Arizona, Florida, Georgia, North Carolina and Ohio provide purchasing assistance as well as a broad stock of inventory that supplements the inventory of the branches. In addition, we use several of our larger branches in other parts of the United States as distribution points for certain product lines. The majority of customer orders are shipped from inventory at our branches. In order to maintain complete control of the delivery process, we use our own fleet of over 4,000 vehicles to deliver products to our customers. We also accommodate special orders from our customers and facilitate 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. We are continuously looking for ways to leverage our people, facilities and fleet. In November 2003, we opened a pilot branch in Miami, Florida in which six product lines now operate in one common facility. Although the product lines share a common facility, their operations are not fully integrated at this time. The continued implementation of our common distribution system will allow us to more fully integrate the purchasing, warehousing, inventory management, administration and fleet operations of our product lines and evaluate future implementations of this branch configuration model. Sales We employ a specialized and experienced sales force for each of our product lines, including over 1,000 outside sales representatives that work with contractors, subcontractors, professional buyers, property management companies and municipalities. Our sales representatives provide product specifications and usage data, design solutions and develop job quotes in an effort to help customers fulfill their needs. Additionally, over 800 inside sales account representatives and approximately 300 counter associates expedite orders, deliveries, quotations, requests for pricing and the release of products for delivery. Marketing Our marketing department's focus is to help drive incremental sales, increase customer retention and enhance business relationships across the supply chain. Our marketing programs build Hughes brand awareness and bring value to the supply chain by helping our vendors market and sell their products to a broad customer base. We are continuing to execute our best-in-class marketing programs, and we believe the following marketing materials and programs are unparalleled in our industry and differentiate us from our competitors: o The creation of best-in-class promotional product brochures that provide our sales force with the tools they need to increase sales, while providing our vendors with an opportunity to participate in our comprehensive targeted sales program; o The production of comprehensive product line catalogs with color photos that showcase vendors' products and facilitate routine ordering for customers; o Unrivaled customer awards programs that drive incremental sales and build customer loyalty and o The hosting of themed marketing events throughout our major markets attended by thousands of our customers, which provides us with the opportunity to show customer appreciation while allowing our vendors to showcase their quality products. Additionally, our marketing department has developed government and healthcare initiatives to increase our business in the construction and MRO markets. The government initiative is designed to effectively solicit and secure local, state and national bids in the government area. On May 1, 2003, we were awarded a General Services Administration contract that will streamline the federal bid process. Furthermore, the government initiative has been awarded a national contract for tools and materials handling with U.S. Communities, the largest local government purchasing alliance in the United States. The healthcare sales initiative is aimed at identifying, developing and pursuing current hospital, assisted living and other related healthcare new construction and MRO opportunities along with cultivating key relationships within the healthcare community and its key contractors and subcontractors. Page 11 of 75 Information Technology Our information technology ("IT") systems are capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management, sales analysis and accounting. In addition, our 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 us to operate efficiently and provide a high level of service to our customers. We believe that our continued investment in upgrading, consolidating and integrating our IT systems is necessary to provide a state-of-the art platform to continue our strategic growth, efficiency and customer service programs. Our IT initiatives will help us increase operational efficiencies, particularly in the area of working capital management; improve information flow, which will aid in decision-making; provide a means for decreasing transaction costs and provide us with the infrastructure necessary to realize further administrative cost savings associated with past and future business acquisitions. We continue to implement the Hughes Unified framework, which includes an e-commerce enabled, customer fulfillment, inventory management, logistics and distribution management system. It is designed specifically for construction and contractor-oriented distributors. We began implementing this software in December 2001, and expect implementation to be completed within the next 18 to 20 months. We believe that this timeframe will enable us to reduce risk, minimize customer disruption and spread implementation costs. Within the Hughes Unified framework, we will consider integration of select best-in-class applications, such as financial, purchasing and data warehousing functions. Our IT initiatives will help us achieve our goal of buying, operating and selling as one efficient, streamlined company. Seasonality Our operating results are impacted by seasonality. Generally, sales of our products are higher in the second and third quarters of each fiscal year due to more favorable weather and daylight conditions during these periods. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects. Competition We believe that we are one of the largest wholesale distributors of our range of products in the United States and that no other company competes against us across all of our product lines. However, there is significant competition in each of our individual product lines. Our competition includes other wholesalers, manufacturers that sell products directly to their respective customer base and some of our customers that resell our products. We also compete, to a limited extent, with retailers in the markets for plumbing, electrical fixtures and supplies, building materials, MRO supplies and contractors' tools. Competition varies depending on product line, customer classification and geographic market. The principal competitive factors in our business include, but are not limited to, availability of materials and supplies; technical product knowledge and expertise as to application and usage; advisory or other service capabilities; pricing of products and availability of credit. Inventories We are a wholesale distributor of construction, repair and maintenance-related products and therefore maintain extensive inventories to meet the rapid delivery requirements of our customers. Our inventories are based on the needs, delivery schedules and lead times of our customers. We focus on distributing products that leverage our strengths in inventory management, purchasing, specialized sales force, distribution and logistics, credit management and information technology. As of January 30, 2004, our inventories totaled approximately $467.0 million and represented approximately 24.8% of our total assets. Employees As of January 30, 2004, we had approximately 8,400 employees. The acquisitions of Century and Marden Susco, LLC ("Marden Susco") added approximately 1,000 and 100 employees, respectively, to our headcount in fiscal year 2004. We currently have 24 employees that are represented by two labor unions. We consider our relationships with our employees to be good. Environmental Laws Compliance with federal, state and local environmental protection laws has not, in the past, had a material effect upon our consolidated results of operations and financial condition. We do not anticipate any material effect in the future. Page 12 of 75 Risk Factors Our business is subject to significant risks. You should carefully consider the risks and uncertainties described below and in the other information included or incorporated by reference in this report, including our consolidated financial statements and the notes thereto filed as part of this report. If any of the events described below actually occur, our business, financial condition or results of operations could be materially and adversely affected. Risks Related to Our Business We operate in a highly competitive marketplace, which may result in decreased demand or prices for our products. The wholesale construction, repair and maintenance distribution industry is highly competitive and fragmented. The principal competitive factors in our business include, but are not limited to: o availability of materials and supplies; o technical product knowledge and expertise as to application and usage; o advisory or other service capabilities; o pricing of products and o availability of credit. Our competition includes other wholesalers and manufacturers that sell products directly to their respective customer base and some of our customers that resell our products. We also compete, to a limited extent, with retailers in the markets for plumbing, electrical fixtures and supplies, building materials, MRO supplies and contractors' tools. Competition varies depending on product line, customer classification and geographic market. We may not be successful in responding effectively to competitive pressures, particularly from competitors with substantially greater financial and other resources than us. Furthermore, because of the fragmented nature of the markets in which we operate, we are also susceptible to being underbid by local competition. Delays in the implementation of our new unified operating system, or interruptions in the proper functioning of our information systems, could disrupt our operations and cause unanticipated increases in our costs. We continue to implement our Hughes Unified operating system and expect implementation to be completed over the next few years. We believe that this time frame will enable us to reduce implementation-related risk, minimize customer disruption, reduce system outages and disruptions and spread implementation costs. Delays in the successful implementation of the new operating system or its failure to meet our expectations could result in adverse consequences, including disruption of operations or unanticipated increases in costs. In addition, the proper functioning of our information systems is critical to the successful operation of our business. Although we protect our information systems through physical and software safeguards and we have back-up remote processing capabilities, these information systems are still vulnerable to natural disasters, power losses, telecommunications failures, physical or software break-ins and similar events. If our critical information systems fail or are otherwise unavailable, we would have to accomplish these functions manually, which could temporarily affect our ability to process orders, identify business opportunities, maintain proper levels of inventories, bill accounts receivable and pay expenses. We rely heavily on our key personnel and the loss of one or more of these individuals could harm our ability to carry out our business strategy. We believe that our ability to implement our business strategy and our continued success will largely depend upon the efforts, skills, abilities and judgment of our executive management team. Our success also depends to a significant degree upon our ability to recruit and retain our highly knowledgeable sales personnel and our marketing, operations and other senior managers. We may not be successful in attracting and retaining these employees or in managing our growth successfully, which may in turn have an adverse effect on our results of operations and financial condition. Page 13 of 75 We may not be able to efficiently or effectively integrate newly-acquired businesses into our business or achieve expected profitability from our acquisitions. Integrating newly-acquired businesses involves a number of risks, including: o unforeseen difficulties in integrating operations and systems; o problems assimilating and retaining our employees or the employees of the acquired company; o challenges in retaining our customers or those of the acquired company following the acquisition; o potential adverse short-term effects on operating results through increased costs or otherwise and o the possibility that management may be distracted from regular business concerns by integration activities and related problem solving. If we are unable to effectively integrate strategic acquisitions, our business, results of operations and financial condition could be adversely affected. We have substantial fixed costs and, as a result, our operating income is sensitive to changes in our net sales. A significant portion of our expenses are fixed costs, which do not fluctuate proportionately with net sales. Consequently, a percentage decline in our net sales has a greater percentage effect on our operating income. Any decline in our net sales could cause our profitability to be adversely affected. Because our business is working capital intensive, we rely on our ability to manage our product purchasing and customer credit policies. Our operations are working capital intensive, and our inventories, accounts receivable and accounts payable are key components of our working capital. We manage our inventories and accounts payable through our product purchasing policies and our accounts receivable through our customer credit policies. Approximately 95% of our net sales are credit sales, and although we take measures to secure lien and bond rights, our customers' ability to pay may depend on the economic strength of the construction industry and regional economies. If we fail to adequately manage our product purchasing or customer credit policies, our working capital and financial condition may be adversely affected. We depend on our vendors for materials and supplies. Unexpected product shortages or an increase in their prices could interrupt our operations and adversely affect our results of operations and financial condition. In total, we purchase materials and supplies from over 10,000 manufacturers and other vendors, not one of which accounted for more than 5% of our total material and supply purchases during fiscal year 2004. Despite this widely diversified base of manufacturers and vendors, we may still experience shortages as a result of unexpected industry demand or production difficulties. If this were to occur and we were unable to obtain a sufficient allocation of products from other manufacturers and vendors, there could be a short-term adverse effect on our results of operations and long-term adverse effect on our customer relationships and reputation. In addition, we have strategic relationships with key vendors. In the event we are unable to maintain those relationships, we may lose some of the competitive pricing advantages that those relationships offer us, which could, in turn, adversely affect our results of operations and financial condition. We may not be successful in identifying and consummating future acquisitions, which is an important element of our business strategy. We intend to continue to grow, in part, through strategic acquisitions. We compete with a number of other companies in pursuing future acquisitions, and some of those competitors may be more successful than we are in completing strategic acquisitions. Moreover, acquisitions we propose to make may be subject to antitrust reviews and may face other regulatory challenges. In addition, we may require additional debt or equity financing to fund future acquisitions, and that financing may not be available or on terms we consider reasonable. As a result of these and other factors, our ability to identify and consummate future acquisitions is uncertain. If we become subject to material liabilities under our self-insured programs, our financial results may be adversely affected. We provide workers' compensation, automobile and product/general liability coverage through a program that is partially self-insured. In addition, we provide medical coverage to our employees through a partially self-insured preferred provider organization. Our results of operations and financial condition may be adversely affected if the number and severity of insurance claims increase. Page 14 of 75 Risks Related to Our Industry Our operating results depend on the strength of the general economy, which is beyond our control. Demand for our products and services depend to a significant degree on construction, repair and maintenance spending in the commercial, residential, industrial and public infrastructure markets. The level of activity in these end-markets depends on a variety of factors that we cannot control, including: o In the commercial market, vacancy rates, interest rates, the availability of financing and regional and general economic conditions; o In the residential market, new housing starts and residential renovation projects, which are influenced by interest rates, availability of financing, housing affordability, unemployment, demographic trends, gross domestic product growth and consumer confidence; o In the industrial market, capital spending, the industrial economic outlook, corporate profitability, interest rates and capacity utilization and o In the public infrastructure market, interest rates, availability of public funds and general economic conditions. Weather conditions can also affect the timing of construction and the demand for our products and services. Although we have diversified our business to reduce our exposure to the seasonality and cyclicality of the construction markets through our focus on expanding our MRO and other replacement-related businesses, we continue to be sensitive to changes in the economy, which may adversely affect our results of operations and financial condition. We are especially susceptible to economic fluctuations in Florida, Texas, North Carolina, Georgia and Arizona, which collectively accounted for approximately 65% of our consolidated net sales in fiscal year 2004. Fluctuating commodity prices may adversely impact our operating results. The cost of steel, aluminum, copper, nickel alloys, polyvinyl chloride (pvc) and other commodities used in products distributed by us can be volatile. Although we attempt to pass increased costs to our customers, we are not always able to do so quickly or at all. Significant fluctuations in the cost of such commodities have adversely affected and in the future may adversely affect our results of operations and financial condition. The movement of manufacturing facilities overseas may adversely affect our operating results. The U.S. manufacturing industry has experienced, and is expected to continue to experience, a shift in production to overseas facilities. This shift has resulted in the closings of existing facilities in the United States, which has reduced, and may continue to reduce, the amount of our business in our Industrial PVF segment. If additional U.S. operations of our customers are moved overseas or if new plant construction in the United States continues to decline, our results of operations and financial condition may be adversely affected. Risks Related to Our Common Stock Our quarterly results may have an adverse effect on the market price of our common stock. Our future operating results may vary from quarter to quarter depending on factors such as seasonality and general economic conditions. If our financial results for a quarter fall below investors' expectations, the market price of our common stock may decline, perhaps significantly. Dividend payments are restricted and within the discretion of our board of directors. The payment of future dividends, if any, will be at the discretion of our board of directors, after taking into account various factors, including earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations. We are also party to debt instruments and agreements that contain provisions limiting the amount of dividends that we may pay. In the future, we may become a party to debt instruments or agreements that further restrict our ability to pay dividends. Moreover, our board of directors may in the future decide not to pay, or to reduce the amount of, dividends even when the aforementioned factors are positive. Our stock price may fluctuate substantially. Our common stock is traded on the New York Stock Exchange under the symbol "HUG." The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our Page 15 of 75 operating results, availability of capital, changes in general conditions in the economy, the financial markets, the wholesale construction, repair and maintenance industry or other developments affecting us, our customers or our competitors, some of which may be unrelated to our performance. Those fluctuations and demand for our products may adversely affect the price of our stock. In addition, if our results of operations fail to meet the expectations of investors, our stock price could decline. Furthermore, the stock market in general has experienced volatility that has often been unrelated to the operating performance of companies in our industry. These fluctuations and general economic, political and market conditions may adversely affect the market price of our common stock, regardless of our operating results. The volatility also could impair our ability in the future to offer common stock as a source of additional capital or as consideration in the acquisition of other businesses. Certain anti-takeover provisions may make our stock less attractive to investors. Certain provisions of our restated articles of incorporation, as amended, Florida law and our shareholders' rights plan may make it more difficult for a third party to acquire a controlling interest in us, even if a 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. In particular, these provisions include a provision dividing the board of directors into three classes of directors elected for staggered three-year terms; a provision authorizing the issuance of preferred stock without shareholder approval and a provision requiring that certain business combinations receive approval by two-thirds of our shares of voting stock. Available Information We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available on our website, www.hughessupply.com, under "Investor Relations", free of charge, as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. During the period covered by this report, we posted our periodic reports on Form 10-K, Form 10-Q, and our current reports on Form 8-K and any amendments to those documents to our website as soon as reasonably practicable after those reports were filed or furnished electronically with the SEC. ITEM 2. PROPERTIES Our corporate headquarters, a leased facility consisting of approximately 195,000 square feet, is located in Orlando, Florida. In addition, we own or lease approximately 600 properties serving 486 branches in 38 states. The typical sales branch consists of a combined office and warehouse facility with an average size of 19,000 square feet. We also operate six central distribution centers, with an average size of 125,000 square feet. We believe that our properties are in good condition and are suitable and adequate to carry out our business. None of the owned principal properties is subject to any encumbrance that is material to our consolidated operations. ITEM 3. LEGAL PROCEEDINGS We are involved in various legal proceedings arising in the normal course of our business. In the opinion of our management, none of the proceedings are material in relation to our consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter ended January 30, 2004. Page 16 of 75 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is listed on the New York Stock Exchange under the symbol "HUG". As of March 26, 2004, there were approximately 799 shareholders of record of our common stock. The following table presents the high and low sale prices for shares of our common stock for each quarterly period along with cash dividends per share in fiscal years 2004 and 2003: First Second Third Fourth Quarter Quarter Quarter Quarter Full Year - -------------------------------------------------------------------------------- Fiscal 2004 Market price per share: High $ 28.90 $ 39.11 $ 40.15 $ 51.75 $ 51.75 Low 19.77 28.69 32.19 38.59 19.77 - ------------------------------------------------------------------------------- Dividends per share $ 0.100 $ 0.100 $ 0.100 $ 0.100 $ 0.400 =============================================================================== Fiscal 2003 Market price per share: High $ 42.98 $ 44.98 $ 35.30 $ 34.55 $ 44.98 Low 29.20 33.24 25.84 24.74 24.74 - ------------------------------------------------------------------------------- Dividends per share $ 0.085 $ 0.085 $ 0.085 $ 0.100 $ 0.355 =============================================================================== Payment of future dividends, if any, will be at the discretion of our board of directors, after taking into account various factors, including earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations. There can be no assurance that dividends will be declared or paid any time in the future. Page 17 of 75 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as our financial statements, notes to those statements and other financial information appearing elsewhere in this report.
(in millions, except per share data and ratios) Fiscal Years (1) - ------------------------------------------------------------------------------------------------------------------------------- 2004 (2),(3) 2003 (3) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF INCOME: Net sales $ 3,253.4 $ 3,066.3 $ 3,037.7 $ 3,310.2 $ 2,994.9 Cost of sales 2,519.7 2,356.6 2,340.6 2,565.1 2,321.0 Gross margin ratio to net sales 22.6% 23.1% 22.9% 22.5% 22.5% - ------------------------------------------------------------------------------------------------------------------------------ Selling, general and administrative expenses $ 589.8 $ 568.0 $ 564.0 $ 590.6 $ 510.7 Percentage of net sales 18.1% 18.5% 18.6% 17.8% 17.1% Depreciation and amortization (4) 21.2 20.5 31.1 32.6 29.8 Operating income 122.7 121.2 101.3 106.3 133.4 Operating margin 3.8% 4.0% 3.3% 3.2% 4.5% - ------------------------------------------------------------------------------------------------------------------------------ Interest and other income $ 6.4 $ 7.3 $ 9.3 $ 17.7 (5) $ 8.0 Interest expense 34.6 30.3 35.9 43.3 31.8 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes $ 94.5 $ 98.2 $ 74.7 $ 80.7 $ 109.6 Percentage of net sales 2.9% 3.2% 2.5% 2.4% 3.7% Income taxes 36.8 40.1 30.6 34.2 43.7 Net income 57.7 58.1 44.1 46.5 65.9 Percentage of net sales 1.8% 1.9% 1.5% 1.4% 2.2% - ------------------------------------------------------------------------------------------------------------------------------ Earnings per share: Basic $ 2.52 $ 2.50 $ 1.90 $ 2.00 $ 2.82 Diluted 2.46 2.45 1.88 1.97 2.80 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding: Basic 22.9 23.2 23.2 23.2 23.4 Diluted 23.5 23.7 23.4 23.6 23.5 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEETS: Working capital (current assets less current liabilities) $ 603.6 $ 558.8 $ 588.3 $ 679.1 $ 653.0 Property and equipment, net 161.8 157.8 145.7 152.1 144.8 Goodwill 609.8 320.1 263.8 249.8 243.4 Total assets 1,881.3 1,434.9 1,293.2 1,406.7 1,367.9 Total debt 413.3 441.9 422.9 531.5 535.8 Shareholders' equity 1,012.0 644.8 594.5 570.0 522.4 - ------------------------------------------------------------------------------------------------------------------------------ Current ratio 2.4 to 1 2.5 to 1 3.1 to 1 3.2 to 1 3.2 to 1 Total debt-to-capital 29% 41% 42% 48% 51% - ------------------------------------------------------------------------------------------------------------------------------ OTHER: Cash dividends per share $ 0.400 $ 0.355 $ 0.340 $ 0.340 $ 0.340 Return on average shareholders' equity 7.0% 9.4% 7.6% 8.5% 13.1% - ------------------------------------------------------------------------------------------------------------------------------
(1) Our fiscal year is a 52 or 53-week period ending on the last Friday in January. All fiscal years presented contained 52 weeks, while fiscal year 2003 contained 53 weeks. (2) Results for fiscal year 2004 include the results of Century Maintenance Supply, Inc. and Marden Susco, LLC from the acquisition dates of December 19, 2003 and August 4, 2003, respectively. (3) Results for fiscal years 2004 and 2003 include the results of Utiliserve Holdings, Inc. from the acquisition date of August 9, 2002. (4) Effective Janury 26, 2002, we adopted Statement of Financial Accounting Standard ("FAS") 142, Goodwill and Other Intangible Assets. Under FAS 142, goodwill is no longer amortized. (5) Includes $11.0 million gain on sale of pool and spa business in January 2001. Page 18 of 75 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of certain significant factors that have affected our financial condition as of January 30, 2004, and the results of operations for fiscal years 2004, 2003 and 2002. This information should be read in conjunction with our consolidated financial statements and notes thereto contained herein. Business Founded in 1928, we are one of the nation's largest diversified wholesale distributors of construction, repair and maintenance-related products. We distribute over 350,000 products to more than 100,000 customers through our 486 branches located in 38 states. Our customers include electrical, plumbing and mechanical contractors; public utilities; property management companies; municipalities and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States. Fiscal Year Our fiscal year is a 52- or 53-week period ending on the last Friday in January. Fiscal year 2004 and fiscal year 2002 contained 52 weeks while fiscal year 2003 contained 53 weeks. The additional week in fiscal year 2003 was included in the first quarter. Segment Information During the third quarter of fiscal year 2004, we revised our reporting structure to provide additional disclosure by realigning our previously reported operating segments (Electrical/Plumbing, Industrial PVF and Water & Sewer/Building Materials) on a more disaggregated basis by product line into six operating segments and an All Other category. The revised operating segments are: Water & Sewer, Plumbing/HVAC, MRO, Utilities, Electrical and Industrial PVF. The All Other category includes our Building Materials, Fire Protection and Mechanical Industrial product lines. The Industrial PVF segment remains unchanged. The corporate category includes corporate level expenses not allocated to our operating segments. Inter-segment sales are excluded from net sales presented for each segment. Operating income for each segment includes certain corporate expense allocations for employee benefits, corporate overhead expenses, data processing expenses and property/casualty insurance. These allocations are based on consumption or at a standard rate determined by management. In connection with the change of our reporting structure and to more accurately reflect consumption, we changed our method of allocating corporate overhead expenses to the segments. All prior period segment results have been reclassified to reflect these changes. Business Combinations and Divestitures On December 19, 2003, we acquired Century Maintenance Supply, Inc. ("Century"), a leading distributor of MRO products serving the multi-family apartment market. Century has a nationwide distribution network of 39 strategically located branches in major metropolitan markets in 35 states. The acquisition will enable us to become a leader in the apartment MRO market and facilitate entry into adjacent customer markets such as hospitality and lodging, assisted living and healthcare, education and government. Century's results of operations have been included in our consolidated statements of income since December 19, 2003. On August 4, 2003, we acquired substantially all of the net assets of Marden Susco, LLC ("Marden Susco"), a southern California supplier of underground piping products for use in municipal water, sewer and storm drain systems. The acquisition allowed us to expand our Water & Sewer business into California. The results of Marden Susco's operations have been included in our consolidated statements of income since August 4, 2003. On August 9, 2002, we acquired all of the capital stock of Utiliserve Holdings, Inc. and its subsidiaries ("Utiliserve"), a wholesale distributor of electrical transmission and distribution products and services to the U.S. electric utility industry. As a result of the acquisition, we are a leading provider of electrical transmission and distribution products and services in the United States. We also expanded our development of customer contracts as a result of Utiliserve's value-added services, including vendor-managed inventory, collaborative emergency response, and job-site delivery. The results of Utiliserve's operations have been included in our consolidated statements of income since August 9, 2002. Page 19 of 75 Prior to fiscal year 2001, our Plumbing/HVAC business conducted international operations in Mexico. In fiscal year 2001, we experienced continued operating losses in these international operations. As a result of these losses and based on an analysis of future profitability and anticipated customer demand for these businesses, we terminated our international operations in fiscal year 2002. In fiscal year 2000, we acquired bestroute.com ("bestroute"). In the fourth quarter of fiscal year 2001, bestroute was not able to meet its operating plan and incurred substantial operating losses attributable to its inability to gain market acceptance and generate net sales sufficient to cover its operating costs. As a result of these continued losses and viability concerns, we discontinued bestroute's operations in March 2001. Results of Operations Same-Store Sales Methodology We compute and disclose same-store sales, which exclude net 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 segment and physical location and (c) closed and divested branches. All same-store sales amounts and percentages presented in this report exclude the impact of the additional week of net sales in the first quarter of fiscal year 2003. Overview Overall, our performance in fiscal year 2004 reflected continued strength in the residential construction market and improvement in the commercial construction industry. After a slow start in the first half of the year, our business came back strongly in the second half, delivering sales beyond our expectations, particularly in the fourth quarter. We achieved 2% same-store sales growth in fiscal year 2004, our first year of positive same-store sales growth since fiscal year 2001. Gross margin ratio to net sales decreased due to competitive pressures and changes to our product mix, with historically lower gross margin businesses like Utilities comprising a higher percentage of our consolidated net sales. Offsetting some of the sell-side margin pressure were higher vendor rebates and discounts as a result of our vendor consolidation efforts and improved programs with our suppliers. Performance in fiscal year 2004 was hindered by a significant sales and profitability decrease in the Industrial PVF segment, our highest operating margin business, as well as underperforming branches in our Plumbing/HVAC segment. The comparison with fiscal year 2003 was also impacted by the additional week in the first quarter of fiscal year 2003. We experienced higher operating expenses in freight, employee healthcare, marketing and insurance during fiscal year 2004. Given our fixed cost structure, we will continue to manage expenses carefully to leverage sales. However, we are also increasing our level of investment spending, particularly in information technology, through various initiatives such as the implementation of our Hughes Unified distribution platform and new systems in finance and data warehousing. We continue to maintain a focus on working capital improvement, and as a result, net cash flow provided by operating activities grew to a record $145.9 million for the year. Initiatives to improve our working capital efficiency to support sales growth will continue and we expect operating cash flow to continue to be strong. In January 2004, we completed an equity offering of 6,900,000 shares and, used the net proceeds primarily to fund our acquisition of Century and to repay indebtedness under our revolving credit agreement. The equity offering strengthened our capital structure by lowering our total debt-to-capital ratio to 29% from the previous year's 41%, establishing a stronger foundation to support future organic and acquisition growth. Page 20 of 75 Net Sales Net sales are affected by numerous factors, including, but not limited to, seasonality, weather, commodity pricing, competition and construction cycles. Consolidated and same-store net sales by segment in fiscal years 2004, 2003 and 2002 were as follows (dollars in millions):
Consolidated Net Sales -------------------------------------------------------------------- Fiscal Years Ended ----------------------------------- % Variance % Variance 2004 2003 2002 2004 to 2003 2003 to 2002 - ----------------------------------------------------------------------------------------- Water & Sewer $ 922.4 $ 877.2 $ 833.1 5.2% 5.3% Plumbing/HVAC 842.1 826.9 855.3 1.8% (3.3%) MRO 158.7 118.9 110.5 33.5% 7.6% Utilities 363.8 248.3 144.9 46.5% 71.4% Electrical 362.8 375.5 430.6 (3.4%) (12.8%) Industrial PVF 283.2 313.9 330.4 (9.8%) (5.0%) All Other 320.4 305.6 332.9 4.8% (8.2%) - -------------------------------------------------------- $ 3,253.4 $ 3,066.3 $ 3,037.7 6.1% 0.9% ======================================================== Same-Store Sales ----------------------------------------------------- Fiscal Years Ended ---------------------- Dollar % Variance 2004 2003 (1) Variance 2004 to 2003 - ----------------------------------------------------------------------------------------- Water & Sewer $ 885.9 $ 850.7 $ 35.2 4.1% Plumbing/HVAC 825.2 794.5 30.7 3.9% MRO 124.7 117.0 7.7 6.6% Utilities 141.3 151.0 (9.7) (6.4%) Electrical 362.7 367.5 (4.8) (1.3%) Industrial PVF 283.2 308.1 (24.9) (8.1%) All Other 316.2 291.9 24.3 8.3% - ---------------------------------------------------------------------- $ 2,939.2 $ 2,880.7 $ 58.5 2.0% ====================================================================== Same-Store Sales ------------------------------------------------------- Fiscal Years Ended ---------------------- Dollar % Variance 2003 (1) 2002 Variance 2003 to 2002 - ----------------------------------------------------------------------------------------- Water & Sewer $ 787.8 $ 773.0 $ 14.8 1.9% Plumbing/HVAC 740.8 751.0 (10.2) (1.4%) MRO 118.9 109.9 9.0 8.2% Utilities 146.1 146.8 (0.7) (0.5%) Electrical 371.7 425.9 (54.2) (12.7%) Industrial PVF 311.5 334.3 (22.8) (6.8%) All Other 338.3 356.2 (17.9) (5.0%) - ---------------------------------------------------------------------- $ 2,815.1 $ 2,897.1 $ (82.0) (2.8%) ======================================================================
(1) The difference in same-store sales amounts for fiscal 2003 is due to our same-store sales methodology. See "Same-Store Sales Methodology". Consolidated net sales in fiscal year 2004 totaled $3,253.4 million, an increase of $187.1 million or 6.1%, compared to fiscal year 2003's net sales of $3,066.3 million due partially to the acquisitions of Century, Marden Susco and Utiliserve as well as strong residential construction activity and an improvement in the commercial construction market during the second half of the fiscal year. The Century and Marden Susco acquisitions added net sales of $29.2 million and $31.2 million, respectively, during fiscal year 2004. A full year of Utiliserve activity in fiscal year 2004 increased net sales by $131.3 million. These increases, along with an increase in consolidated net sales from newly-opened branches of $6.4 million were partially offset by a decrease of $14.4 million related to closed and/or combined branches and a benefit of $55.1 million included in fiscal year 2003's consolidated net sales due to the additional week included in its first quarter. Page 21 of 75 In fiscal year 2004, consolidated same-store sales increased $58.5 million or 2.0%. This increase was due to the procurement of several large subdivision and municipal projects in the midwestern water and sewer markets, an overall improvement in the commercial construction markets served by the Plumbing/HVAC segment and the Building Materials product line in the eastern United States, and market share growth in the MRO segment. These increases were partially offset by lower sales in the Industrial PVF segment due to weak end-market demand and the loss of a large Utilities segment customer during the second quarter of fiscal year 2004. Consolidated net sales in fiscal year 2003 increased $28.6 million or 0.9% compared to fiscal year 2002. Acquired and newly-opened branches accounted for $141.9 million of the increase. The majority of net sales for acquired and newly-opened branches were attributable to the Utilities and Water & Sewer segments, which accounted for $102.0 million and $34.8 million, respectively, of this increase. Included in the Utilities segment's acquired and newly-opened branch sales was $95.3 million of net sales related to the acquisition of Utiliserve. The additional week included in the first quarter of fiscal year 2003 added $55.1 million of net sales. Partially offsetting these increases was a decline of $82.0 million or 2.8% in same-store sales largely as a result of a slow-down in the non-residential building and commercial construction sectors and a decline in Industrial PVF sales due to the postponement or cancellation of certain projects. Consolidated net sales from closed and/or combined branches also decreased by $86.4 million. Water & Sewer Net sales in fiscal year 2004 totaled $922.4 million, an increase of $45.2 million or 5.2% compared to fiscal year 2003's net sales of $877.2 million. This increase was partially due to the acquisition of Marden Susco, which resulted in additional net sales of $31.2 million in fiscal year 2004. Same-store sales increased $35.2 million or 4.1% as a result of increased subdivision projects and increased sewer and waterline projects during fiscal year 2004. Partially offsetting these increases was a $14.5 million decrease resulting from the additional week in the first quarter of fiscal year 2003 and a $6.3 million decrease related to closed and/or combined branches. Same-store sales increased $14.8 million or 1.9% in fiscal year 2003 compared to fiscal year 2002 primarily due to favorable public and residential construction in fiscal year 2003, which increased approximately 6%. In addition, this segment was awarded several large infrastructure projects, including an automated water meter project for $3.2 million. Partially offsetting these increases was a reduction of $4.1 million in the concrete product line's net sales mainly due to decreased demand in the Texas market. Plumbing/HVAC Net sales in fiscal year 2004 totaled $842.1 million, an increase of $15.2 million or 1.8% compared to fiscal year 2003's net sales of $826.9 million. This increase was primarily due to sales growth from acquired and newly-opened branches of $5.3 million and same-store sales increases of $30.7 million or 3.9% due to increased business on several large accounts due to improved market penetration in fiscal year 2004 and overall improvement in the commercial plumbing market. These increases were offset partially by the additional week in the first quarter of fiscal year 2003, which added $14.5 million to fiscal year 2003's net sales as well as a decline of $6.3 million of net sales related to closed and/or combined branches. Same-store sales decreased $10.2 million or 1.4% in fiscal year 2003 compared to fiscal year 2002 largely as a result of competitive pressures in certain local markets, compounded by weak commercial and industrial business. In addition, same-store sales in the Texas market were also unfavorably impacted due to inclement weather conditions. Partially offsetting these decreases was an increase in sales in the Plumbing/HVAC's western region, due in part to the expansion of our customer base. MRO Net sales for fiscal year 2004 totaled $158.7 million, an increase of $39.8 million or 33.5% compared to fiscal year 2003's net sales of $118.9 million. This increase was partially due to the acquisition of Century, which resulted in additional net sales of $29.2 million in fiscal year 2004. Same-store sales increased $7.7 million or 6.6%, and net sales for newly-opened branches increased $4.8 million from the prior year. Despite historically high vacancy rates, net sales increased due to our continued focus on securing national accounts to increase market share and our construction services initiative. Under the national accounts initiative, the MRO segment targets large property management companies to become their preferred supplier. The construction services initiative is geared toward renovation and refurbishment of older apartment complexes. These increases were partially offset by the impact of the additional week in the first quarter of fiscal year 2003, which added $1.9 million to net sales in fiscal year 2003. Same-store sales increased $9.0 million or 8.2% in fiscal year 2003 compared to fiscal year 2002 primarily due to MRO's strategic focus on both its national accounts and construction services initiatives. Page 22 of 75 Utilities Net sales in fiscal year 2004 totaled $363.8 million, an increase of $115.5 million or 46.5% compared to the fiscal year 2003's net sales of $248.3 million. A full year of Utiliserve activity in fiscal year 2004 increased net sales by $131.3 million. This increase was partially offset by the impact of the additional week in the first quarter of fiscal year 2003, which added $2.9 million to net sales in the prior year. Same-store sales decreased $9.7 million or 6.4% due primarily to the loss of a large electric utility customer during the second quarter of fiscal year 2004. Utiliserve's net sales are not reflected in same-store sales due to our calculation methodology. Despite a highly competitive market and a general slowdown in the economy, the Utilities segment's same-store net sales remained relatively flat in both periods with a $0.7 million or 0.5% decrease in fiscal year 2003 compared to fiscal year 2002. This resulted from sales initiatives aimed at providing value-added services, such as the installation and testing of automated electric utility meters. Electrical Net sales in fiscal year 2004 totaled $362.8 million, a decrease of $12.7 million or 3.4% compared to fiscal year 2003's net sales of $375.5 million. This decrease resulted, in part, from the additional week in the first quarter of fiscal year 2003, which added $7.5 million to net sales in fiscal year 2003, and a decline of $0.4 million related to closed and/or combined branches. Same-store sales decreased $4.8 million or 1.3% primarily due to weakness in the commercial construction and industrial markets, particularly in office buildings and hotel construction during the first half of fiscal year 2004. The economic downturn in these markets experienced over the last three years has placed significant pressure on the electrical distribution industry; however during the fourth quarter of fiscal year 2004, sales and bid activity improved as commercial construction activity increased. Same-store sales decreased $54.2 million or 12.7% in fiscal year 2003 compared to fiscal year 2002 largely as a result of the economic slowdown in the electrical commercial construction market, particularly in the southeast and Texas. Competitive pressures in certain local markets, weak commercial, industrial and original equipment manufacturer (OEM) business and inclement weather conditions in the Texas market also contributed to the decrease. Industrial PVF Net sales in fiscal year 2004 totaled $283.2 million, a decrease of $30.7 million or 9.8% compared to fiscal year 2003's net sales of $313.9 million. Contributing to the decrease was $7.2 million of net sales related to the additional week in the first quarter of fiscal year 2003. Same-store sales decreased $24.9 million or 8.1% primarily due to the sharp decline in power and petrochemical industry capital spending and new plant construction. Same-store sales decreased $22.8 million or 6.8% in fiscal year 2003 compared to fiscal year 2002. This decrease reflected the postponement or cancellation of certain gas utility, petrochemical and power generation plant construction and/or rehabilitation projects in late fiscal year 2002 and throughout fiscal year 2003. These projects were postponed and cancelled by our customers due to economic conditions, which resulted in reduced plant utilization and reduced capital spending. The same-store sales decline was partially offset by increased sales prices for certain commodity-based products, including stainless steel and nickel alloys. All Other Net sales in fiscal year 2004 totaled $320.4 million, an increase of $14.8 million or 4.8% compared to fiscal year 2003's net sales of $305.6 million. Same-store sales increased $24.3 million or 8.3%. The Building Materials product line benefited from the strong increase in the number and size of construction projects in Florida and higher non-building construction starts. The Fire Protection product line also posted strong sales growth as a result of expansion into new markets and increases in subdivision and waterline projects. These increases were partially offset by the additional week of sales in the first quarter of fiscal year 2003, which added $6.6 million to net sales in fiscal year 2003, as well as a decline in net sales of $3.6 million related to closed and/or combined branches. Same-store sales decreased $17.9 million or 5.0% in fiscal year 2003 compared to fiscal year 2002 primarily due to declines in the Building Materials and Fire Protection product lines, which decreased 4.2% and 11.8%, respectively. These decreases were largely attributable to a slowdown in non-residential and commercial construction markets particularly in the eastern region for the Fire Protection product line and the Atlanta market for the Building Materials product line. Page 23 of 75 Gross Margin Gross margin is affected by numerous factors, including, but not limited to, product mix changes, commodity pricing, competition, vendor rebates, inventory charges and direct shipments compared to stock sales. The decrease in gross margin ratio to net sales to 22.6% in fiscal year 2004 from 23.1% in fiscal year 2003 was driven primarily by competitive pricing pressures and the mix of our net sales activity. In fiscal year 2004, the Utilities segment, which has historically generated lower gross margins than our other segments, comprised a higher percentage of consolidated net sales, and the Industrial PVF segment, a higher gross margin business, comprised a lower percentage of consolidated net sales. Additionally an unfavorable margin impact resulting from higher inventory reserve requirements was partially offset by an increase in vendor rebates resulting from our continued vendor consolidation efforts and improved programs with our suppliers. Gross margin ratio to net sales was 23.1% and 22.9% in fiscal year 2003 and fiscal year 2002, respectively. Gross margin ratio to net sales benefited from increased vendor rebates and discounts as a result of our vendor consolidation efforts, and a reduction in inventory reserve requirements attributable to lower dead stock and excess inventory levels. Partially offsetting this improvement was the addition of Utiliserve to the sales mix, which generates lower gross margins but higher operating margins than our other segments. Pricing pressures brought about by intensified competition resulting from the slowdown in the non-residential and commercial construction sectors and the adverse impact of deflationary pressures on pvc and ductile iron pipe products also unfavorably impacted gross margin ratio to net sales in fiscal year 2003. Operating Expenses We are primarily a fixed cost business; consequently, a percentage change in our net sales has a greater percentage effect on our operating expense ratio. Operating expenses and percentage of net sales for fiscal years 2004, 2003 and 2002 were as follows (dollars in millions):
Operating Expenses Percentage of Net Sales ----------------------------- ------------------------------- Fiscal Years Ended Fiscal Years Ended ----------------------------- ------------------------------- 2004 2003 2002 2004 2003 2002 - ---------------------------------------------------------------- ------------------------------- Personnel expenses $ 386.1 $ 379.8 $ 373.9 11.9% 12.4% 12.3% Other selling, general and administrative expenses 203.7 188.2 190.1 6.3% 6.1% 6.3% Depreciation and amortization 21.2 20.5 31.1 0.7% 0.7% 1.0% Impairment of long-lived assets -- -- 0.7 -- -- -- - ---------------------------------------------------------------- Total operating expenses $ 611.0 $ 588.5 $ 595.8 18.8% 19.2% 19.6% ================================================================
As a percentage of net sales, personnel expenses were 11.9% and 12.4% in fiscal years 2004 and 2003, respectively. Our workforce increased 16.7% from approximately 7,200 employees at January 31, 2003 to approximately 8,400 employees at January 30, 2004 primarily as a result of the acquisitions of Century and Marden Susco. Century and Marden Susco added $7.7 million of personnel expenses to fiscal year 2004, and a full year of Utiliserve activity during the year additionally increased personnel expenses by $6.1 million. Employee healthcare insurance expenses increased $3.6 million due to increased enrollment and higher rates. The primary factor contributing to the decrease in personnel expenses as a percentage of net sales was a favorable impact resulting from a change to our employee vacation policy. Under the new vacation policy adopted in fiscal year 2004, employees earn their vacation entitlement ratably during the year. Previously, vacation was granted at the beginning of the calendar year. This policy change resulted in a net reversal of our vacation accrual of $8.1 million. Personnel expenses were also favorably impacted by the additional week in fiscal year 2003, which added approximately $7.2 million to the prior year's first quarter. As percentage of net sales, other selling, general and administrative expenses were 6.3% and 6.1% in fiscal years 2004 and 2003, respectively. The increase was primarily attributable to higher fuel prices, resulting in increased shipping and freight costs of $5.3 million, a $1.7 million increase in marketing expenses related to enhanced customer award programs, an increase of $1.6 million in telecommunications expenses attributable to increased bandwidth capacity, and an insurance expense increase of $1.3 million due primarily to increased insurance premiums. Fiscal year 2004 also included expenses of $2.2 million primarily for lease obligations related to the closure of seven Plumbing/HVAC branches and our Texas distribution center, and $2.2 million associated with the relocation of our corporate offices. These increases were offset by a $4.5 million decrease in our provision for doubtful accounts due primarily to lower write-offs of uncollectible customer accounts and higher recoveries of previously written off receivables. The additional week in the first quarter of fiscal year 2003 included $1.2 million of other selling, general and administrative expenses. Page 24 of 75 As a percentage of net sales, personnel expenses were 12.4% and 12.3% in fiscal year 2003 and fiscal year 2002, respectively. Our workforce remained essentially flat with approximately 7,200 employees at January 31, 2003 and January 25, 2002. At January 31, 2003, this included approximately 200 employees as a result of the acquisition of Utiliserve, which increased personnel expenses by $5.6 million in fiscal year 2003. The additional week in the first quarter of fiscal year 2003 also added $7.2 million of personnel expenses. The primary factors contributing to the increase in personnel expenses in fiscal year 2003 were higher employee health insurance expense ($2.4 million) and incentive compensation expense ($6.5 million) associated with bonus programs and restricted stock issued to key executives during fiscal year 2002. These increases were partially offset by reductions in overtime ($1.3 million), contract labor ($2.6 million) and severance expense ($2.7 million). In fiscal year 2003, we continued with our hiring freeze and wage and salary management programs, which included limits on merit and promotional salary increases. These savings were offset in fiscal year 2003 by incremental personnel costs associated with the Hughes Unified implementation and increased employee health insurance. As a percentage of net sales, other selling, general and administrative expenses were 6.1% and 6.3% in fiscal year 2003 and fiscal year 2002, respectively. The additional week in the first quarter of fiscal year 2003 added $1.2 million of other selling, general and administrative expenses. We experienced higher losses totaling $1.5 million on our property/casualty insurance program and increased data processing expenses of $1.0 million primarily for consulting related to the Hughes Unified operating system. We also made donations of $0.9 million in fiscal year 2003 to Hughes Supply Foundation, Inc., a not-for-profit charitable organization. Offsetting these increases were expenses of $3.1 million that were incurred in fiscal year 2002, primarily for lease obligations ($1.6 million) and other contractual obligations ($1.5 million), related to the closure and/or consolidation of branches in fiscal year 2002. Our provision for doubtful accounts decreased $2.0 million in fiscal year 2003 due to provisions in fiscal year 2002 for uncollectible receivables related to our international business. As a percentage of net sales, depreciation and amortization were 0.7% and 1.0% in fiscal year 2003 and fiscal year 2002, respectively. Of the total $10.6 million decrease, $9.2 million related to the amortization of goodwill, which was eliminated in fiscal year 2003 under Statement of Financial Accounting Standards ("FAS") 142, Goodwill and Other Intangible Assets. The remaining decrease of $1.4 million was largely the result of reduced capital spending in fiscal year 2003 along with the elimination of depreciation expense related to our forklift fleet and trailers. Certain of these assets were sold and subsequently leased-back by us in fiscal year 2002. In the fourth quarter of fiscal year 2002, we recorded an impairment loss of $0.7 million related to goodwill of one entity in our Plumbing/HVAC segment. Operating Income We are primarily a fixed cost business; therefore all operating segments were favorably impacted in fiscal year 2003 by the leverage gained from the additional week of net sales. Operating income is affected significantly by fluctuations in net sales as well as changes in our business and product mix. Operating income by segment and as a percentage of net sales in fiscal years 2004, 2003 and 2002 was as follows: (dollars in millions): Operating Income (Loss)
------------------------------------------------------------------ Fiscal Years Ended Percentage of Net Sales ----------------------------- ------------------------------- 2004 2003 2002 2004 2003 2002 ----------------------------- ------------------------------- Water & Sewer $ 45.1 $ 40.4 $ 38.9 4.9% 4.6% 4.7% Plumbing/HVAC 8.4 14.0 (2.8) 1.0% 1.7% (0.3%) MRO 10.1 8.8 5.8 6.4% 7.4% 5.2% Utilities 13.7 10.2 7.2 3.8% 4.1% 5.0% Electrical 8.2 8.1 12.8 2.3% 2.2% 3.0% Industrial PVF 23.0 31.7 29.1 8.1% 10.1% 8.8% All Other 14.2 8.0 10.3 4.4% 2.6% 3.1% ----------------------------- $ 122.7 $ 121.2 $ 101.3 3.8% 4.0% 3.3% =============================
Page 25 of 75 Operating income in fiscal year 2004 totaled $122.7 million, increasing $1.5 million or 1.2%, compared to fiscal year 2003's operating income of $121.2 million. Operating income as a percentage of net sales decreased 20 basis points to 3.8% in fiscal year 2004 compared to 4.0% in fiscal year 2003 due primarily to a decline in Industrial PVF net sales and profitability as a result of the significant downturn in the petrochemical and power industries, and the additional week included in the first quarter of fiscal year 2003, which improved the prior year's operating income leverage by $4.6 million. Partially offsetting these decreases was operating income from the acquisitions of Century and Marden Susco, which collectively added $3.2 million of operating income to fiscal year 2004. A full year of Utiliserve activity in fiscal year 2004 also increased operating income $5.7 million. Operating income in fiscal year 2003 totaled $121.2 million, increasing $19.9 million or 19.6%, compared to operating income of $101.3 million in fiscal year 2002. Operating income as a percentage of net sales was 4.0% and 3.3% in fiscal year 2003 and fiscal year 2002, respectively. The 70 basis points increase was primarily driven by the elimination of $9.2 million of goodwill amortization, which is no longer required under FAS 142, combined with higher gross margins, which improved 20 basis points in fiscal year 2003. Since we are primarily a fixed cost business, with the most significant variable expense being cost of sales, operating income for all of our segments was also favorably impacted by the additional week in fiscal year 2003, which added approximately $4.6 million of operating income. Water & Sewer Operating income as a percentage of net sales increased to 4.9% in fiscal year 2004 from 4.6% in fiscal year 2003. The 30 basis points increase in fiscal year 2004 was due primarily to increased sales volume and stable margins on large-scale projects in relation to fixed expenses. Operating income as a percentage of net sales remained essentially flat at 4.6% and 4.7% in fiscal year 2003 and fiscal year 2002, respectively. The leverage gained from the additional week included in fiscal year 2003 and the elimination of goodwill amortization in accordance with FAS 142 was offset by lower sales volume and reduced gross margins in relation to fixed expenses for our Water & Sewer segment. The decrease in gross margin was due in part to competitive pressures and deflationary pricing on pvc and ductile iron pipe products. Several low margin infrastructure projects combined with a higher proportion of direct shipments, which typically generate lower gross margins, also negatively impacted gross margins in fiscal year 2003. Plumbing/HVAC Operating income as a percentage of net sales decreased to 1.0% of net sales in the fiscal year 2004 from 1.7% of net sales in fiscal year 2003. The 70 basis points decrease during fiscal year 2004 was primarily due to lower gross margin direct shipments comprising a higher percentage of the sales mix as well as increased selling, general and administrative expenses driven by costs associated with closing of seven underperforming branches and our Texas distribution center during January 2004. These decreases were partially offset by lower personnel expenses resulting from headcount reductions. Additionally fiscal year 2003's performance was favorably impacted by the leverage gained from the additional week in its first quarter. As a percentage of net sales, operating income increased to 1.7% in fiscal year 2003 from an operating loss of 0.3% in fiscal year 2002. The 200 basis points improvement in operating income was largely attributable to lower provisions for doubtful accounts, the elimination of goodwill amortization in accordance with FAS 142 and the leverage gained from the additional week included in fiscal year 2003. The provision for doubtful accounts decreased to $2.5 million in fiscal year 2003 from $6.3 million in fiscal year 2002 largely due to the economic slowdown that affected our markets, particularly our international business, during late fiscal year 2001. In fiscal year 2002, we recorded provisions for doubtful accounts of $3.9 million for our international business. Gross margin also improved due, in part, to the closure of certain branches in fiscal year 2002. During the third and fourth quarters of fiscal year 2002, we closed 23 branches in the Plumbing/HVAC segment because these branches did not strategically fit into our core businesses and/or they did not perform to expectations. These branches generally yielded lower gross margins in relation to the other branches. Gross margin was also favorably impacted by margin improvement programs initiated during fiscal year 2002, including increases in vendor rebate programs and focused purchasing. MRO Operating income as a percentage of net sales decreased to 6.4% in fiscal year 2004 from 7.4% in fiscal year 2003. The decrease of 100 basis points in fiscal year 2004 was primarily driven by lower gross margins due to changes in sales mix and higher selling, general and administrative expenses partially attributable to start-up costs associated with newly-opened Page 26 of 75 branches. Additionally fiscal year 2003's performance was favorably impacted by the leverage gained from the additional week in its first quarter. Operating income as a percentage of net sales was 7.4% and 5.2% in fiscal year 2003 and fiscal year 2002, respectively. The 220 basis points improvement was due to the leverage gained from the additional week included in the first quarter of fiscal year 2003 combined with substantially higher sales volumes and gross margin improvements. The increase in gross margin was primarily attributable to more focused purchasing and a change in sales mix from lower margin products such as appliances to higher margin products, including imported items such as plumbing fixtures. Utilities Operating income as a percentage of net sales decreased to 3.8% in fiscal year 2004 from 4.1% in fiscal year 2003. The 30 basis points decrease was primarily due to lower gross margins due to competitive pressures. Increased selling, general and administrative expenses were partially offset by lower provisions for doubtful accounts due to the recovery of a significant customer account in fiscal year 2004. Additionally fiscal year 2003's performance was favorably impacted by the leverage gained from the additional week in its first quarter. Operating income as a percentage of net sales decreased to 4.1% in fiscal year 2003 from 5.0% in fiscal year 2002. Operating income was negatively impacted by lower gross margins, which resulted from a change in sales mix. Partially offsetting this decrease was the leverage gained from the additional week included in fiscal year 2003 and the acquisition of Utiliserve, which generates higher operating income returns compared to the Utilities segment and Hughes as a whole. Electrical Operating income as a percentage of net sales remained relatively flat at 2.3% and 2.2% in fiscal year 2004 and fiscal year 2003, respectively. Reduced selling, general and administrative expenses were proportionate with lower sales volumes resulting from competitive pressures and weak commercial and industrial markets. Gross margins benefited from improved vendor rebates, which resulted from our continued focus on vendor consolidation efforts and improved programs with suppliers. Operating income as a percentage of net sales decreased to 2.2% in fiscal year 2003 from 3.0% in the fiscal year 2002. Lower sales volumes in relation to the fixed expenses for the Electrical segment offset the leverage gained from the additional week included in fiscal year 2003 and the elimination of goodwill amortization in accordance with FAS 142. Partially offsetting this decline was improved gross margin, largely due to the implementation of centralized pricing on the Hughes Unified operating system. Gross margin also benefited from margin improvement programs initiated during fiscal year 2002, including increases in vendor rebate programs, more focused purchasing and reduced dead stock inventories, which resulted from the sale, disposal or return of inventories to our vendors. Industrial PVF Operating income as a percentage of net sales decreased to 8.1% in fiscal 2004 from 10.1% in fiscal year 2003. The decrease was primarily due to substantially lower sales volumes and gross margins in fiscal year 2004 due to the sharp decline in power and petrochemical industry capital spending and new plant construction. Operating income as a percentage of net sales increased to 10.1% in fiscal year 2003 from 8.8% in fiscal year 2002. The Industrial PVF segment benefited from the leverage gained from the additional week in fiscal year 2003 and the elimination of goodwill amortization in accordance with FAS 142. Despite reduced sales volumes in fiscal year 2003, the Industrial PVF segment was able to increase gross margin by 190 basis points. This gross margin improvement in fiscal year 2003 was due to increased sales prices for certain commodity-based products, including stainless steel and nickel alloys. Gross margin also benefited from increases in the vendor rebate programs and reduced dead stock inventories, which resulted from the sale, disposal or return of inventories to the vendors. All Other Operating income as a percentage of net sales increased to 4.4% in fiscal year 2004 from 2.6% in fiscal year 2003. Significant increases in sales volumes, particularly strong sales growth in the Building Materials and Fire Protection product lines, resulted in a 170 basis points improvement in fiscal year 2004. These increases were partially offset by decreases in gross margins on stock shipments associated with competitive pressures. Page 27 of 75 Operating income as a percentage of net sales decreased to 2.6% in fiscal year 2003 from 3.1% in fiscal year 2002. Higher provisions for doubtful accounts and lower gross margins offset the leverage gained from the additional week in fiscal year 2003 and the elimination of goodwill amortization under FAS 142. Gross margin decreased primarily as a result of competitive pressures and deflationary pricing on lumber and plywood products in the Building Materials product line. Interest and Other Income Interest and other income totaled $6.4 million, $7.3 million, and $9.3 million in fiscal years 2004, 2003 and 2002, respectively. The decrease in fiscal 2004 was primarily due to reduced collections of service charge income on past due or delinquent accounts. The decrease in interest and other income in fiscal year 2003 was attributable to reduced interest income of $1.5 million, of which $0.9 million related to the $25.0 million short-term receivable recorded in connection with the sale of our pool & spa business in January 2001. Average cash balances and interest rates declined during fiscal year 2003, which contributed to the remaining decrease in interest income. Further contributing to the overall decrease in interest and other income was reduced foreign exchange gains related to our discontinued international operations in Mexico. Interest Expense In fiscal year 2004 and fiscal year 2003, interest expense totaled $34.6 million and $30.3 million, respectively. The increase was primarily due to approximately $2.6 million of debt issuance costs associated with the interim $250.0 million senior unsecured term loan (the "term loan") and additional borrowings under our senior revolving credit facility used to initially fund the acquisition of Century. We used the proceeds from the issuance of our common stock in January 2004 to repay the term loan in full. We also incurred $1.1 million of loan origination fees in connection with the amendment of our revolving credit agreement to permit the new term loan borrowings and to make its financial and other covenants essentially the same as the term loan agreement. These increases were offset by lower average interest rates and lower outstanding debt balances in fiscal year 2004. Total debt decreased $28.6 million or 6.5% from $441.9 million as of January 31, 2003 to $413.3 million of January 30, 2004 and our weighted-average interest rate for fiscal year 2004 decreased 110 basis points compared to the prior year. Interest expense totaled $30.3 million and $35.9 million in fiscal year 2003 and fiscal year 2002, respectively. The decrease in interest expense of $5.6 million or 15.6% in fiscal year 2003 was due to a reduction of average outstanding debt balances combined with lower interest rates in fiscal year 2003. Borrowing levels were reduced in the first and second quarters of fiscal year 2003 largely as a result of working capital improvements. In the third quarter of fiscal year 2003, we made additional borrowings under our senior revolving credit agreement in order to fund the acquisition of Utiliserve. As a result, total debt increased from $422.9 million at January 25, 2002 to $441.9 million at January 31, 2003. Income Taxes Our effective tax rate was 38.9%, 40.9% and 41.0% in fiscal years 2004, 2003 and 2002, respectively. The decrease in fiscal year 2004 was primarily attributable to a lower effective state income tax rate and a tax benefit related to a discontinued operation in Mexico. Net Income Net income totaled $57.7 million, $58.1 million and $44.1 million in fiscal years 2004, 2003 and 2002, respectively. Diluted earnings per share were $2.46, $2.45 and $1.88 in fiscal years 2004, 2003 and 2002, respectively. In fiscal year 2003, we adopted FAS 142, which eliminated the amortization of goodwill. Had we accounted for goodwill consistent with the provisions of FAS 142 in prior periods, our net income and diluted earnings per share would have been $57.7 million, $58.1 million, and $49.5 million and $2.46, $2.45 and $2.11 in fiscal years 2004, 2003 and 2002, respectively. Other factors impacting net income and diluted earnings per share have been discussed above. Page 28 of 75 Financial Condition Liquidity and Capital Resources The following sets forth certain measures of our liquidity (dollars in millions):
Fiscal Years Ended --------------------------------------- 2004 2003 2002 - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 145.9 $ 112.4 $ 143.0 Net cash used in investing activities (291.5) (42.2) (22.5) Net cash provided by (used in) financing activities 152.2 (75.3) (136.1) ============================================================================================== January 30, January 31, January 25, 2004 2003 2002 - ---------------------------------------------------------------------------------------------- Working capital $ 603.6 $ 558.8 $ 588.3 Current ratio 2.4 to 1 2.5 to 1 3.1 to 1 Debt-to-capital 29.0% 41.0% 42.0% ==============================================================================================
Working Capital Compared to fiscal year 2003, working capital increased $44.8 million or 8.0% in fiscal year 2004. The increase in working capital was primarily attributable to higher accounts receivable balances driven by same-store sales growth and the acquisitions of Century and Marden Susco, lower current portion of long-term debt due to the pay-off of a senior note that matured during the fourth quarter of fiscal year 2004, and increased cash and cash equivalents. These working capital increases were offset by lower levels of owned inventories (inventories less accounts payable) resulting from improved inventory and payables management. We continue to maintain a focus on working capital improvement and have implemented initiatives to improve each element of our working capital. Lower levels of cash and other current assets combined with increases in current maturities of long-term debt, accounts payable, and accrued compensation and benefits balances drove the working capital decrease of $29.5 million in fiscal year 2003. These changes were partially offset by increases in accounts receivable and inventories. Other current assets decreased primarily due to the collection of income tax receivables in the first quarter of fiscal year 2003. The higher accounts receivable, inventories and accounts payable reflect the acquisition of Utiliserve, which added $30.4 million of working capital at January 31, 2003. Inventories and accounts payable balances increased due to strategic purchases, primarily in the Industrial PVF segment. The increase in accrued compensation and benefits is due to higher accrued bonuses from increased profitability in fiscal year 2003 combined with the timing of bi-weekly payroll payments. Operating Activities In fiscal years 2004 and 2003, cash flows provided by operating activities totaled $145.9 million and $112.4 million, respectively. The increase of $33.5 million in operating cash flows was primarily driven by fluctuations in inventories and accounts payable. Partially offsetting these operating cash flow increases were fluctuations in other current assets and accrued compensation and benefits. The $28.5 million increase in inventories during fiscal year 2004 includes $45.3 million related to the acquisitions of Century and Marden Susco, which are classified as investing activities for cash flow reporting purposes. The remaining net inventory decrease of $16.8 million is the result of improved inventory management, and lower pricing of pvc and ductile pipe products in the Water & Sewer segment offset by strategic Industrial PVF segment purchases that took place in fiscal year 2003. Improved cash disbursement management was the primary driver of the $78.3 million increase to accounts payable in fiscal year 2004 of which $19.6 million was associated with the acquisitions of Century and Marden Susco and classified as an investing activity for cash flow reporting purposes. In the first quarter of fiscal year 2003, we collected approximately $20.0 million of non-recurring income tax receivables, which decreased the other current asset balance and favorably impacted operating cash flows for fiscal year 2003. Fluctuations Page 29 of 75 in accrued compensation and benefits balances primarily reflect the decrease in our vacation accrual associated with a policy change in 2004 and the timing of bi-weekly payroll payments. Accounts receivable balances increased $70.2 million in fiscal year 2004 of which $50.5 million related to investing activity associated with the acquisitions of Century and Marden Susco. The remaining increase of $24.3 million due to increasing sales volumes during the fourth quarter of fiscal year 2004 was offset by the fiscal year 2004 provision for doubtful accounts of $4.6 million, which was lower than fiscal year 2003's provision primarily due to lower write-offs of uncollectible customer accounts and higher recoveries of previously written off receivables. Days sales outstanding also remained consistent in both periods. The decrease of $30.6 million in net cash provided by operating activities in fiscal year 2003 resulted from increases in inventories and accounts receivable and a decrease in depreciation and amortization. These decreases were partially offset by increases in net income, accounts payable, accrued compensation and benefits, and a decrease in other current assets. Accounts receivable increased as a result of higher sales volumes in January 2003 compared to January 2002. Overall, days sales outstanding for accounts receivable remained essentially flat in both periods. Inventories and accounts payable increased as a result of strategic purchases, primarily in the Industrial PVF Segment. Other current assets primarily decreased due to the collection of income tax receivables in fiscal year 2003. The increase in net income of $14.0 million was partially offset by a decrease in depreciation and amortization primarily resulting from the elimination of goodwill amortization under FAS 142. Going forward, we expect to maintain a sufficient level of liquidity for operational purposes. Investing Activities Our expenditures for property and equipment were $15.9 million, $15.3 million and $16.9 million in fiscal years 2004, 2003 and 2002, respectively. Of these expenditures, $9.4 million, $9.7 million and $7.6 million, respectively, related to IT outlays. Included in the IT outlays were $5.6 million, $7.5 million and $4.7 million related to the Hughes Unified operating system in fiscal years 2004, 2003 and 2002, respectively. The Hughes Unified capital expenditures were primarily for personal computers and related hardware along with capitalized software upgrades. Fiscal year 2005 capital expenditures are expected to be in the range of approximately $20 million to $25 million, of which approximately $4.8 million relates to the Hughes Unified operating system. We also plan to implement new systems in finance and data warehousing. Proceeds from the sale of property and equipment totaled $4.0 million, $4.5 million and $8.7 million in fiscal years 2004, 2003 and 2002, respectively. The decrease in fiscal year 2003 was due to the sale and subsequent leaseback of substantially all of our forklift fleet and certain of our trailers in August 2001, which generated cash proceeds of $5.7 million. Partially offsetting this decrease were proceeds from sales of certain land and building assets in fiscal year 2003 resulting from the closure and consolidation of branches. Cash payments for business acquisitions totaled $279.6 million, $33.4 million and $32.0 million in fiscal years 2004, 2003 and 2002, respectively. On December 19, 2003, we acquired Century, a leading supplier of MRO products serving the multi-family apartment market throughout the United States. The purchase price consisted of $260.0 million cash paid for Century's net assets, including the assumption of $31.4 million of accounts payable and accrued liabilities, and $101.4 million of debt. Effective August 4, 2003, we acquired substantially all of the net assets of Marden Susco, a southern California supplier of underground piping products for use in municipal water, sewer and storm drain systems. We paid $19.6 million for the net assets of Marden Susco, including the assumption of $13.7 million of accounts payable and accrued liabilities and $6.7 million of debt. In August 2002, we acquired all of the capital stock of Utiliserve, a wholesale distributor of electrical transmission and distribution products and services to the United States electric utility industry. We paid $33.4 million for the equity value of Utiliserve and assumed $54.5 million and $33.2 million of long-term debt and other liabilities, respectively. On December 30, 2002, we sold the remaining 49.0% of our equity investment in Anasteel Supply Company, LLC. for $2.3 million. We received cash proceeds of $2.0 million with the remaining $0.3 million of consideration in the form of a long-term note receivable due July 31, 2005. The note receivable bears interest at a fixed rate of 7.0%. On March 2, 2001, in connection with the closure of bestroute.com, one of our e-commerce ventures, we entered into an agreement with the holders of 723,183 of our 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, all of which was paid by the end of the second quarter of fiscal year 2002. Page 30 of 75 In connection with the sale of the assets of our Pool & Spa business in January 2001, we received $23.0 million of cash proceeds with the remaining $25.0 million of consideration in the form of a short-term note receivable, which bore interest at 7.0% and was fully collected in fiscal year 2002. Financing Activities Total debt was $413.3 million and $441.9 million as of January 30, 2004 and January 31, 2003, respectively, reflecting a decrease of $28.6 million or 6.5%. The decrease in total debt was attributable to principal payments on debt and strong cash flows provided by operating activities, offset by borrowings made under our revolving credit agreement. Scheduled payments on our senior notes totaled $63.1 million, $18.7 million, and $14.9 million in fiscal years 2004, 2003 and 2002, respectively. Net borrowings (payments) on our senior revolving credit facility totaled $27.7 million, $19.6 million and ($100.3 million) in fiscal years 2004, 2003 and 2002 respectively. On March 15, 1999, our board of directors authorized us to repurchase up to 2,500,000 shares of our outstanding common stock to be used for general corporate purposes. Since March 15, 1999, we have repurchased a total of 1,831,400 shares at an average price of $22.91 per share, of which 258,600 shares, 257,000 shares and 394,700 shares at average prices of $23.39 per share, $27.78 per share and $19.10 per share were repurchased during fiscal years 2004, 2003 and 2002, respectively. Shares repurchased totaled $6.0 million, $7.1 million and $7.5 million in fiscal years 2004, 2003 and 2002, respectively. On March 26, 2003, we replaced our existing $275.0 million revolving credit agreement, which was scheduled to mature on January 25, 2004, with a new $252.5 million senior revolving credit facility, subject to borrowing limitations, which matures on March 26, 2007. The new senior revolving credit facility is unsecured and contains financial and other covenants, including limitations on dividends and maintenance of certain financial ratios. Interest is payable at market rates plus applicable margins and commitment fees ranging from 0.15% to 0.30% per annum are paid on the new senior revolving credit facility. On May 22, 2003, we amended our senior revolving credit facility to increase maximum borrowing capacity from $252.5 million to $290.0 million effective June 9, 2003. To initially fund our acquisition of Century in December 2003 we borrowed $250.0 million at 3.39% per annum under an interim senior unsecured term loan agreement (the "term loan"). Concurrently, our existing revolving credit agreement was amended to permit the new term loan borrowings and to make financial and other covenants essentially the same as those in the term loan agreement. The balance of the funds necessary to expedite the acquisition were borrowed under our existing revolving credit facility. On January 28, 2003 we completed the sale of 6,900,000 shares of common stock in a public offering that generated net proceeds of $317.5 million. The proceeds were primarily used to fund the acquisition of Century and to repay indebtedness under our revolving credit agreement. At January 30, 2004 there were no outstanding borrowings under the term loan agreement. Dividend payments totaled $9.4 million, $8.1 million and $8.0 million during fiscal years 2004, 2003 and 2002, respectively. The higher dividend payments were primarily attributable to an increase in our dividend rates, which were $0.400 per share, $0.355 per share and $0.340 per share in fiscal years 2004, 2003 and 2002, respectively. We are required to maintain certain financial ratios and minimum net worth levels contained in the covenants of our debt agreements. The covenants restrict our activities regarding investments, liens, borrowing and leasing, and payment of dividends other than stock. At January 30, 2004, we are in compliance with all financial and other covenants. As of January 30, 2004, we had approximately $8.3 million of cash and $190.0 million of unused borrowing capacity (subject to borrowing limitations under long-term debt covenants) to fund ongoing operating requirements and anticipated capital expenditures. We believe we have sufficient borrowing capacity and cash on hand to take advantage of growth and business opportunities. Page 31 of 75 Off-balance Sheet Arrangements We have entered into operating leases for certain facilities, vehicles and equipment. Many of our vehicle and equipment leases typically contain set residual values and residual value guarantees. We believe that the likelihood of any material amounts being funded in connection with these commitments is remote. The following table shows our approximate commitments related to those operating leases that contain residual value guarantees as of January 30, 2004 (in millions):
Total Amounts Less than 1 - 3 4 - 5 After Committed 1 year years years 5 years - ----------------------------------------------------------------------------------------------------- Residual guarantees under operating leases $ 3.0 $ 0.1 $ 1.7 $ 1.2 $ -- - -----------------------------------------------------------------------------------------------------
Contractual Obligations The following table summarizes our approximate payments due under specified contractual obligations as of January 30, 2004 (in millions):
Payments due by period -------------------------------------------------------- Less than 1 - 3 4 - 5 After Total 1 year years years 5 years - ---------------------------------------------------------------------------------------------- Long-term debt $ 413.3 $ 44.6 $ 113.8 $ 175.2 $ 79.7 Non-cancelable operating leases 181.4 52.7 71.2 32.2 25.3 - ---------------------------------------------------------------------------------------------- Total contractual cash obligations $ 594.7 $ 97.3 $ 185.0 $ 207.4 $ 105.0 ==============================================================================================
Recent Accounting Pronouncements FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. In general, FAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As we do not currently have any derivative financial instruments, the adoption of FAS 149 did not have an impact on our consolidated financial statements. FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003 and clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As we did not have any of these financial instruments, the adoption of FAS 150 did not have an impact on our consolidated financial statements. Financial Accounting Standards Board Interpretation ("FIN") 46, Consolidation of Variable Interest Entities, was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation and disclosure requirements apply immediately to variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We are not the primary beneficiary of any variable interest entities as of January 30, 2004. In December 2003, a revision to FIN 46 ("FIN 46R") was issued to clarify some of the provisions of the interpretation and to exempt certain entities from its requirements. Adoption of the provisions of FIN 46R is required for interim periods ending after March 15, 2004. We are currently evaluating the impact that the adoption of this revision will have on our consolidated financial statements, and do not expect it to have a material impact. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the prescription drug benefit under Medicare. Questions have arisen regarding whether an employer that provides postretirement prescription drug coverage Page 32 of 75 should recognize the effects of the Act on its accumulated postretirement benefit obligation (APBO) and net postretirement benefit costs under FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. While we do offer benefits, including prescription drug coverage, to employees who have attained certain levels of service after they have retired, those benefits are only available to retirees until age 65, at which time Medicare coverage becomes effective. As such, we do not believe that this specific provision of the Act will have a material effect on our consolidated financial statements. In December 2003, the FASB issued FAS 132 (Revised) ("FAS 132-R"), Employer's Disclosure about Pensions and Other Postretirement Benefits. FAS 132-R retains disclosure requirements of the original FAS 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefits cost. FAS 132-R is effective for fiscal years ending after December 15, 2003. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The provisions of FAS 132-R did not have a material effect on our consolidated financial statements. In December 2003, the Staff of the Securities and Exchange Commission ("SEC" or "the Staff") issued Staff Accounting Bulletin ("SAB") 104, Revenue Recognition, which superseded SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of Emerging Issues Task Force Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables which was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The provisions of SAB 104 did not have a material impact on our consolidated financial statements. Critical Accounting Policies Our significant accounting policies are more fully described in the notes to the consolidated financial statements. Certain of our 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, vendors and other outside sources and management's estimates, as appropriate. Our significant accounting policies include: Allowance for Doubtful Accounts We evaluate the collectibility of accounts receivable based on numerous factors, including past transaction history with customers, their credit worthiness and an assessment of our lien and bond rights. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience and on a quarterly basis, we write-off uncollectible receivables. This estimate is periodically adjusted when we become aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a slowdown in the markets in which we operate may result in higher than expected uncollectible accounts, and therefore, the need to revise estimates for bad debts. 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. At January 30, 2004 and January 31, 2003, the allowance for doubtful accounts totaled $6.5 million and $8.5 million, respectively. Inventories Inventories are carried at the lower of cost or market. The cost of substantially all inventories is determined by the moving average cost method. We evaluate our 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 each branch's physical inventory results over the last two years, a review of potential dead stock based on historical product sales and forecasted sales and an overall consolidated analysis of potential excess inventory. 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 future events impact, either favorably or unfavorably, the saleability of our products or our relationship with certain key vendors, our inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions. At January 30, 2004 and January 31, 2003, our inventory reserves totaled $4.5 million and $6.0 million, respectively. Consideration Received from Vendors At the beginning of each calendar year, we enter into agreements with many of our vendors providing for inventory purchase rebates upon achievement of specified volume purchasing levels. We accrue the receipt of vendor rebates as part of our cost of sales for products sold based on progress towards earning the vendor rebates, taking into consideration cumulative purchases of inventory to date and projected purchases through the end of the year. An estimate of unearned vendor rebates is Page 33 of 75 included in the carrying value of inventory at each period end for vendor rebates to be received on products not yet sold. While we believe we will continue to receive consideration from vendors in fiscal year 2005 and thereafter, there can be no assurance that vendors will continue to provide comparable amounts of vendor rebates in the future. Impairment of Long-Lived Assets Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To analyze recoverability, we project undiscounted future cash flows over the remaining life of the asset. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset less any costs of disposition. Our judgment regarding the existence of impairment indicators are based on market and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets are impaired. Evaluating the impairment also requires us to estimate future operating results and cash flows that require judgment by management. If different estimates were used, the amount and timing of asset impairments could be affected. In the fourth quarter of fiscal year 2002, we recorded an impairment loss of $0.7 million related to goodwill of one entity in our Plumbing/HVAC segment. Self-Insurance We are self-insured for certain losses relating to workers' compensation, automobile, general and product liability claims. We also maintain stop loss coverage to limit the exposure arising from such claims. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon our estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and our 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 30, 2004 differs from the actual development of such losses in future periods, our insurance reserves could differ significantly, resulting in either higher or lower future insurance expense. At January 30, 2004 and January 31, 2003, self-insurance reserves totaled $1.0 million and $5.6 million, respectively. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Rate Risk We are 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, our operating performance is affected by price fluctuations in steel, nickel alloy, copper, aluminum, plastic, lumber and other commodities. We seek 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. We believe that inflation (which has been moderate over the past few years) did not significantly affect our operating results or markets in fiscal years 2004, 2003 or 2002. As discussed above, our results of operations were both favorably and unfavorably impacted by increases and decreases in the pricing of certain commodity-based products. Such commodity price fluctuations have from time to time created cyclicality in our financial performance and could continue to do so in the future. Interest Rate Risk At January 30, 2004, we had approximately $124.6 million of outstanding variable-rate debt. Based upon a hypothetical 10% increase or decrease in interest rates from their January 30, 2004 levels, the market risk with respect to our variable-rate debt would not be material. We manage our interest rate risk by maintaining a combination of fixed-rate and variable-rate debt. Page 34 of 75 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements
Page(s) ------- Consolidated Statements of Income for Fiscal Years Ended January 30, 2004, January 31, 2003 and January 25, 2002....................................... 36 Consolidated Balance Sheets as of January 30, 2004 and January 31, 2003........ 37 Consolidated Statements of Shareholders' Equity for Fiscal Years Ended January 30, 2004, January 31, 2003 and January 25, 2002..................... 38 Consolidated Statements of Cash Flows for Fiscal Years Ended January 30, 2004, January 31, 2003 and January 25, 2002..................... 39 Notes to Consolidated Financial Statements..................................... 40-63 Report of Independent Certified Public Accountants............................. 64 Management's Responsibility for Financial Statements........................... 65
Page 35 of 75 HUGHES SUPPLY, INC. Consolidated Statements of Income (in millions, except per share data)
Fiscal Years Ended ----------------------------------------- January 30, January 31, January 25, 2004 2003 2002 - ------------------------------------------------------------------------------------ Net Sales $ 3,253.4 $ 3,066.3 $ 3,037.7 Cost of Sales 2,519.7 2,356.6 2,340.6 - ----------------------------------------------------------------------------------- Gross Margin 733.7 709.7 697.1 - ----------------------------------------------------------------------------------- Operating Expenses: Selling, general and administrative 589.8 568.0 564.0 Depreciation and amortization 21.2 20.5 31.1 Impairment of long-lived assets -- -- 0.7 - ----------------------------------------------------------------------------------- Total operating expenses 611.0 588.5 595.8 - ----------------------------------------------------------------------------------- Operating Income 122.7 121.2 101.3 - ----------------------------------------------------------------------------------- Non-Operating Income (Expenses): Interest and other income 6.4 7.3 9.3 Interest expense (34.6) (30.3) (35.9) - ----------------------------------------------------------------------------------- (28.2) (23.0) (26.6) - ----------------------------------------------------------------------------------- Income Before Income Taxes 94.5 98.2 74.7 Income Taxes 36.8 40.1 30.6 - ----------------------------------------------------------------------------------- Net Income $ 57.7 $ 58.1 $ 44.1 =================================================================================== Earnings Per Share: Basic $ 2.52 $ 2.50 $ 1.90 =================================================================================== Diluted $ 2.46 $ 2.45 $ 1.88 =================================================================================== Weighted average Shares Outstanding: Basic 22.9 23.2 23.2 =================================================================================== Diluted 23.5 23.7 23.4 ===================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Page 36 of 75 HUGHES SUPPLY, INC. Consolidated Balance Sheets (in millions, except share and per share data)
January 30, January 31, 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $ 8.3 $ 1.7 Accounts receivable, less allowance for doubtful accounts of $6.5 and $8.5 493.3 423.1 Inventories 467.0 438.5 Deferred income taxes 19.4 19.7 Other current assets 53.0 47.1 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 1,041.0 930.1 Property and Equipment, Net 161.8 157.8 Goodwill 609.8 320.1 Other Assets 68.7 26.9 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,881.3 $ 1,434.9 ============================================================================================================================= Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $ 44.6 $ 63.8 Accounts payable 308.3 230.0 Accrued compensation and benefits 39.3 43.3 Other current liabilities 45.2 34.2 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 437.4 371.3 Long-Term Debt 368.7 378.1 Deferred Income Taxes 55.4 34.0 Other Noncurrent Liabilities 7.8 6.7 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 869.3 790.1 Commitments and Contingencies (Note 10) 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; 30,795,577 and 23,935,764 shares issued 30.8 23.9 Capital in excess of par value 533.3 222.4 Retained earnings 465.1 416.7 Treasury stock, 216,952 and 245,700 shares, at cost (5.5) (6.8) Unearned compensation related to outstanding restricted stock (11.7) (11.4) - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,012.0 644.8 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,881.3 $ 1,434.9 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 37 of 75 HUGHES SUPPLY, INC. Consolidated Statements of Shareholders' Equity (in millions, except share and per share data)
Common Stock Capital in Treasury Stock ------------------- Excess of Retained ------------------- Unearned Shares Dollars Par Value Earnings Shares Dollars Compensation Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 26, 2001 24,211,485 $ 24.2 $ 228.1 $ 337.1 (576,783) $ (13.3) $ (6.1) $ 570.0 Net income -- -- -- 44.1 -- -- -- 44.1 Cash dividends--$0.340 per share -- -- -- (8.0) -- -- -- (8.0) Purchase of treasury stock -- -- -- -- (394,700) (7.5) -- (7.5) Shares issued under stock option plans and related tax benefits -- -- 0.3 (1.7) 265,378 5.6 -- 4.2 Purchase and retirement of common shares (91,322) (0.1) (0.8) (1.1) -- -- -- (2.0) Retirement of treasury stock (342,854) (0.3) (3.2) (4.0) 342,854 7.5 -- -- Issuance of restricted stock, net of cancellations (2,709) -- 0.5 1.3 339,000 7.2 (9.5) (0.5) Amortization of restricted stock -- -- -- -- -- -- 1.5 1.5 Cancellation of stock rights issued to bestroute.com -- -- (7.3) -- -- -- -- (7.3) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 25, 2002 23,774,600 $ 23.8 $ 217.6 $ 367.7 (24,251) $ (0.5) $ (14.1) $ 594.5 Net income -- -- -- 58.1 -- -- -- 58.1 Cash dividends--$0.355 per share -- -- -- (8.5) -- -- -- (8.5) Purchase of treasury stock -- -- -- -- (257,000) (7.1) -- (7.1) Shares issued under stock option plans and related tax benefits 216,836 0.1 5.8 (0.1) 15,551 0.3 -- 6.1 Purchase and retirement of common shares (25,784) -- (0.5) (0.6) -- -- -- (1.1) Issuance of restricted stock, net of cancellations (29,888) -- (0.5) 0.1 20,000 0.5 (0.1) -- Amortization of restricted stock -- -- -- -- -- -- 2.8 2.8 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 31, 2003 23,935,764 $ 23.9 $ 222.4 $ 416.7 (245,700) $ (6.8) $ (11.4) $ 644.8 Net income -- -- -- 57.7 -- -- -- 57.7 Cash dividends--$0.400 per share -- -- -- (10.1) -- -- -- (10.1) Purchase of treasury stock -- -- -- -- (258,600) (6.0) -- (6.0) Shares issued under stock option plans and related tax benefits -- -- 1.2 (0.4) 199,348 5.1 -- 5.9 Issuance of common stock, net 6,900,000 6.9 310.6 -- -- -- -- 317.5 Purchase and retirement of common shares (10,299) -- (0.1) (0.3) -- -- -- (0.4) Issuance of restricted stock, net of cancellations (29,888) -- (0.8) 1.5 88,000 2.2 (3.3) (0.4) Amortization of restricted stock -- -- -- -- -- -- 3.0 3.0 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 30, 2004 30,795,577 $ 30.8 $ 533.3 $ 465.1 (216,952) $ (5.5) $ (11.7) $ 1,012.0 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 38 of 75 HUGHES SUPPLY, INC. Consolidated Statements of Cash Flows (in millions)
Fiscal Years Ended ------------------------------------- January 30, January 31, January 25, 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 57.7 $ 58.1 $ 44.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21.2 20.5 31.1 Provision for doubtful accounts 4.6 9.1 11.1 Amortization of restricted stock 2.7 2.8 1.0 Income tax benefit of stock options exercised 1.2 1.4 0.3 Deferred income taxes 10.7 14.9 10.4 Other 2.9 (1.2) 0.1 Changes in assets and liabilities, net of businesses acquired: Accounts receivable (24.3) (24.3) 50.1 Inventories 16.8 (11.6) 55.0 Other current assets (0.8) 10.6 (12.3) Other assets (3.6) (0.4) (1.8) Accounts payable 63.3 25.2 (41.3) Accrued compensation and benefits (8.5) 9.0 (0.9) Other current liabilities 0.9 (2.3) (4.3) Other noncurrent liabilities 1.1 0.6 0.4 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 145.9 112.4 143.0 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (15.9) (15.3) (16.9) Proceeds from sale of property and equipment 4.0 4.5 8.7 Business acquisitions, net of cash (279.6) (33.4) (32.0) Proceeds from sale of investment in affiliated entity -- 2.0 -- Purchase of bestroute.com stock rights -- -- (7.3) Proceeds from sale of pool and spa business -- -- 25.0 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (291.5) (42.2) (22.5) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net borrowings (payments) under short-term debt arrangements 27.7 19.6 (100.3) Proceeds from issuance of senior term loan 250.0 -- -- Principal payments on other debt and debt of acquired entities (422.3) (73.0) (23.8) Proceeds from issuance of common stock, net 317.5 -- -- Change in book overdrafts (4.6) (10.3) 1.8 Purchase of treasury shares (6.0) (7.1) (7.5) Dividends paid (9.4) (8.1) (8.0) Other (0.7) 3.6 1.7 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 152.2 (75.3) (136.1) - --------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents 6.6 (5.1) (15.6) Cash and Cash Equivalents, Beginning of Year 1.7 6.8 22.4 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 8.3 $ 1.7 $ 6.8 ===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Page 39 of 75 Note 1--Description of Business and Summary of Significant Accounting Policies Business Founded in 1928, we are one of the nation's largest diversified wholesale distributors of construction, repair and maintenance-related products distributing over 350,000 products to more than 100,000 customers through 486 branches located in 38 states. Our customers include electrical, plumbing and mechanical contractors; public utilities; property management companies; municipalities and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States. We are organized on a product line basis into six reportable segments: Water & Sewer; Plumbing/Heating and Air Conditioning (HVAC); Maintenance, Repair and Operations (MRO); Utilities; Electrical and Industrial Pipe, Valves and Fittings (PVF). An "All Other" category includes our Building Materials, Fire Protection and Mechanical Industrial product lines. Principles of Consolidation Our consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. Significant intercompany balances and transactions have been eliminated. Results of operations of companies acquired are included from their respective dates of acquisition. Investments in 50% or less owned affiliates over which we have the ability to exercise significant influence are accounted for using the equity method. During fiscal years 2004, 2003 and 2002, we did not have any "less than 20% owned" investments in affiliates accounted for under the equity method. Fiscal Year Our fiscal year is a 52- or 53-week period ending on the last Friday in January. Fiscal years 2004 and 2002 contained 52 weeks while fiscal year 2003 contained 53 weeks. The additional week in fiscal year 2003 was included in the first quarter. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and the differences could be material. Cash and Cash Equivalents We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Allowance for Doubtful Accounts We evaluate the collectibility of accounts receivable based on numerous factors, including past transaction history with customers, their credit worthiness, and an assessment of our lien and bond rights. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience and on a quarterly basis, we write off uncollectible receivables. This estimate is periodically adjusted when we become aware of a specific customer's inability to meet its financial obligations (e.g. bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a slowdown in the markets in which we operate may result in higher than expected uncollectible accounts, and therefore, the need to revise estimates for bad debts. 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. At January 30, 2004 and January 31, 2003, the allowance for doubtful accounts totaled $6.5 million and $8.5 million, respectively. Page 40 of 75 Inventories Inventories are carried at the lower of cost or market. The cost of substantially all inventories is determined by the moving average cost method. We evaluate our 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 each branch's physical inventory results over the last two years, a review of potential dead stock based on historical product sales and forecasted sales and an overall consolidated analysis of potential excess inventory. 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 future events impact, either favorably or unfavorably, the saleability of our products or our relationship with certain key vendors, our inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions. At January 30, 2004 and January 31, 2003, our inventory reserves totaled $4.5 million and $ 6.0 million, respectively. Consideration Received From Vendors At the beginning of each calendar year, we enter into agreements with many of our vendors providing for inventory purchase rebates ("vendor rebates") upon achievement of specified volume purchasing levels. We accrue the receipt of vendor rebates as part of our cost of sales for products sold based on progress towards earning the vendor rebates, taking into consideration cumulative purchases of inventory to date and projected purchases through the end of the year. An estimate of unearned vendor rebates is included in the carrying value of inventory at each period end for vendor rebates received on products not yet sold. While we believe that we will continue to receive consideration from vendors in fiscal year 2005 and thereafter, there can be no assurance that vendors will continue to provide comparable amounts of vendor rebates in the future. 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 2-20 years Furniture, fixtures and equipment 1-12 years Maintenance and repair costs are charged to expense as incurred. Renewals and improvements that extend the useful lives of assets are capitalized. Gains or losses are recognized upon disposition. Interest costs related to assets under construction are capitalized during the construction period and totaled $0.6 million, $0.4 million and $0.3 million in fiscal years 2004, 2003 and 2002. Depreciation of property and equipment totaled $16.6 million, $16.1 million and $18.1 million in fiscal years 2004, 2003 and 2002, 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. Effective January 26, 2002, we adopted Statement of Financial Accounting Standards ("FAS") 142, Goodwill and Other Intangible Assets. FAS 142 requires entities to assess the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis effective beginning in fiscal year 2003. When the fair value is less than the related goodwill value, entities are required to reduce the amount of goodwill. The approach to evaluating the recoverability of goodwill as outlined in FAS 142 requires the use of valuation techniques utilizing estimates and assumptions about projected future operating results and other variables. Under the new impairment approach, we may be subject to earnings volatility if additional goodwill impairment occurs at a future date. FAS 142 also requires entities to discontinue the amortization of goodwill, including amortization of goodwill acquired in past business combinations. Accordingly, we no longer amortized goodwill beginning in fiscal year 2003 (see note 4). At January 30, 2004 and January 31, 2003, goodwill, net of accumulated amortization, totaled $609.8 million and $320.1 million, respectively. Accumulated amortization of goodwill totaled $40.3 million at January 30, 2004 and January 31, 2003. Page 41 of 75 Other Assets We capitalize certain software development costs, which are being amortized on a straight-line basis over the estimated useful lives of the software, ranging from 2 to 7 years. At January 30, 2004 and January 31, 2003, capitalized software development costs totaled $10.6 million and $9.4 million, respectively, net of accumulated amortization of $14.9 million and $11.7 million, respectively. Amortization of capitalized software development costs totaled $3.2 million, $3.9 million and $3.6 million in fiscal years 2004, 2003 and 2002, respectively. Intangible assets, which principally consist of customer contracts acquired in business combinations, are recorded at their respective fair values in accordance with FAS 141, Business Combinations, and are generally amortized using the straight-line method. Additional disclosure related to acquired other intangible assets as of fiscal year-end 2004 and 2003 are as follows (in millions):
Fiscal Years Ended ----------------------------------------------------- 2004 2003 ----------------------------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Value Amortization Value Amortization -------- ------------ -------- ------------ Amortized intangible assets Acquired customer contracts $ 37.1 $ (1.4) $ 8.2 $ (0.2) Non-compete/employment agreements 3.1 (0.3) 0.4 (0.1) -------- -------- -------- -------- Total 40.2 (1.7) 8.6 (0.3) Unamortized intangible assets Private label tradenames 5.9 -- -- -- -------- -------- -------- -------- Total $ 46.1 $ (1.7) $ 8.6 $ (0.3) ---------------------------------------------------
The weighted-average amortization period is 13 years for acquired customer contracts and 5 years for non-compete agreements. The weighted-average period for acquired customer contracts and non-compete agreements on a combined basis is 12 years. The aggregate amortization expense for fiscal years 2004, 2003 and 2002 was $1.4 million, $0.4 million and $0.2 million, respectively. Total estimated annual amortization expense expected for the next five fiscal years, based on current levels of intangible assets is $3.5 million. Impairment of Long-Lived Assets Other than Goodwill Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To analyze recoverability, we project undiscounted future cash flows over the remaining life of the asset. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset less any costs of disposition (see note 6). Our judgments regarding the existence of impairment indicators are based on market and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets are impaired. Evaluating the impairment also requires us to estimate future operating results and cash flows. If different estimates were used, the amount and timing of asset impairments could be affected. Self-Insurance We are self-insured for certain losses relating to workers' compensation, automobile, general and product liability claims. We also maintain stop loss coverage to limit the exposure arising from such claims. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon our estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and our 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 30, 2004 differs from the actual development of such losses in future periods, our insurance reserves could differ significantly, resulting in either higher or lower future insurance expense. At January 30, 2004 and January 31, 2003, self-insurance reserves totaled $1.0 million and $5.6 million, respectively. Page 42 of 75 Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and benefits, and other current liabilities approximate their fair values because of the short-term nature of these instruments. The fair value of our long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to us for debt of the same remaining maturities. The fair value of long-term debt was computed by discounting the remaining cash flows by a rate equal to the estimated constant treasury rate for the remaining life of the debt instrument plus applicable credit spread over the remaining average life of the issue. The fair values of long-term debt approximated $324.3 million and $395.9 million and the related carrying values were $413.3 million and $441.9 million at January 30, 2004 and January 31, 2003, respectively. Revenue Recognition We ship products to customers predominantly by our internal fleet and to a lesser extent by third party carriers. We recognize revenues from product sales when title to the products is passed to the customer, which occurs at the point of destination for products shipped by our internal fleet and at the point of shipping for products shipped by third party carriers. Revenues related to services are recognized in the period the services are performed and totaled $2.6 million, $2.4 million and $2.6 million in fiscal years 2004, 2003 and 2002, respectively. Concentration of Credit Risk The majority of our sales are credit sales which are made primarily to customers whose ability to pay is dependent, in part, 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 our customer base. We perform ongoing credit evaluations of our customers and in certain situations obtain collateral sufficient to protect our credit position. Advertising Advertising costs are charged to expense as incurred and totaled $6.8 million, $5.1 million and $5.3 million in fiscal years 2004, 2003 and 2002, respectively. Shipping and Handling Fees and Costs We include shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with outbound freight are included in selling, general and administrative expenses and totaled $25.3 million, $24.1 million and $23.5 million in fiscal years 2004, 2003 and 2002, 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 We measure 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. For purposes of pro forma disclosures under FAS 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, the estimated fair value of the stock options is amortized to compensation expense over the options' vesting period. Page 43 of 75 The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (in millions except per share data):
Fiscal Years Ended ------------------------------- 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------ Net income as reported: $ 57.7 $ 58.1 $ 44.1 Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects (3.6) (2.0) (0.6) - ------------------------------------------------------------------------------------------------------------------ Pro forma net income $ 54.1 $ 56.1 $ 43.5 ================================================================================================================== Earnings per share: Basic--as reported $ 2.52 $ 2.50 $ 1.90 ================================================================================================================== Basic--pro forma $ 2.36 $ 2.42 $ 1.88 ================================================================================================================== Diluted--as reported $ 2.46 $ 2.45 $ 1.88 ================================================================================================================== Diluted--pro forma $ 2.30 $ 2.37 $ 1.86 ==================================================================================================================
Comprehensive Income We do 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 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. In general, FAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As we do not currently have any derivative financial instruments, the adoption of FAS 149 did not have an impact on our consolidated financial statements. FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003 and clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As we did not have any of these financial instruments, the adoption of FAS 150 did not have an impact on our consolidated financial statements. Financial Accounting Standards Board Interpretation ("FIN") 46, Consolidation of Variable Interest Entities, was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation and disclosure requirements apply immediately to variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We are not the primary beneficiary of any variable interest entities as of January 30, 2004. In December 2003, a revision to FIN 46 ("FIN 46R") was issued to clarify some of the provisions of the interpretation and to exempt certain entities from its requirements. Adoption of the provisions of FIN 46R is required for interim periods ending after March 15, 2004. We are currently evaluating the impact that the adoption of this revision will have on our consolidated financial statements, and do not expect it to have a material impact. Page 44 of 75 In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the prescription drug benefit under Medicare. Questions have arisen regarding whether an employer that provides postretirement prescription drug coverage should recognize the effects of the Act on its accumulated postretirement benefit obligation (APBO) and net postretirement benefit costs under FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. While we do offer benefits, including prescription drug coverage, to employees who have attained certain levels of service after they have retired, those benefits are only available to retirees until age 65, at which time Medicare coverage becomes effective. As such, we do not believe that this specific provision of the Act will have a material effect on our consolidated financial statements. In December 2003, the FASB issued FAS 132 (Revised) ("FAS 132-R"), Employer's Disclosure about Pensions and Other Postretirement Benefits. FAS 132-R retains disclosure requirements of the original FAS 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefits cost. FAS 132-R is effective for fiscal years ending after December 15, 2003. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The provisions of FAS 132-R did not have a material effect on our consolidated financial statements. In December 2003, the Staff of the Securities and Exchange Commission ("SEC" or "the Staff") issued Staff Accounting Bulletin ("SAB") 104, Revenue Recognition, which superseded SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of Emerging Issues Task Force Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables which was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The provisions of SAB 104 did not have a material impact on our consolidated financial statements. Note 2--Business Combinations and Divestitures Business Combinations On December 19, 2003, we acquired Century Maintenance Supply, Inc. ("Century"), a leading supplier of MRO products serving the multi-family apartment market throughout the United States. The acquisition will enable us to become a leader in the apartment MRO market and facilitate entry into adjacent customer markets. The purchase price consisted of $260.0 million cash paid for Century's net assets, including the assumption of $31.4 million of accounts payable and accrued liabilities and $101.4 million of debt. The results of Century's operations have been included in our consolidated statements of income since December 19, 2003. The total cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values in accordance with FAS 141. Goodwill, of which approximately $7.1 million is deductible for tax purposes, and other intangible assets recorded in connection with the transaction totaled $271.1 million and $36.4 million, respectively. The goodwill and intangible assets were assigned entirely to our MRO segment. The fair value assigned to intangible assets and the related weighted-average useful life was based on valuations prepared by an independent third party appraisal firm using estimates and assumptions provided by management. The intangible assets are subject to amortization and consist primarily of customer lists, private label trade names and employment agreements that are amortized on a straight-line basis over a weighted-average useful life of 11.5 years. The estimated annual amortization expense related to these contracts for the next five fiscal years is expected to be $2.8 million. Unaudited pro-forma operating results of operations, assuming the acquisition of Century had been completed as of the beginning of fiscal year 2003, are as follows (in millions except per share data): Fiscal Years Ended ------------------------ 2004 2003 - -------------------------------------------------------------------------------- Net sales $ 3,534.4 $ 3,357.0 Operating income 153.2 148.3 Net income 67.2 66.0 - -------------------------------------------------------------------------------- Earnings per share: Basic $ 2.93 $ 2.85 Diluted $ 2.86 $ 2.79 - -------------------------------------------------------------------------------- These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the period presented or the results which may occur in the future. Page 45 of 75 Effective August 4, 2003, we acquired substantially all of the net assets of Marden Susco, LLC ("Marden Susco"), a southern California supplier of underground piping products for use in municipal water, sewer and storm drain systems. As a result of the acquisition, we have expanded the geographical presence of our Water & Sewer business into the state of California. The purchase price consisted of $19.6 million cash paid for Marden Susco's net assets, including the assumption of $13.7 million of accounts payable and accrued liabilities and $6.7 million of debt. The results of Marden Susco's operations have been included in our consolidated statements of income since August 4, 2003. The total cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values in accordance with FAS 141. Goodwill, all of which is deductible for income tax purposes, and other intangible assets recorded in connection with the transaction totaled $18.1 million and $1.0 million, respectively. The goodwill and intangible assets were assigned entirely to our Water & Sewer segment. The fair value assigned to intangible assets and the related weighted-average useful life was based on valuations prepared by an independent third party appraisal firm using estimates and assumptions provided by management. The intangible assets are subject to amortization and consist primarily of employment agreements, revenue backlog, and customer lists that are amortized on a straight-line basis over a weighted-average useful life of 4.8 years. The estimated annual amortization expense related to these contracts for the next five fiscal years is expected to be $0.1 million. Pro forma results of operations reflecting this acquisition have not been presented because the results of operations of Marden Susco are not material to our consolidated operating results or assets. On August 9, 2002, we acquired 100% of the capital stock of Utiliserve Holdings, Inc. and its subsidiaries ("Utiliserve"), a wholesale distributor of electrical transmission and distribution products and services to the United States' electric utility industry. As a result of the acquisition, we are a leading provider of electrical transmission and distribution products and services in the United States. We also expanded our development of customer contracts as a result of Utiliserve's value-added services, including vendor-managed inventory, collaborative emergency response and job-site delivery. Through its supply chain management solutions, Utiliserve is able to assume full responsibility for its customers' warehouse, workflow and inventory management needs. The purchase price consisted of $33.4 million cash paid (net of cash acquired of $1.9 million) for Utiliserve's net equity along with the assumption of $54.5 million and $33.2 million of debt and other liabilities, respectively. The results of Utiliserve's operations have been included in our consolidated statements of income since August 9, 2002. The total cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values in accordance with FAS 141. Goodwill, of which approximately $25.7 million is deductible for income tax purposes, and other intangible assets recorded in connection with the transaction totaled $56.3 million and $8.6 million, respectively. The goodwill was assigned entirely to our Utilities segment. The fair value assigned to intangible assets and the related weighted-average useful life was based on valuations prepared by an independent third party appraisal firm using estimates and assumptions provided by management. The intangible assets are subject to amortization and consist mainly of customer contracts that are being amortized on a straight-line basis over a weighted-average useful life of 14.6 years. The estimated annual amortization expense related to these contracts for the next five fiscal years is expected to be $0.6 million. During fiscal year 2002, we 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. Page 46 of 75 The assets acquired and liabilities assumed for acquisitions are summarized below (in millions): Fiscal Years Ended ------------------------------- 2004 2003 2002 - ------------------------------------------------------------------------------- Accounts receivable $ 50.4 $ 19.9 $ 13.5 Inventories 45.3 30.5 9.7 Property and equipment 3.1 2.4 1.0 Goodwill 289.2 56.3 23.7 Other assets (including intangibles) 44.8 13.9 0.1 - ------------------------------------------------------------------------------- Assets acquired 432.8 123.0 48.0 - ------------------------------------------------------------------------------- Accounts payable and accrued liabilities (45.1) (33.2) (8.1) Long-term debt (108.1) (54.5) (8.6) - ------------------------------------------------------------------------------- Liabilities assumed (153.2) (87.7) (16.7) - ------------------------------------------------------------------------------- Cash purchase price $ 279.6 $ 35.3 $ 31.3 - ------------------------------------------------------------------------------- Divestitures On December 30, 2002, we sold our remaining 49.0% equity investment in Anasteel Supply Company, LLC. for $2.3 million. We received cash proceeds of $2.0 million with the remaining $0.3 million of consideration in the form of a note receivable due July 31, 2005. The note receivable bears interest at a fixed rate of 7.0%. In fiscal year 2000, we invested $1.8 million in bestroute.com ("bestroute"), an e-commerce company founded in 1999 to provide hard-to-find inventory products to wholesale distributors and end-users via the internet. During fiscal year 2001, we were required to fund an additional $6.3 million to bestroute as certain operating thresholds were met. In September 2000, we acquired the remaining 51.0% interest of bestroute in a transaction where the other members of bestroute received 723,183 stock rights of our company. Under the terms of the 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 our common stock. The agreement also provided a call provision under which we had the ability to call the stock rights in exchange for shares of our 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 year 2001, bestroute was not able to meet its operating plan and incurred operating losses of $2.1 million. 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, we discontinued bestroute's operations on March 2, 2001, and entered into an agreement with the holders of the stock rights to cancel 347,541 of the stock rights and redeem the remaining rights for $7.3 million of cash. Note 3--Property and Equipment Property and equipment at January 30, 2004 and January 31, 2003 consist of the following (in millions): 2004 2003 - ------------------------------------------------------------------------------- Land $ 37.2 $ 34.6 Buildings and improvements 138.3 117.5 Transportation equipment 21.1 24.1 Furniture, fixtures and equipment 86.6 75.9 Construction in progress 1.3 19.9 - ------------------------------------------------------------------------------- 284.5 272.0 Less accumulated depreciation (122.7) (114.2) - ------------------------------------------------------------------------------- $ 161.8 $ 157.8 - ------------------------------------------------------------------------------- Page 47 of 75 Note 4--Goodwill Effective January 26, 2002, we adopted both FAS 141 and FAS 142. 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. Under FAS 142, goodwill is no longer amortized, but rather tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This new approach requires the use of valuation techniques and methodologies significantly different from the undiscounted cash flow policy that was previously followed. Our nine operating segments are also the reporting units defined in FAS 142. The reporting units' goodwill was tested for impairment during the first quarter of fiscal year 2004 based upon the expected present value of future cash flows approach. As a result of this valuation process, as well as the application of the remaining provisions of FAS 142, we concluded that there was no impairment of goodwill related to any of our reporting units. A summary of the changes in the carrying amount of goodwill by reportable segment for the period ended January 30, 2004 is as follows (in millions):
Water & Plumbing/ Industrial Sewer HVAC MRO Utilities Electrical PVF All Other Total ------------------------------------------------------------------------------------------- Balance at January 25, 2002 $ 86.6 $ 50.1 $ 1.7 $ 2.5 $ 9.0 $ 56.4 $ 57.5 $ 263.8 Goodwill acquired -- -- -- 56.3 -- -- -- 56.3 - -------------------------------------------------------------------------------------------------------------------- Balance at January 31, 2003 86.6 50.1 1.7 58.8 9.0 56.4 57.5 320.1 Goodwill acquired 18.1 -- 271.1 -- -- -- -- 289.2 Finalization of purchase accounting -- -- -- 0.5 -- -- -- 0.5 - -------------------------------------------------------------------------------------------------------------------- Balance at January 30, 2004 $ 104.7 $ 50.1 $ 272.8 $ 59.3 $ 9.0 $ 56.4 $ 57.5 $ 609.8 - --------------------------------------------------------------------------------------------------------------------
Prior to the adoption of FAS 142, we amortized goodwill over estimated useful lives ranging from 15 to 40 years. Had we accounted for goodwill consistent with the provisions of FAS 142 in prior periods, our net income, basic earnings per share and diluted earnings per share would have been affected as follows (in millions except per share data): Fiscal Years Ended ----------------------------- 2004 2003 2002 - -------------------------------------------------------------------------------- Net income, as reported $ 57.7 $ 58.1 $ 44.1 Add: goodwill amortization, net of tax -- -- 5.4 - -------------------------------------------------------------------------------- Adjusted net income $ 57.7 $ 58.1 $ 49.5 ================================================================================ Basic earnings per share, as reported $ 2.52 $ 2.50 $ 1.90 Add: goodwill amortization, net of tax -- -- 0.23 - -------------------------------------------------------------------------------- Adjusted basic earnings per share $ 2.52 $ 2.50 $ 2.13 ================================================================================ Diluted earnings per share, as reported $ 2.46 $ 2.45 $ 1.88 Add: goodwill amortization, net of tax -- -- 0.23 - -------------------------------------------------------------------------------- Adjusted diluted earnings per share $ 2.46 $ 2.45 $ 2.11 - -------------------------------------------------------------------------------- Note 5--Branch Closure and Consolidation Activities In the normal course of business, we continually evaluate the operations and performance of our individual branches and identify branches for closure or consolidation. Prior to fiscal year 2002, we approved a plan to close and consolidate 43 branches, Page 48 of 75 including bestroute as discussed in note 2 above, because these branches did not strategically fit into our core businesses and/or they did not perform to our expectations. During fiscal year 2003, we announced the closure of an additional seven branches along with a distribution center in Georgia. Effective January 1, 2003, we adopted FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities. FAS 146 was effective for exit or disposal activities initiated after December 31, 2002. We closed seven underperforming Plumbing/HVAC branches and our Texas distribution center during January 2004. Approximately $2.2 million of selling, general and administrative expenses were recorded in connection with these closings. In addition to our branch closure activities, we relocated our corporate offices during October 2003. As a result of this decision, we recorded approximately $2.0 million of selling, general and administrative expenses during fiscal year 2004 to establish an accrued liability for the fair value of the remaining lease payments due under the previous locations' leases, net of estimated sublease income. The accrual is expected to be paid out substantially by April 2005. The following is a summary of the expenses associated with our closure activities (in millions): Fiscal Years Ended --------------------------- 2004 2003 2002 - -------------------------------------------------------------------------------- Cost of sales $ -- $ 0.4 $ 1.7 ================================================================================ Lease expense $ 4.0 $ -- $ 1.6 Severance expense -- 0.1 0.5 Professional expense (contractual obligation) -- -- 0.7 Other 0.4 (0.3) 0.9 - -------------------------------------------------------------------------------- Selling, general and administrative expenses $ 4.4 $ (0.2) $ 3.7 ================================================================================ Non-operating expenses $ -- $ -- $ 0.7 - -------------------------------------------------------------------------------- The cost of sales amounts represented inventory write-downs of products that will no longer be saleable following the closure of the branches. Severance expense included charges associated with payments owed to employees who have been or will be involuntarily terminated in connection with our branch closures. We have accrued the estimated lease obligations from the planned closure dates through the end of the contractual lease terms, net of any estimated sublease income. Other costs accrued for branches identified for closure were based on amounts due under agreements and/or based on estimates to terminate such agreements as well as certain executory expenses. Non-operating expenses primarily related to write-downs of assets for which we project the undiscounted cash flows to be less than the carrying amount of the related investment. During the third quarter of fiscal year 2003, we reversed accruals totaling $0.5 million related to previous branch closures, mainly as a result of favorable settlements of lease obligations for less than originally anticipated. The liability balance, included in other current liabilities, related to our closure activities as of January 30, 2004 and January 31, 2003 was as follows (in millions): Fiscal Years Ended -------------------- 2004 2003 - ------------------------------------------------------------------------------- Beginning balance $ 1.2 $ 3.1 Provision (income) 4.4 (0.2) Cash expenditures: Lease (1.4) (1.1) Severance -- (0.1) Other (0.1) (0.3) Non-cash asset impairments -- (0.2) - ------------------------------------------------------------------------------- Ending balance $ 4.1 $ 1.2 - ------------------------------------------------------------------------------- Page 49 of 75 Note 6--Impairment of Long-Lived Assets In the fourth quarter of fiscal year 2002, we recorded an impairment loss of $0.7 million related to goodwill of one entity in our Plumbing/HVAC segment. Note 7--Total Debt Total debt at January 30, 2004 and January 31, 2003 consists of the following (in millions):
Fiscal Years Ended -------------------- 2004 2003 - ------------------------------------------------------------------------------------------------- 8.27% senior notes, due 2003 $ -- $ 19.0 8.27% senior notes, due 2005 11.2 16.8 8.42% senior notes, due 2007 82.4 103.0 7.96% senior notes, due 2011 70.0 79.3 7.14% senior notes, due 2012 32.4 36.2 7.19% senior notes, due 2012 40.0 40.0 6.74% senior notes, due 2013 45.2 50.0 Unsecured bank notes under $290.0 revolving credit agreement, payable March 26, 2007, with an interest rate of 2.0% at January 30, 2004 100.0 72.4 Other notes payable with varying interest rates of 2.2% to 7.6% at at January 30, 2004 with due dates from 2004 to 2010 32.1 25.2 - ------------------------------------------------------------------------------------------------- Total debt 413.3 441.9 Less current portion (44.6) (63.8) - ------------------------------------------------------------------------------------------------- Total long-term debt $ 368.7 $ 378.1 =================================================================================================
Unsecured Bank Notes and Line of Credit Agreements On March 26, 2003, we replaced our existing $275.0 million revolving credit agreement, which was scheduled to mature on January 25, 2004, with a new $252.5 million revolving credit agreement (the "new credit agreement"), subject to borrowing limitations, which matures on March 26, 2007. On May 22, 2003, we amended the new credit agreement to increase maximum borrowing capacity from $252.5 million to $290.0 million effective June 9, 2003. The new credit agreement is unsecured and contains financial and other covenants, including limitations on dividends and maintenance of certain financial ratios. Interest is payable at market rates plus applicable margins and commitment fees ranging from 0.15% to 0.30% per annum are paid on the new credit agreement. We have a commercial paper program backed by our new credit agreement. There were no commercial paper borrowings outstanding at January 30, 2004 or at January 31, 2003. In order to initially fund the acquisition of Century, we borrowed $250.0 million at 3.39% under an interim senior unsecured term loan agreement (the "term loan"). Effective December 19, 2003, the new credit agreement was amended to permit the new term loan borrowings and to make financial and other covenants essentially the same as those in the term loan agreement. On January 28, 2004, we completed the sale of 6,900,000 shares of common stock in a public offering that generated net proceeds of $317.5 million. The proceeds we received were primarily used to fund the acquisition of Century. At January 30, 2004 there were no outstanding borrowings under the term loan agreement. We had two short-term lines of credit with borrowing capacities of $10.0 million and $15.0 million, respectively, during fiscal year 2003. On July 25, 2002, both line of credit agreements were amended to extend the maturity dates to June 30, 2003 and the funds under the $15.0 million line were allocated to an operating lease agreement. On August 30, 2002, the Page 50 of 75 operating lease agreement was amended to increase borrowing capacity from $15.0 million to $18.7 million. Under the terms of the operating lease agreement, we lease certain equipment, including vehicles, forklifts and trailers from various companies with funds provided by the $18.7 million line of credit. Monthly payments are made to the bank in accordance with the terms of each specific equipment lease. There was no remaining availability under the operating lease agreement at January 30, 2004. The $10.0 million line of credit was uncommitted and terminated when the new credit agreement was executed. Other Notes Payable On June 22, 2001, we 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, including up to $25.0 million for our new corporate headquarters building in Orlando, Florida ("Orlando property"). Concurrently, we entered into an agreement with AFG, certain financial parties as lenders, and SunTrust as agent for the construction of a new multi-branch complex 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. 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, we executed a master lease agreement ("Orlando lease agreement") with AFG under which we would lease the Orlando property for a five-year term, including the construction period and a lease period. The Orlando lease agreement required interest only payments that began at the earlier of the completion of construction or eighteen months following the acquisition of the Orlando property. Payments were interest only at LIBOR rates plus applicable credit spreads. On June 5, 2002, we terminated our Orlando loan agreement with AFG and SunTrust. Concurrently, we executed a new real estate term credit agreement (the "credit agreement") with SunTrust, and the outstanding principal balance of $1.7 million under the Orlando loan agreement was paid off and rolled into the credit agreement. Under the terms of the credit agreement, SunTrust agreed to fund up to a maximum of $25.0 million for the acquisition and development of our new corporate headquarters building in Orlando, Florida. The credit agreement bears interest based on LIBOR plus applicable credit spreads and matures July 31, 2005. At January 30, 2004 and January 31, 2003, the total outstanding borrowings of $24.4 million and $10.1 million, respectively, under the credit agreement are recorded in long-term debt. On March 16, 2004, we entered into sale-leaseback transaction in which we sold the Orlando property to a subsidiary of Wachovia Development Corporation and leased the property back for a period of 20 years. The lease expires on March 16, 2024, with five 5-year extensions exercisable at our option upon 12 months notice. We do not have an option to purchase the leased facility at the end of the minimum lease term and have not issued any residual value guarantee of the value of the leased facility. The lease is accounted for as an operating lease. 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 execution of the Miami loan agreement, we executed a master lease agreement (the "Miami lease agreement") with AFG. Under the terms of the Miami lease agreement, we leased the Miami property with rent payments beginning September 2003. Rent payments for the first four years were to be interest only at a rate based on LIBOR plus applicable credit spreads. As the lease was treated as a capital lease the outstanding borrowings and related assets were reflected in long-term debt and property and equipment. At January 31, 2003, the total outstanding borrowings of $6.7 million under the Miami loan agreement were recorded in long-term debt. There were no outstanding borrowings under the Miami lease agreement at January 30, 2004 because on January 30, 2004, a subsidiary of SunTrust Bank agreed to purchase the property from AFG and to lease the property to us under a new 20-year term lease expiring in 2024, with 5 year extensions exercisable at our option upon 12 months notice. The future minimum lease payments under the lease are approximately $22.7 million. We do not have an option to purchase the leased facility at the end of the minimum lease term and have not issued any residual value guarantee of the value of the leased facility. The gain on the sale of approximately $0.1 million will be amortized over the minimum term of the lease, which has been accounted for as an operating lease. Page 51 of 75 Other Our debt agreements contain covenants that require that we, among other things, maintain certain financial ratios and minimum net worth levels. The covenants also restrict our activities regarding investments, liens, borrowing and leasing, and payment of dividends other than stock. Under the dividend covenant, approximately $155.4 million was available at January 30, 2004 for payment of dividends. At January 30, 2004, we were in compliance with all financial and other covenants. Maturities of debt for each of the five years subsequent to January 30, 2004 and in the aggregate are as follows (in millions): Fiscal Years Ending - -------------------------------------------------------------------------------- 2005 $ 44.6 2006 68.8 2007 45.0 2008 151.1 2009 24.1 Thereafter 79.7 - -------------------------------------------------------------------------------- Total $ 413.3 ================================================================================ Note 8--Income Taxes The consolidated provision for income taxes consists of the following (in millions): Fiscal Years Ended -------------------------------- 2004 2003 2002 - ------------------------------------------------------------------------------- Currently payable: Federal $ 26.5 $ 23.3 $ 17.8 State 2.7 2.1 2.3 - ------------------------------------------------------------------------------- 29.2 25.4 20.1 - ------------------------------------------------------------------------------- Deferred: Federal 6.9 13.2 11.0 State 0.7 1.5 (0.5) - ------------------------------------------------------------------------------- 7.6 14.7 10.5 - ------------------------------------------------------------------------------- Income taxes $ 36.8 $ 40.1 $ 30.6 - ------------------------------------------------------------------------------- The following is a reconciliation of tax computed at the statutory federal rate to the income tax expense in the consolidated statements of income (dollars in millions):
Fiscal Years Ended ------------------------------------------------------------------ 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------ Amount % Amount % Amount % -------- -------- -------- -------- -------- -------- Tax computed at statutory federal rate $ 33.1 35.0% $ 34.4 35.0% $ 26.1 35.0% Effect of: State and local income tax, net of federal income tax benefit 2.2 2.3% 2.3 2.4% 1.5 2.0% Nondeductible expenses 0.9 1.0% 1.3 1.3% 2.4 3.1% Other, net 0.6 0.6% 2.1 2.2% 0.6 0.9% - ---------------------------------------------------------------------------------------------------------- Income taxes $ 36.8 38.9% $ 40.1 40.9% $ 30.6 41.0% - ----------------------------------------------------------------------------------------------------------
Page 52 of 75 The components of deferred tax assets and liabilities at January 30, 2004 and January 31, 2003 are as follows (in millions): Fiscal Years Ended -------------------- 2004 2003 - ------------------------------------------------------------------------------- Deferred tax assets: Allowance for doubtful accounts $ 3.1 $ 1.9 Inventories 7.4 6.2 Accrued vacation 0.3 2.5 Other accrued liabilities 7.2 4.5 State net operating losses 2.5 4.7 Deferred compensation 5.3 4.7 - ------------------------------------------------------------------------------- Gross deferred tax assets 25.8 24.5 Valuation allowance (0.6) (0.2) - ------------------------------------------------------------------------------- Total deferred tax assets 25.2 24.3 - ------------------------------------------------------------------------------- Deferred tax liabilities: Capitalized software development costs 2.9 2.7 Goodwill and intangible assets 33.2 16.6 Deferred revenue 11.6 9.7 Prepaid expenses and other current assets 11.3 9.4 Property and equipment 1.4 0.1 Other 0.8 0.1 - ------------------------------------------------------------------------------- Total deferred tax liabilities 61.2 38.6 - ------------------------------------------------------------------------------- Net deferred tax liabilities $ (36.0) $ (14.3) - ------------------------------------------------------------------------------- At January 30, 2004, we had federal and state net operating loss carryforwards of $2.5 million, which expire between 2012 and 2024. A valuation allowance has been provided on certain of the state net operating losses at January 30, 2004 as full realization of these assets is not considered more likely than not. Note 9--Employee Benefit Plans Profit Sharing Plan We have a 401(k) profit sharing plan, which provides benefits for substantially all of our employees who meet minimum age and length of service requirements. The maximum percentage of each eligible employee's contribution to be matched by the Company was increased 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 $4.6 million, $4.9 million and $5.0 million in fiscal years 2004, 2003 and 2002, respectively. Bonus Plans We have bonus plans, based on growth, profitability formulas, and return on assets, which provide incentive compensation for key officers and employees. Amounts charged to expense for bonuses to executive officers totaled $3.4 million, $2.8 million and $1.3 million in fiscal years 2004, 2003 and 2002, respectively. Deferred Executive Compensation Plan A non-qualified executive deferred compensation plan established on March 1, 2002 allows eligible employees to defer up to 90.0% of their cash compensation through the plan. We do not match employees' contributions under the current plan. Supplemental Executive Retirement Plan We have 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 our general assets. At January 30, 2004 and January 30, 2003, the liability under the plan, as determined in accordance with FAS Page 53 of 75 87, Employers' Accounting for Pensions, was $5.7 million and $5.1 million, respectively. The liability in each year is recorded in other noncurrent liabilities. Amounts charged to expense under the plan totaled $0.9 million, $0.6 million and $0.5 million in fiscal years 2004, 2003 and 2002, respectively. Note 10--Commitments and Contingencies Lease Commitments We occupy certain facilities and operate certain equipment and vehicles under leases that expire at various dates through the year 2024. In addition to minimum rentals, there are certain executory costs such as real estate taxes, insurance, and common area maintenance on most of our facility leases. Rent expense under these leases totaled $57.3 million, $51.5 million and $51.6 million in fiscal years 2004, 2003 and 2002, respectively. Future minimum annual rental payments under non-cancelable operating leases as of January 30, 2004 are as follows (in millions): Fiscal Years Ending - -------------------------------------------------------------------------------- 2005 $ 52.7 2006 41.4 2007 29.8 2008 21.4 2009 10.8 Thereafter 25.3 - -------------------------------------------------------------------------------- Total $ 181.4 ================================================================================ Certain operating leases for vehicles and equipment expiring in fiscal year 2009 contain residual value guarantee provisions and other guarantees which would become due in the event of a default under the operating lease agreement, or at the expiration of the operating lease agreement if the fair value of the leased properties is less than the guaranteed residual value. The maximum amount of our guarantee obligation at January 30, 2004 is approximately $3.0 million. As indicated in Note 7 above, we entered into an agreement to lease our newly constructed multi-branch complex in Miami, Florida from AFG beginning in September 2003. As the lease was treated as a capital lease, the outstanding borrowings and related assets were reflected in our long-term debt and property and equipment. On January 30, 2004, a subsidiary of SunTrust Bank agreed to purchase the property from AFG and to lease the property to us under a new 20-year term lease expiring in 2024, with 5-year extensions exercisable at our option upon 12 months notice. The future minimum lease payments under the lease are approximately $22.7 million. We do not have an option to purchase the leased facility at the end of the minimum lease term and have not issued any residual value guarantee of the value of the leased facility. As such, the gain on the sale of approximately $0.1 million will be amortized over the minimum term of the lease, which has been accounted for as an operating lease. Legal Matters We are involved in various legal proceedings arising in the normal course of our business. In our opinion, none of the proceedings are material in relation to our consolidated operations, cash flows, or financial position. Note 11--Stock Option Plans Stock Plans The 1997 Executive Stock Plan (the "1997 Stock Plan") is our only currently active stock plan at January 30, 2004. The Directors' Stock Option Plan established for non-employee board of directors members became inactive in May 2003. The 1997 Stock Plan authorizes the granting of both incentive and non-incentive stock options for an aggregate of 3,250,000 shares of common stock, to key employees. 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 our 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. 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"). Under the 1997 Stock Plan, we can grant up to 1,625,000 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. Page 54 of 75 In May 2002, the shareholders approved an amendment to the 1997 Stock Plan allowing the compensation committee to make grants of performance-based restricted shares to senior executives. Performance-based shares are used as an incentive to increase shareholder returns with actual awards based on various criteria, including increases in the price of our common shares, earnings per share, shareholder value and net income. Compensation expense for the number of shares issued is recognized over the vesting period. On August 21, 2002, March 18, 2003, and September 15, 2003, target awards of 125,000 shares, 35,000 shares, and 15,000 shares, respectively, were made to senior executives. These shares are to be issued in five separate tranches if the price of our common shares achieves certain price levels. During fiscal year 2004, 88,000 shares were issued with a market value at the date of grant of $3.8 million. 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 year 2004 this expense totaled $0.2 million. In fiscal year 2003, none of the stock price achievement levels had been attained and accordingly, no restricted shares were issued to participants. During fiscal year 2002, we granted certain senior 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 price of our common shares 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 $10.7 million 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 $2.2 million, $2.2 million and $0.7 million in fiscal years 2004, 2003 and 2002, respectively. During fiscal year 2003 and fiscal year 2002, we granted certain employees 20,000 shares and 11,000 shares of restricted stock, with market values at the date of grant of $0.6 million and $0.3 million, respectively. There were no non-performance shares granted to employees during fiscal year 2004. In fiscal years 2004, 2003 and 2002, we cancelled 29,888 shares, 29,888 shares and 84,709 shares, respectively, of the restricted shares granted, with market values at the date of grant of $0.5 million, $0.5 million and $1.5 million, 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 years 2004, 2003 and 2002, this expense totaled $0.7 million, $0.7 million and $0.8 million, 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 our 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 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 30, 2004. Stock Options Stock option and restricted stock activity and information about the 1997 Stock Plan and the Directors' Stock Plan are as follows:
Shares Weighted- Subject Average Stock Options To Option Option Price - ------------------------------------------------------------------------------------------- Balance at 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 - ----------------------------------------------------------------------------------------- Balance at January 25, 2002 (695,664 shares exercisable) 955,364 22.40 Granted 672,200 33.91 Exercised (232,387) 20.97 Cancelled (30,400) 31.40 - ----------------------------------------------------------------------------------------- Balance at January 31, 2003 (544,277 shares exercisable) 1,364,777 28.11 Granted 661,150 34.68 Exercised (199,348) 23.44 Cancelled (40,400) 32.07 - ----------------------------------------------------------------------------------------- Balance at January 30, 2004 (704,729 shares exercisable) 1,786,179 $ 30.85 =========================================================================================
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Shares Shares Available for Restricted stock Outstanding Issuance - ------------------------------------------------------------------------------------------- Balance at January 26, 2001 342,521 518,979 Granted 421,000 (421,000) Cancelled (84,709) 84,709 Vested (36,000) -- - ----------------------------------------------------------------------------------------- Balance at January 25, 2002 642,812 182,688 Additional authorized -- 250,000 Shares transferred to stock option pool -- (288,900) Shares assigned but not issued -- (125,000) Granted 20,000 (20,000) Cancelled (29,888) 29,888 Vested -- -- - ----------------------------------------------------------------------------------------- Balance at January 31, 2003 632,924 28,676 Additional authorized -- 500,000 Shares transferred to stock option pool -- (118,750) Issuance of assigned shares -- 38,000 Granted 88,000 (88,000) Cancelled (29,888) 29,888 Vested (15,000) -- - ----------------------------------------------------------------------------------------- Balance at January 30, 2004 676,036 389,814 =========================================================================================
Outstanding options at January 30, 2004 have expiration dates ranging from August 17, 2004 to January 5, 2014. The following table summarizes information about stock options outstanding at January 30, 2004:
Options Outstanding Options Exercisable ---------------------------------------- ----------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price - ------------------------------------------------------------------------------------------------ $12.83 - $18.75 298,068 5.3 $ 16.85 280,568 $ 16.95 21.00 - 28.75 117,941 6.3 24.35 98,441 24.79 30.90 - 36.05 1,236,670 8.6 34.05 321,720 33.58 38.01 - 49.65 133,500 8.2 38.17 4,000 39.33 - ------------------------------------------------------------------------------------------------ $12.83 - $49.65 1,786,179 7.8 $ 30.85 704,729 $ 25.76 ================================================================================================
Stock-Based Compensation We account for our 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. For purposes of pro forma disclosures under FAS 123, as amended by FAS 148, the estimated fair value of the stock options is amortized to compensation expense over the options' vesting period. Pro forma information relating to the fair value of stock-based compensation is presented in Note 1 under Stock-Based Compensation. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants: Fiscal Years Ended ---------------------------- 2004 2003 2002 - ------------------------------------------------------------------------------- Risk-free interest rates 3.1% 4.6% 4.7% - ------------------------------------------------------------------------------- Dividend yield 1.1% 1.1% 1.5% - ------------------------------------------------------------------------------- Expected volatility 45.1% 40.3% 38.3% - ------------------------------------------------------------------------------- Expected stock option lives 5 8 8 - ------------------------------------------------------------------------------- The weighted average estimated fair value of employee stock options granted during 2004, 2003 and 2002 was $13.61, Page 56 of 75 $15.94 and $9.16 per share, respectively. The pro forma calculations above do not include the effects of options granted prior to fiscal year 1996. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions could materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. Note 12--Capital Stock On January 28, 2004, we completed the sale of 6,900,000 shares of common stock in a public offering that generated net proceeds of $317.5 million. The proceeds were primarily used to fund the acquisition of Century and to repay indebtedness under our revolving credit agreement. Treasury Stock On March 15, 1999, our board of directors authorized the repurchase of up to 2,500,000 shares of our outstanding common stock to be used for general corporate purposes. Since March 15, 1999, we have repurchased 1,831,400 shares at an average price of $22.91 per share, of which 258,600 shares at an average price of $23.39 were purchased in fiscal year 2004, 257,000 shares at an average price of $27.78 per share were repurchased in fiscal year 2003 and 394,700 shares at an average price of $19.10 per share were repurchased in fiscal year 2002. Preferred Stock Our 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. We have a shareholder rights plan. Under the plan, we distributed to shareholders a dividend of one right per share of our common stock. When exercisable, each right will permit the holder to purchase one one-thousandth of a share (a "unit") of Series A Stock at a purchase price of $200 per unit from the Company. The rights generally become exercisable if a person or group acquires 15% or more of our common stock or commences a tender offer that could result in such person or group owning 15% or more of our common stock. If certain subsequent events occur after the rights first become exercisable, the rights may become exercisable for the purchase of shares of our common stock, 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 $0.01 per right at any time prior to the latter of (a) ten days after 20% or more of our 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 our stock. The rights expire on June 2, 2008 unless terminated earlier in accordance with the shareholder rights plan. Page 57 of 75 Note 13--Earnings Per Share Basic earnings per share are calculated by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share includes the additional dilutive effect of our 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 year 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 -------------------------------------- 2004 2003 2002 - ------------------------------------------------------------------------------------------------------ Basic weighted-average number of shares 22,927,656 23,212,392 23,175,025 Incremental shares resulting from: Stock options 187,787 153,011 96,062 Restricted stock 379,722 299,208 84,986 Stock rights issued in connection with bestroute acquisition -- -- 67,550 - ------------------------------------------------------------------------------------------------------ Diluted weighted-average number of shares 23,495,165 23,664,611 23,423,623 - ------------------------------------------------------------------------------------------------------
Excluded from the above computations of diluted weighted-average number of shares were unvested shares of restricted common stock of 10,000 shares and 82,000 shares at average prices of $31.35 and $31.27 per share for fiscal years 2003 and 2002, respectively, because their effect would have been anti-dilutive. No unvested shares of restricted common stock were considered to have an anti-dilutive effect for fiscal year 2004. Options to purchase 183,820 shares, 821,020 shares and 280,114 shares of common stock at average exercise prices of $37.50, $33.95 and $32.34 per share for fiscal years 2004, 2003 and 2002, respectively, were excluded from the above computations of diluted weighted-average number of shares because their effect would have been anti-dilutive. Note 14--Supplemental Cash Flows Additional supplemental information related to the consolidated statements of cash flows is as follows (in millions):
Fiscal Years Ended ----------------------------- 2004 2003 2002 - --------------------------------------------------------------------------------------------- Income taxes paid $ 13.1 $ 10.3 $ 36.6 Interest paid 31.3 29.9 35.8 Property acquired with debt 21.7 17.9 6.9 Debt paid with sale-leaseback proceeds 13.8 -- -- Note receivable from sale of investment in affiliated entity -- 0.3 --
During fiscal years 2004, 2003 and 2002, we awarded certain key employees 88,000 restricted shares, 20,000 restricted shares and 421,000 restricted shares of our common stock, respectively, in accordance with the 1997 Executive Stock Plan. During fiscal year 2002, we retired 342,854 shares of our common stock previously held in treasury. Dividends declared but not paid totaled $3.1 million and $2.4 million at January 30, 2004 and January 31, 2003, respectively. See note 2 for the net assets acquired and liabilities assumed for acquisitions recorded using the purchase method of accounting. Note 15--Related Party Transactions We lease several buildings and properties from certain related parties, including our chairman of the board, two other 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 us. Rents paid under these leases totaled $2.5 million, $2.1 million and $2.1 million in fiscal years 2004, 2003 and 2002, respectively. We made donations totaling $0.3 million, $0.9 million and $0.1 million to Hughes Supply Foundation, Inc. ("HSF"), a not-for-profit charitable organization, in fiscal years 2004, 2003 and 2002, respectively. The board of directors of HSF is comprised of certain executives of our company, including our chairman of the board, president and chief executive officer, and executive vice president and chief financial officer. Page 58 of 75 Note 16--Segment Information During the third quarter of fiscal year 2004, we revised our reporting structure to provide additional disclosure by realigning our previously reported operating segments, Electrical/Plumbing, Industrial PVF, and Water & Sewer/Building Materials on a more disaggregated basis by product line into six operating segments and an All Other category. The revised operating segments are: Water & Sewer, Plumbing/HVAC, MRO, Utilities, Electrical and Industrial PVF. The All Other category includes our Building Materials, Fire Protection, and Mechanical Industrial product lines. The Industrial PVF segment remains unchanged. The Corporate category includes corporate level expenses not allocated to our operating segments. Inter-segment sales are excluded from net sales presented for each segment. Operating income for each segment includes certain corporate expense allocations for employee benefits, corporate overhead expenses, data processing expenses, and property/casualty insurance. These allocations are based on consumption or at a standard rate determined by management. In connection with the change of our reporting structure mentioned above, we changed our method of allocating corporate overhead expenses to the segments. All prior period segment results have been reclassified to reflect these changes. The following is a description of our operating segments: Water & Sewer The Water & Sewer segment provides a complete line of water, sewer and storm-drain products to serve the needs of both contractors and municipalities in all aspects of the water and wastewater industries. Our waterline products transmit potable and non-potable water from the source to treatment plants, storage towers and pumping stations and ultimately to homes and businesses. Also included in this product category is our concrete business, which complements our Water & Sewer business by manufacturing prefabricated concrete vaults used for sewer and storm drain applications Plumbing/HVAC The Plumbing/HVAC segment includes both our plumbing and HVAC products. Our plumbing products are sold primarily to contractors and homebuilders for bathroom and kitchen installation. Our HVAC business distributes air conditioning and heating equipment to contractors for the installation and repair of central air conditioners, furnaces and refrigeration systems. MRO The MRO segment serves the multi-family housing market through customers such as apartment property management companies. The products in the MRO segment include the items needed to maintain an apartment unit or complex in good working condition, such as plumbing, electrical, appliances/parts, hardware, door/window parts, HVAC equipment/parts and janitorial supplies. Utilities The Utilities segment distributes products that electric utilities need to bring power from the generating plants through the transmission and distribution lines directly to the meters. In addition, the Utilities segment offers supply chain management services, including warehouse integration and outsourcing, meter testing and repair and product assembly. These products and services allow us to provide the electric utility companies with the products they need in order to keep their systems operational. Electrical The electrical segment serves the commercial, residential and industrial markets with customers including electrical contractors, industrial companies, original equipment manufacturers ("OEMs") and commercial businesses. The products and services in our Electrical product line include wire management products, electrical distribution equipment, wire and cable, automation equipment, tools and fasteners, light bulbs, light fixtures, motor controls, energy products, wiring devices, data/communications products and storeroom/job trailer management. Page 59 of 75 Industrial PVF The Industrial PVF segment distributes specialty stainless and high nickel alloy industrial PVF products for industrial, mechanical and specialty uses. The segment primarily serves industrial customers such as petrochemical, food and beverage, pulp and paper, mining, marine and pharmaceutical customers, industrial and mechanical contractors, fabricators, wholesale distributors, exporters and OEMs. All Other The "All Other" category includes our Building Materials, Fire Protection, and Mechanical Industrial businesses. In addition, the All Other category included revenues and expenses related to bestroute, an e-commerce company for which operations were discontinued during fiscal year 2002. The Building Materials business distributes products including concrete and masonry supplies and accessories, lumber, bridge rail, overhang brackets, erosion control products, bearing pads, tilt-up bracing rental, lifting and bracing inserts, sealants, waterproofing and fireproofing materials, commercial washroom specialties, tools and accessories primarily to the commercial, industrial and public infrastructure markets, with customers such as general contractors and subcontractors. The Fire Protection branches and fabrication facilities are located strategically within our large network of Water & Sewer branches, giving our customers, contractors and builders in the commercial, residential and industrial markets, access to the materials for both aboveground and underground applications. Products and services provided include sprinkler heads and devices, steel pipe and fittings, backflow prevention devices, valves, hydrants, air compressors and fabrication. The Mechanical Industrial business offers a complete inventory of valves, actuators and accessories in addition to a variety of consulting services and serves the commercial and industrial markets, with customers including fabricators, OEMs, industrial subcontractors, mechanical contractors, exporters, purchasing agents, maintenance departments, engineering departments and planners. Page 60 of 75 The following table presents net sales and other financial information by segment for fiscal years 2004, 2003 and 2002, as reclassified for the changes discussed above (in millions):
Water & Plumbing/ Industrial Sewer HVAC MRO Utilities Electrical PVF All Other Corporate Total - -------------------------------------------------------------------------------------------------------------------------------- Net sales 2004 $ 922.4 $ 842.1 $ 158.7 $ 363.8 $ 362.8 $ 283.2 $ 320.4 $ -- $ 3,253.4 2003 877.2 826.9 118.9 248.3 375.5 313.9 305.6 -- 3,066.3 2002 833.1 855.3 110.5 144.9 430.6 330.4 332.9 -- 3,037.7 - -------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 2004 $ 3.2 $ 3.3 $ 1.0 $ 1.5 $ 1.0 $ 0.7 $ 1.9 $ 8.6 $ 21.2 2003 3.1 3.7 0.4 0.9 1.3 0.8 2.4 7.9 20.5 2002 6.8 6.4 0.7 0.4 2.0 2.8 4.9 7.1 31.1 - -------------------------------------------------------------------------------------------------------------------------------- Provision for doubtful accounts 2004 $ 1.8 $ 0.8 $ 0.4 $ (0.9) $ 0.8 $ 0.6 $ 1.1 $ -- $ 4.6 2003 3.6 2.5 0.1 -- 1.3 0.4 1.2 -- 9.1 2002 3.1 6.3 -- -- 0.7 0.3 0.3 0.4 11.1 - -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 2004 $ 45.1 $ 8.4 $ 10.1 $ 13.7 $ 8.2 $ 23.0 $ 14.2 $ -- $ 122.7 2003 40.4 14.0 8.8 10.2 8.1 31.7 8.0 -- 121.2 2002 38.9 (2.8) 5.8 7.2 12.8 29.1 10.3 -- 101.3 - -------------------------------------------------------------------------------------------------------------------------------- Interest and other income (expense) 2004 $ 2.7 $ 2.2 $ 0.2 $ -- $ 0.6 $ (0.1) $ 0.7 $ 0.1 $ 6.4 2003 2.8 2.0 0.3 0.1 0.8 (0.1) 1.4 -- 7.3 2002 3.2 3.1 0.2 0.1 0.7 -- 1.1 0.9 9.3 - -------------------------------------------------------------------------------------------------------------------------------- Interest expense 2004 $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 34.5 $ 34.6 2003 -- -- -- -- -- -- 0.1 30.2 30.3 2002 -- -- -- -- -- -- -- 35.9 35.9 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 2004 $ 47.8 $ 10.7 $ 10.3 $ 13.7 $ 8.8 $ 22.9 $ 14.7 $ (34.4) $ 94.5 2003 43.2 16.0 9.1 10.2 8.9 31.6 9.4 (30.2) 98.2 2002 42.1 (0.7) 6.0 7.4 13.5 29.1 11.2 (33.9) 74.7 - -------------------------------------------------------------------------------------------------------------------------------- Capital expenditures 2004 $ 2.5 $ 1.2 $ 1.8 $ 0.1 $ 0.1 $ 0.3 $ 0.3 $ 9.6 $ 15.9 2003 2.3 0.8 0.1 0.3 0.1 0.5 0.7 10.5 15.3 2002 3.2 1.7 0.6 0.2 0.3 0.7 2.8 7.4 16.9 - --------------------------------------------------------------------------------------------------------------------------------
Page 61 of 75 The following table includes our investment in assets (accounts receivable less allowance for doubtful accounts, inventories and goodwill) and accounts payable for each segment at January 30, 2004 and January 31, 2003 (in millions):
Fiscal Year 2004 - ------------------------------------------------------------------------------------------ Accounts Segment Accounts Receivable Inventories Goodwill Assets Payable - ------------------------------------------------------------------------------------------ Water & Sewer $ 161.4 $ 92.8 $ 104.7 $ 358.9 $ 78.8 Plumbing/HVAC 106.8 114.4 50.1 271.3 79.1 MRO 48.7 52.6 272.8 374.1 16.4 Utilities 30.9 46.8 59.3 137.0 22.2 Electrical 51.6 28.4 9.0 89.0 28.1 Industrial PVF 40.5 103.3 56.4 200.2 27.8 All Other 53.4 28.7 57.5 139.6 18.8 Corporate -- -- -- -- 37.1 - ---------------------------------------------------------------- --------- --------- $ 493.3 $ 467.0 $ 609.8 1,570.1 $ 308.3 ================================================================ ========= Cash and cash equivalents 8.3 Deferred income taxes 19.4 Other current assets 53.0 Property and equipment 161.8 Other assets 68.7 - ----------------------------------------------------------------------------- Total Assets $ 1,881.3 ============================================================================= Fiscal Year 2003 - ------------------------------------------------------------------------------------------ Accounts Segment Accounts Receivable Inventories Goodwill Assets Payable - ------------------------------------------------------------------------------------------ Water & Sewer $ 133.8 $ 81.5 $ 86.6 $ 301.9 $ 50.5 Plumbing/HVAC 100.9 116.9 50.1 267.9 57.0 MRO 13.1 16.8 1.7 31.6 3.6 Utilities 30.6 42.1 58.8 131.5 22.9 Electrical 57.4 37.5 9.0 103.9 28.1 Industrial PVF 41.2 117.3 56.4 214.9 19.1 All Other 46.1 26.4 57.5 130.0 17.5 Corporate -- -- -- -- 31.3 - ---------------------------------------------------------------- --------- --------- $ 423.1 $ 438.5 $ 320.1 $ 1,181.7 $ 230.0 ================================================================ ========= Cash and cash equivalents 1.7 Deferred income taxes 19.7 Other current assets 47.1 Property and equipment 157.8 Other assets 26.9 - ----------------------------------------------------------------------------- Total Assets $ 1,434.9 - -----------------------------------------------------------------------------
Page 62 of 75 Note 17--Quarterly Financial Information (Unaudited) The following is a summary of the unaudited results of operations for each quarter in fiscal years 2004 and 2003 (in millions except per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter Full Year - ----------------------------------------------------------------------------------------- Fiscal 2004 Net sales $ 782.8 $ 815.1 $ 859.5 $ 796.0 $ 3,253.4 Gross margin 175.4 184.5 193.5 180.3 733.7 Net income 11.8 18.7 17.8 9.4 57.7 - ----------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.52 $ 0.82 $ 0.78 $ 0.41 $ 2.52 Diluted 0.51 0.80 0.76 0.39 2.46 - ----------------------------------------------------------------------------------------- Average shares outstanding: Basic 22.8 22.8 22.9 23.2 22.9 Diluted 23.1 23.3 23.4 24.0 23.5 - ----------------------------------------------------------------------------------------- Dividends per share $ 0.100 $ 0.100 $ 0.100 $ 0.100 $ 0.400 ========================================================================================= Fiscal 2003 Net sales $ 790.0 $ 774.7 $ 804.0 $ 697.6 $ 3,066.3 Gross margin 181.1 180.6 188.4 159.6 709.7 Net income 12.4 18.5 19.8 7.4 58.1 - ----------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.54 $ 0.80 $ 0.85 $ 0.32 $ 2.50 Diluted 0.52 0.78 0.84 0.31 2.45 - ----------------------------------------------------------------------------------------- Average shares outstanding: Basic 23.2 23.3 23.3 23.2 23.2 Diluted 23.6 23.8 23.6 23.5 23.7 - ----------------------------------------------------------------------------------------- Dividends per share $ 0.085 $ 0.085 $ 0.085 $ 0.100 $ 0.355 =========================================================================================
Page 63 of 75 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 cash flows present fairly, in all material respects, the financial position of Hughes Supply, Inc. and its subsidiaries at January 30, 2004 and January 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 2004 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. As discussed in Note 4 to the consolidated financial statements, effective January 26, 2002, the Company changed its method of accounting for goodwill and certain intangible assets as a result of adopting Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. PricewaterhouseCoopers LLP Orlando, Florida April 14, 2004 Page 64 of 75 Management's Responsibility for Financial Statements The consolidated financial statements and related information included in this Annual Report were prepared in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America as further described in their report. The Audit Committee of the board of directors is composed of four 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. Page 65 of 75 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have not had any change in, or disagreement with, our accountants or a reportable event, which is required to be reported in response to this item. ITEM 9A. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, management, under the supervision of the Company's chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the chief executive officer and chief financial officer concluded that, as of the end of such period, the disclosure controls and procedures were effective at a level of reasonable assurance to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. In addition, there have been no changes in the Company's internal control over financial reporting, as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, during the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. PART III The information required by Items 10, 11, 12, 13 and 14 of Part III is incorporated by reference to the Company's Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements The consolidated financial statements of the Company and its subsidiaries are included in Item 8 on pages 35 - 65. (2) Financial Statement Schedules The financial statement schedules are included on page 72. 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. (3) Exhibits Filed A substantial number of the exhibits listed below in the index to the exhibits on page 68 - 71 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. Page 66 of 75 (b) Reports on Form 8-K Hughes Supply filed or furnished the following current reports on Form 8-K during the quarter ended January 30, 2004: On November 25, 2003, Hughes Supply, Inc. furnished a Current Report on Form 8-K dated November 25, 2003 that included information relating to our third quarter operating results. On November 26, 2003, Hughes Supply, Inc. filed a Current Report on Form 8-K dated November 26, 2003 that included information relating to the announcement of our definitive all cash merger agreement with Century Maintenance Supply, Inc. On December 18, 2003, Hughes Supply, Inc. filed a Current Report on Form 8-K dated December 17, 2003 that included information relating to our revised segment presentation. On January 5, 2004, Hughes Supply, Inc. filed a Current Report on Form 8-K dated December 19, 2003 that included information relating to our acquisition of Century Maintenance Supply, Inc. On January 8, 2004, Hughes Supply, Inc. filed an amendment to its Current Report on Form 8-K dated December 19, 2003 that included certain financial information relating to Century Maintenance Supply, Inc. On January 23, 2004, Hughes Supply, Inc. filed a Current Report on Form 8-K dated January 22, 2004 that included information relating to the pricing and offering for sale of shares of our common stock. On February 2, 2004, Hughes Supply, Inc. furnished a Current Report on Form 8-K dated January 30, 2004 that included information relating to investor presentation materials used in meetings related to the sale of shares of our common stock. Page 67 of 75 INDEX TO EXHIBITS (Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits) (2) Plan of acquisition. 2.1 Agreement and Plan of Merger dated as of November 26, 2003, among Hughes Supply, Inc., MRO Merger Corp., Century Maintenance Supply, Inc., FS Equity Partners IV, L.P., Century Airconditioning Holdings, Inc., and Dennis C. Bearden, incorporated by reference to Exhibit 2.1 Form 8-K filed on January 5, 2004 (Commission File No. 001-08772). 2.2 First Amendment to Agreement and Plan of Merger, incorporated by reference to Exhibit 2.2 to Form 8-K filed on January 5, 2004 (Commission File No. 001-08772). (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 Amended and Restated By-Laws of Hughes Supply, Inc. (As Amended and Restated on May 20, 2003), incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended May 2, 2003 (Commission File No. 001-08772). 3.3 Form of Articles of Amendment of series A Junior Participating Preferred Stock , incorporated by reference to Exhibit 99.3 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). (10) Material contracts. 10.1 Amended and restated lease agreements with Hughes, Inc. dated April 1, 2003, incorporated by reference to Exhibit 10.1 to Form 10Q for the quarter ended May 2, 2003 (Commission File No. 001-08772). Sub-Item Property -------- -------- (a) 521 West Central Blvd, Orlando, FL (b) 1010 Grand Avenue, Orlando, FL (c) 2018 Lucerne Terrace, Orlando, FL (d) 335 N. Ingraham Avenue, Lakeland, FL (e) 951 Pierce Street, Clearwater, FL (f) 903 Brentwood Drive Daytona, FL (g) 401 Angle Road, Fort Pierce, FL (h) 576 NE 23rd Street, Gainesville, FL (i) 2525 12th Street, Sarasota, FL (j) 341 South Seaboard Avenue, Venice, FL (k) 2439 7th Street SW, Winter Haven, FL 10.2 Hughes Supply, Inc. 1988 Stock Option Plan as amended March 12, 1996 incorporated by reference to Exhibit to Form 10-K for the fiscal year ended January 26, 1996 (Commission File No. 001-08772). Page 68 of 75 10.3 Real Estate Term Credit Agreement, dated as of May 31, 2002, by and among Hughes Supply Shared Services, Inc. as borrower, Hughes Supply, Inc. as parent, and SunTrust Bank as lender incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended May 3, 2002 (Commission File No. 001-08772). 10.3 (a) First Amendment to Real Estate Term Credit Agreement, dated as of March 26, 2003, by and among Hughes Supply Shared Services, Inc. as borrower, Hughes Supply, Inc. as parent and SunTrust Bank as lender, incorporated by reference to Exhibit 10(a) to Form 10Q for quarter ended August 1, 2003 (Commission File No. 001-08772 10.4 Hughes Supply, Inc. Amended and Restated Directors' Stock Option Plan with amendments approved through May 21, 2002, incorporated by reference to Exhibit 10.4 to form 10-K for the fiscal year ended January 31, 2003 (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 Hughes Supply, Inc. 1997 Executive Stock Plan, Amended and Restated Plan (as amended on April 9, 2003), incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended May 2, 2003 (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 March 26, 2003 amount Hughes Supply, Inc. as borrower, and the Lenders from time to time party hereto and SunTrust Bank as administrative agent, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended January 31, 2003 (Commission File No. 001-08772). 10.10 (a) Lender Joinder Agreement dated May 22, 2003 executed by BNP PARIBAS in favor of Hughes Supply, Inc., the borrower, and SunTrust Bank, as administrative agent, for the lenders from time to time party to the revolving credit agreement dated as of March 26, 2003, among the borrowers, lenders and administrative agent, incorporated by reference to Exhibit 10.10 (a) to Form 10-Q for the quarter ended May 2, 2003 (Commission File No. 001-08772). 10.10 (b) Lender Joinder agreement dated May 22, 2003 executed by CommerceBank N.A. in favor of Hughes Supply, Inc., the borrower, and SunTrust Bank, as administrative agent, for the lenders from time to time party to the revolving credit agreement dated as of March 26, 2003, among the borrowers, lenders and administrative agent, incorporated by reference to Exhibit 10.10 (b) to Form 10-Q for the quarter ended May 2, 2003 (Commission File No. 001-08772). 10.11 Loan and Aircraft Security Agreement dated as of November 12, 2002 between Juno Industries, Inc. (d/b/a Hughes Aviation), customer, and SunTrust Leasing Corporation, lender, CESSNA 560 XL M/S No. 560-5119, FAA Registration Mark N357 WC incorporated by reference to Exhibit 10.11 to form 10-K for the fiscal year ended January 31, 2003 (Commission File No. 001-08772). 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). Page 69 of 75 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 to Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 001-08772). 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). 10.15 (e) First Amendment to Master Agreement incorporated by reference to Exhibit 10.15 (e) to form 10-K for the fiscal year ended January 31, 2003 (Commission File No. 001-08772). 10.16 (a) Amendment to Uncommitted Guidance and Swing Line Demand Promissory Note dated July 26, 2002 by the Company and SunTrust Bank, Inc. incorporated by reference to Exhibit 10.16 (a) to Form 10-Q for the quarter ended August 2, 2002 (Commission File No. 001-08772). 10.17 Senior Term Loan Agreement dated as of December 19, 2003, among Hughes Supply, Inc., Lehman Commercial Paper, Inc. SunTrust Bank, and each of the several other banks and financial institutions from time to time party thereto, Lehman Brothers, Inc. and SunTrust Robinson Humphrey, as exclusive joint advisors, joint book managers and joint lead arrangers and SunTrust Bank, as administrative agent, incorporated by reference to Exhibit 10.1 to Form 8-K filed January 5, 2004 (Commission File No. 001-08772). 10.18 First Amendment to Revolving Credit Agreement dated as of December 19, 2003, among Hughes Supply, Inc., the several banks and other financial institutions from time to time party thereto, and SunTrust Bank as administrative agent, incorporated by reference to Exhibit 10.2 to Form 8-K filed January 5, 2004 (Commission File No. 001-08772). 10.19 Lease agreements with SJ Limited Partnership. Sub-Item Property -------- -------- (a) 7311 Galveston Road, #800, Houston, TX (b) 7311 Galveston Road, #510, Houston, TX 10.20 Lease agreement with SJ Partnership for 7311 Gavleston Road, #710, Houston, TX 10.21 Lease agreement with Stanwood Limited Partnership for 2751 Miller Road, Decatur, GA 10.22 Lease agreement with SWS-GA Realty, Inc. and Stanwood Interests Limited Partnership for 2331 Varkel Way, Lithonia, GA Page 70 of 75 10.23 Lease agreements with SWS-TX Realty, Inc. Sub-Item Property -------- -------- (a) 8511 Monroe Boulevard, Houston, TX (b) 8505 Monroe Boulevard, Houston, TX 10.24 Lease agreements with JEM-Realty, Inc. and Stanwood Interests Limited Partnership Sub-Item Property -------- -------- (a) 629 Pressley Road, Charlotte, NC (b) 11835 West Fairmont Parkway, LaPorte, TX (c) Tract 26 South Houston Gardens, No. 6, Harris County, TX (21) Subsidiaries of the Registrant. (23) Consent of PricewaterhouseCoopers LLP. (31.1) Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer. (31.2) Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President and Chief Financial Officer. (32.1) Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the President and Chief Executive Officer. (32.2) Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the Executive Vice President and Chief Financial Officer. Page 71 of 75 FINANCIAL STATEMENT SCHEDULE SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended January 30, 2004, January 31, 2003 and January 25, 2002 (in millions)
Balance at Additions Balance at Beginning Charged to End of Description of Period Income Deductions Period - -------------------------------------------------------------------------------------- 2004 Allowance for doubtful accounts $ 8.5 $ 8.1(a) $ (10.1)(b) $ 6.5 Inventory reserves 6.0 7.8(c) (9.3)(d) 4.5 Deferred income taxes 0.2 0.4 -- 0.6 - ------------------------------------------------------------------------------------- 2003 Allowance for doubtful accounts $ 8.4 $ 10.8(a) $ (10.7)(b) $ 8.5 Inventory reserves 9.8 0.9(c) (4.7)(d) 6.0 Deferred income taxes 0.1 0.1 -- 0.2 - ------------------------------------------------------------------------------------- 2002 Allowance for doubtful accounts $ 6.1 $ 13.4(a) $ (11.1)(b) $ 8.4 Inventory reserves 10.4 8.0(c) (8.6)(d) 9.8 Deferred income taxes 0.7 -- (0.6) 0.1 - -------------------------------------------------------------------------------------
(a) Represents gross bad debt expense, excluding recoveries of bad debts, which totaled $3.5 million, $1.7 million and $2.3 million in fiscal 2004, fiscal 2003 and fiscal 2002, respectively. (b) Represents write-offs of uncollectible receivable amounts. (c) Represents amounts charged for provision for inventory loss, including book to physical inventory adjustments and estimated dead stock write-offs. (d) Deductions represent the net difference between the original inventory provisions recorded and actual book to physical adjustments, dead stock write-offs, and reductions in calculated reserve requirements. Page 72 of 75 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 April 14, 2004 appearing in the 2004 Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(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 April 14, 2004 Page 73 of 75 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/ Thomas I. Morgan -------------------- Thomas I. Morgan President and Chief Executive Officer /s/ David Bearman ----------------- David Bearman Executive Vice President and Chief Financial Officer Date: April 14, 2004 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/ Vincent S. Hughes --------------------------- --------------------------- David H. Hughes Vincent S. Hughes April 14, 2004 April 14, 2004 (Director) (Director) /s/ Thomas I. Morgan /s/ Dale E. Jones ---------------------------- ---------------------------- Thomas I. Morgan Dale Jones April 14, 2004 April 14, 2004 (Director) (Director) /s/ John D. Baker II /s/ William P. Kennedy --------------------------- ---------------------------- John D. Baker II William P. Kennedy April 14, 2004 April 14, 2004 (Director) (Director) /s/ Robert N. Blackford /s/ Patrick J. Knipe --------------------------- ---------------------------- Robert N. Blackford Patrick J. Knipe April 14, 2004 April 14, 2004 (Director) (Director) /s/ H. Corbin Day /s/ Amos R. McMullian --------------------------- ---------------------------- H. Corbin Day Amos R. McMullian April 14, 2004 April 14, 2004 (Director) (Director) Page 74 of 75 INDEX OF EXHIBITS FILED WITH THIS REPORT 10.19 Lease agreements with SJ Limited Partnership. Sub-Item Property -------- -------- (a) 7311 Galveston Road, #800, Houston, TX (b) 7311 Galveston Road, #510, Houston, TX 10.20 Lease agreement with SJ Partnership for 7311 Gavleston Road, #710, Houston, TX 10.21 Lease agreement with Stanwood Limited Partnership for 2751 Miller Road, Decatur, GA 10.22 Lease agreement with SWS-GA Realty, Inc. and Stanwood Interests Limited Partnership for 2331 Varkel Way, Lithonia, GA 10.23 Lease agreements with SWS-TX Realty, Inc. Sub-Item Property -------- -------- (a) 8511 Monroe Boulevard, Houston, TX (b) 8505 Monroe Boulevard, Houston, TX 10.24 Lease agreements with JEM-Realty, Inc. and Stanwood Interests Limited Partnership Sub-Item Property -------- -------- (a) 629 Pressley Road, Charlotte, NC (b) 11835 West Fairmont Parkway, LaPorte, TX (c) Tract 26 South Houston Gardens, No. 6, Harris County, TX (21) Subsidiaries of the Registrant (23) Consent of PricewaterhouseCoopers LLP (31.1) Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer (31.2) Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President and Chief Financial Officer (32.1) Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the President and Chief Executive Officer (32.2) Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the Executive Vice President and Chief Financial Officer Page 75 of 75 EX-10.19 3 d59199_ex10-19.txt LEASE AGREEMENTS WITH SJ LIMITED PARTNERSHIP Exhibit 10.19 Sub-ITEM (a) Page 1 of 8 COMMERCIAL LEASE Agreement of Lease, made as of this 1st day of May, 2000, by and between S J LIMITED PARTNERSHIP, ("Landlord"), and SOUTHWEST STAINLESS, L.P. ("Tenant"). A. Landlord and Tenant desire to hereby enter into a Commercial Lease for the demised premises described therein as 7311 Galveston Rd. #800, Houston, TX. ("Leased Premises") including a 12,500-sq. ft. tilt wall concrete building with 5500 sq. ft. concrete outside storage. NOW THEREFORE, in consideration of the mutual covenants contained in the lease and herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. The Landlord leases to the Tenant the Leased Premises for the term of ten (10) years from the first day of May, 2000 to the thirtieth (30th) day of April, 2010, at an annual rental of Ninety-Three Thousand Six Hundred and no/100 Dollars ($93,600.00), payable at the office of the Landlord in equal monthly installments of Seven Thousand Eight Hundred and no/100 Dollars ($7800.00), in advance, on the first of each month, the first payment to be made on the 1st day of May, 2000; With an annual increase by amount equal to % increase in CPI-U, in no event more than 3%. a.) Provided it is not then in default under the Lease. Tenant may extend the term up to three (3) times for one (1) year per extension by written notice of its election to do so given to Landlord at least ninety (90) days prior to the current expiration date. The extended term will be on all of the terms and conditions of this Lease. 2. The Tenant agrees: (a) That it will pay the said rent at the times and in the manner aforesaid. (b) That it will during the said term insure and keep insured the said building from loss or damage by fire in at least the sum of $450,000.00 by insurance companies of recognized responsibility licensed to do business in this state, and that it will pay all the premiums necessary for those purposes within ten (10) days after the same shall become due and will promptly deliver to the Landlord the policies of insurance and the receipts from such premiums: Provided, that if the Tenant shall at any time fail to insure or keep insured as aforesaid, the Landlord may do all things necessary to effect or maintain such insurance, and any reasonable moneys expended by it for that purpose shall be payable by the Tenant on demand, may be recovered as rent in arrears. Any policies obtained by Tenant will name Landlord as an additional named insured. (c) That it will keep all and singular the said building and premises, including the plumbing in such repair as the same are at the commencement of the said term or may be put in during the continuance thereof, reasonable wear and tear and damage by fire or other unavoidable casualty only excepted, and will promptly replace all glass thereof broken during the said term by other of the same size and quality. It is Page 2 of 8 the intent of the parties that Tenant will only be required to make repairs or replacements which are not structural in nature. (d) That it will not injure, or deface or suffer to be injured or defaced the premises or any part thereof. (e) Tenant agrees to indemnify and save harmless Landlord and its parents, subsidiaries, affiliates, directors, officers, employees, servants, attorneys and representatives from any and all claims of action, damages, fines, judgments, penalties, cost (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorney's fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Tenant of any applicable federal, state of local environmental laws of regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed after commencement of the Term and which was caused by or brought onto the Premises by Tenant or Tenant's agents, contractors, employees, licensees and invitees; or (c) as a result of any violation by Tenant of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Tenant's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease; provided, however, that Tenant will not be liable for the acts of any other tenants of said property. (f) That it will use the premises for storage, distribution and sale of any and all products sold by the Tenant or for any other lawful purpose. Tenant will not make or suffer any unlawful, improper, or offensive use of the premises, or any use or occupancy thereof contrary to any law of the state or any ordinance of the said city now or hereafter made, or which shall be injurious to any person or property, or which shall be liable to endanger or affect any insurance on the said building or to increase the premium thereof. (g) That it will not assign, underlet, or part with the possession of the whole or any part of the premises without first obtaining the written consent of the Landlord. Provided however, Tenant may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Tenant, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Tenant's issued and outstanding shares, or which succeeds to the entire business of Tenant through purchase, merger, consolidated or reorganization, or to any affiliate sharing common majority ownership with the Tenant. Subtenants or assignees will become liable directly to Landlord for all obligations of Tenant hereunder, without relieving Tenant's liability. (h) That the Landlord at all reasonable times may, with not less than 24 hour notice to tenant, enter to view the premises and to make repairs which the Landlord may see fit to make, or to show the premises to person who may wish to lease. Page 3 of 8 (i) That at the expiration of the said term it will peaceably yield up to the Landlord the premises and all erections and additions made upon the same, in good repair in all respect, reasonable use and wear and damage by fire and other unavoidable casualties excepted, as the same now are or may be put in by the Landlord. Provided however, Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Tenant has placed in the Premises, provided that during such removal Tenant will make all reasonable repairs necessary to return the Premises to its original condition, reasonable wear and tear excepted. (j) That all property of any kind that may be on the premises during the continuance of this lease shall be at the sole risk of the Tenant, and that the Landlord shall not be liable to the Tenant or any other person for any injury, loss, or damage to property or to any person on the premises unless caused by the negligence or willful neglect of the Landlord. (k) That no assent, express or implied, by the Landlord to any bleach of any of the Tenant's covenants, shall be deemed to be a waiver of any succeeding breach of the same covenant. (l) That Tenant agrees to accept possession of the demised premises in their present condition. 3. The Landlord covenants that the Tenant shall peaceably hold and enjoy the premises. 4. If the Tenant shall fail to pay rent reserved hereunder or any part thereof after Fifteen (15) days' written notice of same, or shall default in the performance of any other covenant or condition of this lease after thirty (30) days' written notice of same, the Landlord, by its agents and servants, may immediately, or at any time thereafter, re-enter the demised premises, either by summary proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damage therefor, and the Tenant, shall remain liable to the Landlord for the deficiency, if any, between Tenant's rent hereunder and the price obtained by Landlord on re-letting, and also in case of any such re-entry the Tenant shall pay to the Landlord on demand, as additional damages, all legal and other expenses incurred in removing the Tenant, the commissions for re-letting the demised premises and collecting rent, the cost of redecorating, refinishing, and repairing the demised premises and such other expenses as the Landlord may incur in connection therewith. Upon any such re-entry, the Landlord, at its option, may re-let the demised premises or any part or parts thereof, for the remainder of the demised terms or any part or parts thereof, or for a period extending beyond the date for the expiration of this lease and receive the rents therefor; and the rents collected for the balance of the agreed term of the Tenant on any such re-letting may be applied to pay any of the aforesaid items of "additional damages" remaining unpaid and to the fulfillment and performance of the other covenants of the Tenant hereunder, and the net avails thereof shall be applied by the Landlord on account of any rent unpaid by the Tenant for the remainder of the demised term; but the Tenant, however, shall pay to the Landlord upon each such rent days the amount of any and all deficiencies then existing. In any case, Landlord will use best efforts to mitigate Tenant's damages. No Page 4 of 8 termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, will affect Landlord's right to collect rent for the period prior to the termination thereof. Pursuit of any of the foregoing remedies will not preclude pursuit of any other remedies provided by law. 5. In case the premised or any part thereof shall at any time during the said term be destroyed or damaged by fire or other unavoidable casualty so as to be unfit for occupancy and use, and so that the premises cannot be rebuilt or restored by the Landlord within ninety (90) days thereafter, then this lease shall terminate; but if the premises can be rebuilt or restored within ninety (90) days, the Landlord will at its own expense and with due diligence so rebuild or restore the premises, and a just and proportionate part of the rents hereby reserved shall be paid by the Tenant until the premises shall have been so rebuilt or restored. 6. In the event the whole or a substantial part of the premises shall be taken by the city or state or other public authority for any public use, then this lease shall terminate from the time when possession of the whole or of the part so taken shall be required for such public use, and the rents, properly apportioned, shall be paid up to the time. Provided, however, such termination will be without prejudice to the rights of either Landlord or Tenant to recover compensation and damage caused by condemnation from the condemnor. If is further understood and agreed that neither Tenant nor Landlord will have any rights in any award made to the other by any condemnation authority. 7. The agreements, conditions, covenants and terms herein contained shall in every case, apply to, be binding upon and inure to the benefit of the respective parties hereto, their heirs, executors, administrators, successors and assigns, with the same force and effect, as if specifically mentioned in each instance where a party hereto is named, provided, however, that no assignment or under-letting by Tenant in violation of the provisions of this lease, shall vest in any such assignee or under-tenant any right or title in or to the leasehold estate hereby created. 8. Tenant hereby especially covenants and agrees that this lease shall be subject and subordinate to any mortgage or mortgages now on the demised premises. Provided, however, as a condition to such subordination, Landlord must secure from each mortgagee a nondisturbance agreement acceptable to Tenant providing that in the event of a foreclosure, the mortgagee will recognize the validity of this Lease and, provided that Tenant is not in default, will not disturb tenant's possession or its rights under this lease. 9. Any notice to be given under the terms of this lease by either party to the other party shall be in writing, and may be effected by personal delivery or sent by registered or certified mail, return receipt requested, postage prepaid, to the respective parties at the following addresses: Page 5 of 8 Landlord: S J Limited Partnership 7311 Galveston Rd, #710 Houston TX 77034 Tenant: Southwest Stainless, L.P. 20 North Orange Ave., Suite 200 Orlando, Florida 32801 Attn: Mark Scimeca, Esquire, Associate General Counsel Phone: (407) 841-4755; Fax: (407) 649-3018 10. This lease shall be construed and enforced in accordance with the laws of the State of Texas. 11. As used in this lease, whenever the context so indicates, the gender of all words shall include the masculine, feminine and neuter and the number of all words include the singular and plural. 12. This lease, including any exhibits hereto, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings of the parties in connection therewith. No covenants, representations or conditions not expressed in this lease shall be binding upon the parties or shall affect or be effective to interpret, change or restrict the provisions of this Agreement. 13. No modification, cancellation or surrender of this lease shall be effective unless in writing signed by the Landlord and Tenant by their duly authorized officers. 14. If any provision of this lease is or may be held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless survive and continue in full force and effect without being impaired or invalidated in any way. 15. Landlord warrants as of the commencement date of this Lease that the Premises are structurally sound and that all electrical, lighting, utility, fire safety, HVAC, and all operating systems are in good working condition and are not in need of repair. 16. Tenant will have the right, at its expense, to undertake a Phase I and or Phase II Environmental Site Assessment or equivalent (the "Environmental Report") with respect to the Premises. In the event that the results of such Environmental Report are unsatisfactory to Tenant, in its sole discretion, then tenant will have the right, at any time within forty-five (45) days after commencement of the term of this Lease to terminate this Lease immediately upon written notice to Landlord. 17. Landlord agrees to maintain and keep in good repair the roof, exterior wails, structural supports (Including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Landlord will also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Page 6 of 8 Premises subsequent to the end of then term, and any other repairs not expressly delegated to Tenant in this Lease. Landlord will also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises, remediate the Premises to comply with any and all environmental laws applicable thereto, and pay for all clean up and disposal cost at no cost to Tenant, unless directly caused by Tenant, its employees, agents or contractors. Notwithstanding anything to the contrary set forth elsewhere in this Lease, in the event the installation of sprinkler and fire protection systems on Premises is required by applicable law, ordinances, regulations or governmental requirements for Tenant's current or future use of the Premises at any time during the term of this Lease or any renewals thereof, Landlord, at Landlord's sole expense and without materially interfering with Tenant's operations on the Premises, shall immediately install on the Premises, and subsequently maintain, repair, modify and replace as necessary to comply with applicable law, ordinances, regulations and governmental requirements, all such required sprinkler and fire protection systems. 18. Landlord agrees to indemnify and save harmless Tenant and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-ups costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorney's fees and expenses of litigation) arising during or after the Lease term: (a) as a result of any violation by Landlord or prior owners or occupants of the Premises of any applicable federal, state or local environmental laws or regulation, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed prior to commencement of the Lease term; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any Landlord's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease. 19. Landlord will pay all real property taxes which may be assessed by any lawful authority against the Premises. Amended to tenant responsibility 5/15/00. 20. Should Landlord fail to perform any of its obligations hereunder, Landlord will have a period of thirty (30) days after its receipt of writing notice from Tenant of a failure of performance within which to commence a cure of that failure. Failure of Landlord to commence that cure within the 30-day period or to effect that cure within 30-day period will be an event of default under this Lease and Tenant may, at its option, elect to: (a) terminate this Lease upon thirty (30) days written notice to Landlord; (b) bring an action to require specific performance of Landlord's obligations; (c) provide Landlord with an additional period of time within which to effect that cure; (d) commence such cure itself, and Tenant may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Tenant hereunder, or require that Landlord immediately reimburse Tenant for its expenses; provided, however, in the event of an emergency, Tenant may immediately effect a cure of Landlord's failure Page 7 of 8 should Landlord fail to act immediately to do so, without the requirements of any by Tenant to Landlord; and/or (e) pursue any other remedies provided herein or providing by law. 21. Landlord warrants that Landlord owns the Premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Tenant's intended use of the Premises; that the Premises has legal, direct, pedestrian and vehicular access to and from and abuts one or more publicly dedicated roads; that the Premises are in compliance with all applicable laws, regulations and ordinances; that all computerized elements (defined to include all computer hardware and software and all equipment and systems containing or utilizing computer hardware and software) that are located within, operate within, benefit or serve all or any portion of either the Premises of any common areas appurtenant to or necessary to the normal use and operation of the Premises (the "Computerized Elements") are able to (a) accurately and properly recognize, manipulate and compare (in the normal functioning of such Computerized Elements) all dates, including without limitation the Year 2000 as a Leap Year and all dates thereafter, and (b) accurately and properly perform calculations and functions that rely on the ability to recognize, manipulate or compare such dates, and (c) operate in accordance with the specifications and manuals for such Computerized Elements (such Computerized Elements may include, by way of example and not limitation, elevators, security systems, access gates, utility systems, fire protection systems, telephone systems, lighting systems and HVAC systems); to the best of Landlord's knowledge, that past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Landlord has not received a citation from any regulatory agency for noncompliance with environmental laws; that, other than the following matters: NONE, Landlord has no knowledge of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials (ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substance (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Tenant, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Landlord, anyone claiming by, through or under Landlord, or any other party, except as otherwise specifically provided in this Lease. 22. If Tenant remains in possession of the Premises after expiration of the term hereof, with Landlord's acquiescence and without any express agreement of the parties, Tenant will be a tenant-at-will at the rental rate in effect at end of the Lease; and there will be no renewal of this Lease by operation of law. This Lease will not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which will set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Tenant's rights under this Lease including, without limitation, all rights of first refusal and options to purchase provided hereunder, if any. If Tenant records the Memorandum of Lease, Tenant agrees Page 8 of 8 to pay all recording fees and taxes required by reason of the recording of the Memorandum of Lease. 2.3. Landlord and Tenant shall each indemnify, defend and save the other harmless from and against any broker commissions, or fees or claim for commissions or fees arising under the indemnifying party which indemnification will expressly survive the termination of this Lease. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to Commercial Lease to be executed effective the date first above written. WITNESSES: LANDLORD: "SJ LIMITED PARTNERSHIP" /s/ Stefanie Soboleski By: /s/ David Jans ------------------------------ --------------------------------- Printed: Stefanie Soboleski Printed: David Jans ---------------------- ---------------------------- Title: Partner ------------------------------ /s/ Jason Thrash ----------------------------- Printed: Jason Thrash --------------------- WITNESSES: "TENANT" SOUTHWEST STAINLESS L.P. By: Z & L ACQUISITION CORP., its General Partner /s/ Mark Scimeca By: /s/ J. Stephen Zeph ----------------------------- --------------------------------- Printed: Mark Scimeca Printed: J. Stephen Zeph --------------------- ---------------------------- /s/ Gloria Jean Smith Title: Assistant Treasurer --------------------- ------------------------------ Printed: Gloria Jean Smith -------------------- Exhibit 10.19 Sub-ITEM (b) Page 1 of 9 COMMERCIAL LEASE Agreement of Lease, made as of this is 1st day of June 2000, by and between S J LIMITED PARTNERSHIP, ("Landlord"), and SOUTHWEST STAINLESS, L.P. ("Tenant"). A. Landlord and Tenant desire to hereby enter into a Commercial Lease for the demised premises described therein as 7311 Galveston Rd. #510, Houston, TX. ("Leased Premises") including a 12,500-sq. ft. machine shop, of concrete tilt-wall construction, with 3000-sq. ft. of office and 19,000 sq. ft concreted outside storage. B. The following list of machinery is included in this lease: 1-42" Bullard vertical turret lathe - Serial no. 111651 1-24" Bullard vertical turret lathe - Serial no. 101749 1-20" Monarch horizontal lathe - Serial no. 35217 2-12" Sharp horizontal lathes - Serial no. 4025 & K5069 1- Acer milling machine - Serial no. 030011661 1- Doall horizontal band saw - Serial no. 52799972 1- Goff 4 ft. Rotoblaster - Serial no. 199-50-759 NOW THEREFORE, in consideration of the mutual covenants contained in the lease and herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. The Landlord leases to the Tenant the Leased Premises for the term of seven (7) years and 11 months from the first day of June (1st) 2000 to April 30, 2010, at an annual rental of Ninety-Six Thousand Two Hundred Forty no/100 Dollars ($96,240.00), payable at the office of the Landlord in equal monthly installments of Eight Thousand Twenty and no/100 Dollars ($8,020.00), in advance, on the first of each month, the first payment to be made on the 1st day of June, 2002; With an annual increase by amount equal to % increase in CPI-U, in no event more than 3%. a.) Provided it is not then in default under the Lease, Tenant may extend the term up to three (3) times for one (1) year per extension by written notice of its election to do so given to Landlord at least ninety (90) days prior to the current expiration date. The extended term will be on all of the terms and conditions of this Lease. 2. The Tenant agrees: (a) That it will pay the said rent at the times and in the manner aforesaid. (b) That it will during the said term insure and keep insured the said building from loss or damage by fire in at least the sum of $450,000.00 by insurance companies of recognized responsibility, licensed to do business in this state, and that it will pay all the premiums necessary for those purposes within ten (10) days after the same shall become due and will promptly deliver to the Landlord the policies of insurance and the receipts from such premiums: Provided, that if the Tenant shall at any time fail to insure or keep insured as aforesaid, the Landlord may do all things necessary to effect or maintain such insurance, and any reasonable moneys expended by it for that purpose shall be payable by the Tenant on demand, may be recovered as rent Page 2 of 9 in arrears. Any policies obtained by Tenant will name Landlord as an additional named insured. (c) That it will keep all and singular the said building and premises, including the plumbing in such repair as the same are at the commencement of the said term or may be put in during the continuance thereof, reasonable wear and tear and damage by fire or other unavoidable casualty only excepted, and will promptly replace all glass thereof broken during the said term by other of the same size and quality. It is the intent of the parties that Tenant will only be required to make repairs or replacements, which are not structural in nature. (d) That it will not injure, or deface or suffer to be injured or defaced the premises or any part thereof. (e) Tenant agrees to indemnify and save harmless Landlord and its parents, subsidiaries, affiliates, directors, officers, employees, servants, attorneys and representatives from any and all claims of action, damages, fines, judgments, penalties, cost (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorney's fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Tenant of any applicable federal, state of local environmental laws of regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed after commencement of the Term and which was caused by or brought onto the Premises by Tenant or Tenant's agents, contractors, employees, licensees and invitees; or (c) as a result of any violation by Tenant of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Tenant's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease; provided, however, that Tenant will not be liable for the acts of any other tenants of said property. (f) That it will use the premises for storage, distribution and sale of any and all products sold by the Tenant or for any other lawful purpose. Tenant will not make or suffer any unlawful, improper, or offensive use of the premises, or any use or occupancy thereof contrary to any law of the state or any ordinance of the said city now or hereafter made, or which shall be injurious to any person or property, or which shall be liable to endanger or affect any insurance on the said building or to increase the premium thereof. (g) That it will not assign, underlet, or part with the possession of the whole or any part of the premises without first obtaining the written consent of the Landlord. Provided however, Tenant may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Tenant, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Tenant's issued and outstanding shares, or which succeeds to the entire business of Tenant through purchase, merger, consolidated or Page 3 of 9 reorganization, or to any affiliate sharing common majority ownership with the Tenant, Subtenants or assignees will become liable directly to Landlord for all obligations of Tenant hereunder, without relieving Tenant's liability. (h) That the Landlord at all reasonable times may, with not less than 24 hour notice to tenant, enter to view the premises and to make repairs which the Landlord may see fit to make, or to show the premises to person who may wish to lease. (i) That at the expiration of the said term it will peaceably yield up to the Landlord the premises and all erections and additions made upon the same, in good repair in all respect, reasonable use and wear and damage by fire and other unavoidable casualties excepted, as the same now are or may be put in by the Landlord. Provided however, Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Tenant has placed in the Premises, provided that during such removal Tenant will make all reasonable repairs necessary to return the Premises to its original condition, reasonable wear and tear excepted. (j) That all property of any kind that may be on the premises during the continuance of this lease shall be at the sole risk of the Tenant, and that the Landlord shall not be liable to the Tenant or any other person for any injury, loss, or damage to property or to any person on the premises unless caused by the negligence or willful neglect of the Landlord. (k) That no assent, express or implied, by the Landlord to any breach of any of the Tenant's covenants, shall be deemed to be a waiver of any succeeding breach of the same covenant. (l) That Tenant agrees to accept possession of the demised premises in their present condition. 3. The Landlord covenants that the Tenant shall peaceably hold and enjoy the premises. 4. If the Tenant shall fail to pay rent reserved hereunder or any part thereof after Fifteen (15) days' written notice of same, or shall default in the performance of any other covenant or condition of this lease after thirty (30) days' written notice of same, the Landlord, by its agents and servants, may immediately, or at any time thereafter, re-enter the demised premises, either by summary proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damage therefor, and the Tenant, shall remain liable to the Landlord For the deficiency, if any, between Tenant's rent hereunder and the price obtained by Landlord on re-letting, and also in case of any such re-entry the Tenant shall pay to the Landlord on demand, as additional damages, all legal and other expenses incurred in removing the Tenant, the commissions for re-letting the demised premises and collecting rent, the cost of redecorating, refinishing, and repairing the demised premises and such other expenses as the Landlord may incur in connection therewith. Upon any such re-entry, the Landlord, at its option, may re-let the demised premises or any part or parts thereof, for the remainder of the demised terms or any part or parts thereof, or for a period extending beyond the date for Page 4 of 9 the expiration of this lease and receive the rents therefor; and the rents collected for the balance of the agreed term of the Tenant on any such re-letting may be applied to pay any of the aforesaid items of "additional damages" remaining unpaid and to the fulfillment and performance of the other covenants of the Tenant hereunder, and the net avails thereof shall be applied by the Landlord on account of any rent unpaid by the Tenant for the remainder of the demised term; but the Tenant, however, shall pay to the Landlord upon each such rent days the amount of any and all deficiencies then existing. In any case, Landlord will use best efforts to mitigate Tenant's damages. No termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, will affect Landlord's right to collect rent for the period prior to the termination thereof. Pursuit of any of the foregoing remedies will not preclude pursuit of any other remedies provided by law. 5. In case the premised or any part thereof shall at any time during the said term be destroyed or damaged by fire or other unavoidable casualty so as to be unfit for occupancy and use, and so that the premises cannot be rebuilt or restored by the Landlord within ninety (90) days thereafter, then this lease shall terminate; but if the premises can be rebuilt or restored within ninety (90) days, the Landlord will at its own expense and with due diligence so rebuild or restore the premises, and a just and proportionate part of the rents hereby reserved shall be paid by the Tenant until the premises shall have been so rebuilt or restored. 6. In the event the whole or a substantial part of the premises shall be taken by the city or state or other public authority for any public use, then this lease shall terminate from the time when possession of the whole or of the part so taken shall be required for such public use, and the rents, properly apportioned, shall be paid up to the time. Provided, however, such termination will be without prejudice to the rights of either Landlord or Tenant to recover compensation and damage caused by condemnation from the condemnor. If is further understood and agreed that neither Tenant nor Landlord will have any rights in any award made to the other by any condemnation authority. 7. The agreements, conditions, covenants and terms herein contained shall in every case, apply to, be binding upon and inure to the benefit of the respective parties hereto, their heirs, executors, administrators, successors and assigns, with the same force and effect, as if specifically mentioned in each instance where a party hereto is named, provided, however, that no assignment or under-letting by Tenant in violation of the provisions of this lease, shall vest in any such assignee or under-tenant any right or title in or to the leasehold estate hereby created. 8. Tenant hereby especially covenants and agrees that this lease shall be subject and subordinate to any mortgage or mortgages now on the demised premises. Provided, however, as a condition to such subordination. Landlord must secure from each mortgagee a nondisturbance agreement acceptable to Tenant providing that in the event of a foreclosure, the mortgagee will recognize the validity of this Lease and, provided that Tenant is not in default, will not disturb tenant's possession or its rights under this lease. Page 5 of 9 9. Any notice to be given under the terms of this lease by either party to the other party shall be in writing, and may be effected by personal delivery or sent by registered or certified mail, return receipt requested, postage prepaid, to the respective parties at the following addresses: Page 6 of 9 Landlord: S J Limited Partnership 7311 Galveston Rd, #710 Houston TX 77034 Tenant: Southwest Stainless, L.P., c/o Hughes Supply, Inc., Attn.: Legal Dept. 20 North Orange Ave., Suite 200 Orlando, Florida 32801 This lease shall be construed and enforced in accordance with the laws of the State of Texas. 10. As used in this lease, whenever the context so indicates, the gender of all words shall include the masculine, feminine and neuter and the number of all words include the singular and plural. 11. This lease, including any exhibits hereto, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings of the parties in connection therewith. No covenants, representations or conditions not expressed in this lease shall be binding upon the parties or shall affect or be effective to interpret, change or restrict the provisions of this Agreement. 12. No modification, cancellation or surrender of this lease shall be effective unless in writing signed by the Landlord and Tenant by their duly authorized officers. 13. If any provision of this lease is or may be held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless survive and continue in full force and effect without being impaired or invalidated in any way. 14. Landlord warrants as of the commencement date of this Lease that the Premises are structurally sound and that all electrical, lighting, utility, fire safety, HVAC, and all operating systems are in good working condition and are not in need of repair. 15. Tenant will have the right, at its expense, to undertake a Phase I and or Phase II Environmental Site Assessment or equivalent (the "Environmental Report") with respect to the Premises. In the event that the results of such Environmental Report are unsatisfactory to Tenant, in its sole discretion, then tenant will have the right, at any time within forty-five (45) days after commencement of the term of this Lease to terminate this Lease immediately upon written notice to Landlord. 16. Landlord agrees to maintain and keep in good repair the roof, exterior wails, structural supports (Including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Landlord will also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of then term, and any other repairs not expressly Page 7 of 9 delegated to Tenant in this Lease. Landlord will also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises, remediate the Premises to comply with any and all environmental laws applicable thereto, and pay for all clean up and disposal cost at no cost to Tenant, unless directly caused by Tenant, its employees, agents or contractors. Notwithstanding anything to the contrary set forth elsewhere in this Lease, in the event the installation of sprinkler and fire protection systems on Premises is required by applicable law, ordinances, regulations or governmental requirements for Tenant's current or future use of the Premises at any time during the term of this Lease or any renewals thereof, Landlord, at Landlord's sole expense and without materially interfering with Tenant's operations on the Premises, shall immediately install on the Premises, and subsequently maintain, repair, modify and replace as necessary to comply with applicable law, ordinances, regulations and governmental requirements, all such required sprinkler and fire protection systems. 17. Landlord agrees to indemnify and save harmless Tenant and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-ups costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorney's fees and expenses of litigation) arising during or after the Lease term (a) as a result of any violation by Landlord or prior owners or occupants of the Premises of any applicable federal, state or local environmental laws or regulation, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed prior to commencement of the Lease term; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any Landlord's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease. 18. Upon receipt from Landlord of real property tax bills for the Premises, Tenant will pay all real property taxes which may be assessed by any lawful authority against the Premises. Tenant shall have the right to appeal any real property tax assessment. Landlord shall cooperate reasonably with Tenant in connection with any such appeal. Any such appeal shall be at Tenant's sole expense. Landlord shall deliver all tax notices and bills for the premises to Tenant within 10 days of Landlord's receipt thereof. 19. Should Landlord fail to perform any of its obligations hereunder, Landlord will have a period of thirty (30) days after its receipt of writing notice from Tenant of a failure of performance within which to commence a cure of that failure. Failure of Landlord to commence that cure within the 30-day period or to effect that cure within 30-day period will be an event of default under this Lease and Tenant may, at its option, elect to: (a) terminate this Lease upon thirty (30) days written notice to Landlord; (b) bring an action to require specific performance of Landlord's obligations; (c) provide Landlord with an additional period of time within which to effect that cure; (d) commence such cure itself, and Tenant may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Tenant hereunder, or require that Landlord immediately reimburse Tenant for its expenses; provided, however, in the event of an emergency, Tenant may immediately effect a cure of Landlord's failure should Landlord fail to act immediately to do so, without the requirements of any by Page 8 of 9 Tenant to Landlord; and/or, (e) pursue any other remedies provided herein or providing by law. 20. Landlord warrants that Landlord owns the Premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Tenant's intended use of the Premises; that the Premises has legal, direct, pedestrian and vehicular access to and from and abuts one or more publicly dedicated roads; that the Premises are in compliance with all applicable laws, regulations and ordinances; that all computerized elements (defined to include all computer hardware and software and all equipment and systems containing or utilizing computer hardware and software) that are located within, operate within, benefit or serve all or any portion of either the Premises of any common areas appurtenant to or necessary to the normal use and operation of the Premises (the "Computerized Elements") are able to (a) accurately and properly recognize, manipulate and compare (in the normal functioning of such Computerized Elements) all dates, including without limitation the Year 2000 as a Leap Year and all dates thereafter, and (b) accurately and properly perform calculations and functions that rely on the ability to recognize, manipulate or compare such dates, and (c) operate in accordance with the specifications and manuals for such Computerized Elements (such Computerized Elements may include, by way of example and not limitation, elevators, security systems, access gates, utility systems, fire protection systems, telephone systems, lighting systems and HVAC systems); to the best of Landlord's knowledge, that past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Landlord has not received a citation from any regulatory agency for noncompliance with environmental laws; that, other than the following matters: NONE, Landlord has no knowledge of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials (ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substance (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Tenant, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Landlord, anyone claiming by, through or under Landlord, or any other party, except as otherwise specifically provided in this Lease. 21. If Tenant remains in possession of the Premises after expiration of the term hereof, with Landlord's acquiescence and without any express agreement of the parties, Tenant will be a tenant-at-will at the rental rate in effect at end of the Lease; and there will be no renewal of this Lease by operation of law. This Lease will not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which will set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Tenant's rights under this Lease including, without limitation, all rights of first refusal and options to purchase provided hereunder, if any. If Tenant records the Memorandum of Lease, Tenant agrees to pay all recording fees and taxes required by reason of the recording of the Memorandum of Lease. Page 9 of 9 22. Landlord and Tenant shall each indemnify, defend and save the other harmless from and against any broker commissions, or fees or claim for commissions or fees arising under the indemnifying party which indemnification will expressly survive the termination of this Lease; provided, however, that upon execution of the Lease by both parties, Landlord shall pay to Mohr Partners, Inc. a commission equal to 4.5% of the sum of all base rent (excluding add-ons & CPI increases) payable under this Lease. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to Commercial Lease to be executed effective the date first above written. WITNESSES: LANDLORD: "SJ LIMITED PARTNERSHIP" /s/ Stefanie Soboleski By: /s/ David Jans ------------------------------ --------------------------------- Printed: Stefanie Soboleski Printed: David Jans ---------------------- ---------------------------- Title: President ------------------------------ /s/ Keneth D. Owen ------------------------------ Printed: Keneth D. Owen ---------------------- WITNESSES: "TENANT" SOUTHWEST STAINLESS, L.P., a DE limited partnership By: Z & L ACQUISITION CORP., a DE corporation, its General Partner /s/ Mark Scimeca By: /s/ J. Stephen Zeph ------------------------------ --------------------------------- Printed: Mark Scimeca Printed: J. Stephen Zeph ---------------------- ---------------------------- /s/ Barbara K. Winslow Title: Assistant Treasurer ---------------------- ------------------------------ Printed: Barbara K. Winslow ---------------------- July 10, 2002 VIA FAX: 713-941-2735 SJ Limited Partnership 7311 Galveston Rd., #710 Houston, Texas 77034 Re: Br. 9026 - Commercial Lease for 7311 Galveston Road, #510, Houston, Texas by and between SJ Limited Partnership, as Landlord, and Southwest Stainless, L.P., as Tenant, dated June 1, 2002 (the "Lease"). Dear Landlord: Per my conversation with Dave Jans this morning, this letter shall serve to confirm the agreement of Landlord and Tenant to amend the Lease to extend by three (3) weeks the forty-five (45) day Tenant environmental due diligence period provided for in Paragraph 15 of the Lease. Please sign below and fax a signed copy of this letter back to me at 407-649-3018 at your earliest convenience today. Thank you very much for your assistance and cooperation in this regard. Sincerely, Mark Scimeca Associate General Counsel The foregoing is accepted and agreed to by: SOUTHWEST STAINLESS, L.P. SJ LIMITED PARTNERSHIP By: Z&L Acquisition Corp., Its sole General Partner By:________________________ By:__________________________________ Printed:___________________ Benjamin P. Butterfield, Secretary November 11, 2002 VIA FACSIMILE TO (713) 941-2735 AND CERTIFIED MAIL RETURN RECEIPT REQUESTED SJ Limited Partnership 7311 Galveston Rd., #710 Houston, Texas 77034 Re: Br. 9090: Commercial Lease dated June 1, 2002 by and between SJ Limited Partnership, as Landlord, and Southwest Stainless, L.P., as Tenant, for property located at 7311 Galveston Road, #510, Houston, Texas (the "Lease"). Dear Landlord: This letter amendment to Lease shall serve to confirm the agreement of Landlord and Tenant to modify the Lease as follows: 1. The Lease is hereby amended by deleting the first paragraph in Item 1 in its entirety and replacing it with the following: 1. The landlord leases to the Tenant the Leased Premises for the term of seven (7) years and eleven (11) months from the first day of June (1st) 2002 to April 30, 2010 at an annual rental of Ninety-Three Thousand Six Hundred and no/100 Dollars ($93,600.00), payable at the office of the Landlord in equal monthly installments of Seven Thousand Eight Hundred and no/100 ($7,800.00), in advance, on the first of each month, the first payment to be made on the 1st day of June, 2002; with an annual increase by amount equal to % increase in CPI-U, in no event more than 3%. Paragraph 1a.) shall remain unchanged. 2. Except as modified hereby, the Lease shall remain unchanged and in full force and effect. Please indicate the acceptance and agreement of Landlord to this letter amendment to Lease by having Landlord sign below and faxing a signed copy of this letter to my attention at (407) 649-3018. Thank you for your assistance with this matter. SJ Limited Partnership November 11, 2002 Page Two Sincerely, Mark Scimeca Assistant Secretary and Associate General Counsel MDS:js cc: Mike Stanwood (via fax) Dave Jans (via fax) George Urquiola (via inter-office mail) Jeff Bulejcik (via inter-office mail) The foregoing is accepted and agreed to by: SOUTHWEST STAINLESS, L.P. By: Z&L Acquisition Corp., Its sole General Partner By:______________________________ Printed:_________________________ Title:___________________________ Date:____________________________ SJ LIMITED PARTNERSHIP By:______________________________ Printed:_________________________ Title:___________________________ Date:____________________________ EX-10.20 4 d59199_ex10-20.txt LEASE AGREEMENT WITH SJ PARTNERSHIP Exhibit 10.20 ADDENDUM TO COMMERCIAL LEASE THIS ADDENDUM TO COMMERCIAL LEASE is made and entered into as of the 13th day of March, 2001, by and between SJ PARTNERSHIP ("Landlord"), and HUGHES SUPPLY, INC., a Florida corporattion ("Tenant"). A. On April 1, 1999, Landlord and Tenant entered into a Commercial Lease for the demised premises ("Premises") described therein as 7311 Galveston Rd., #710, Houston, Texas, as amended simultaneous therein (the "Lease"). B. Landlord and Tenant desire to amend the Lease as set forth below. NOW THEREFORE, in consideration of the mutual covenants contained in the Lease and herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. All terms as defined in the Lease are herein incorporated by this reference and are to have the meanings as set forth therein. 2. Paragraph 1 of the Lease shall be modified to delete "for the term of five years from the first day of April, 1999, to thirtieth day of April, 2004" therefrom to be replaced with "for a term of eleven years and one month from the first day of April, 1999 to the thirtieth day of April 2010." 3. The Lease shall remain in full force and effect as amended above. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to Commercial Lease to be executed effective the date first written above. LANDLORD: WITNESS: SJ PARTNERSHIP /s/ Stefanie Soboleski By: /s/ David Jans - --------------------------------- -------------------------------- Print Name: Stefanie Soboleski Name: David Jans ---------------------- ------------------------------ Title: Partner ----------------------------- /s/ Kenneth D. Owen - --------------------------------- Print Name: Kenneth D. Owen ---------------------- TANANT: WITNESS: HUGHES SUPPLY, INC., a Florida corporation /s/ Marjorie H. Fitton By: /s/ A. Stewart Hall, Jr. - ---------------------------------- --------------------------------- Print Name: Majorie H. Fitton Name: A. Stewart Hall, Jr. ------------------------------- Title: President /s/ Gloria Jean Smith ------------------------------ - ---------------------------------- Print Name: Gloria Jean Smith ----------------------- COMMERCIAL LEASE Agreement of Lease, made as of this 1st day of Apiil, 1999, between SJ PARTNERSHIP, hereinafter called the Lessor, and HUGHES SUPPLY, INC. hereinafter called the Lessee, withnesseth: 1. (a) The Lessor leases the building known as 7311 Galveston Road, #710, in tlie City of Houston, Texas, (12,000 sq. ft. tilt wall concrete building with machine shop equipment and 12,000 sq. ft. concrete outside storage) for the term of five (5) years from the 1st day of April 1999, to the 30th day of April, 2004, at an annual rental of Ninety-Three Thousand Six-Hundred and no/100 Dollars ($93,600.00), payable at the office of Lessor in Equal monthly installments of Seven Thousand Eight Hundred and no/100 Dollars ($7,800.00), in advance, on the first of each month, the first payment to be made on the 1st day of April, 1999. 2. The Lessee agrees: (a) That it will pay the said rent at the times and in the manner aforesaid. (b) That it will during the said term insure and keep insured in the name of the Lessor the said building from loss or damage by fire in at least the sum of $250,000.00 by insurance companies to be approved by the Lessor, and that it will pay all the premiums necessary for those purposes within ten (10) days after the same shall become due and will promptly deliver to the Lessor the policies of insurance and the receipts from such premiums; Provided, that if the Lessee shall at any time fail to insure or keep insured as aforesaid, the Lessor may do all things necessary to effect or maintain such insurance, and any moneys expended by it for that purpose shall be payable by the Lessee on demand, may be recovered as rent in arrears. (c) That it will keep all and singular the said building and premises, including the plumbing in such repair as the same are at the commencement of the said term or may be put in during the continuance thereof, reasonable wear and tear and damage by fire or other unavoidable casualty only excepted, and will promptly replace all glass thereof broken during the said term by other of the same size and quality. (d) That it will not injure, or deface or suffer to be injured or defaced the premises or any part thereof. (e) That it will save harmless and indemnify the Lessor from and against all loss, liability, or expense that may incurred by reason of any accident with the machinery, gas or water or other pipes, or from any damage, neglect, or misadventure arising from or in any way growing out of the use, misuse, or abuse of the city water, or from the bursting of any pipes. (f) That it will not make or suffer any unlawful, improper, or offensive use of the premises, or any use or occupancy thereof contrary to any law of the state or any ordinance of the said city now or hereafter made, or which shall be injurious to any person or property, or which shall be liable to endanger or affect any insurance on the said building or to increase the premium thereof. (g) That it will not assign, underlet, or part with the possession of the whole or any part of the premises without first obtaining the written consent of the Lessor. (h) That the Lessor at all seasonable times may enter to view the premises and to make repairs which Lessor may see fit to make, or to show the premises to person who may wish to lease. (i) That at the expiration of the said term it will peaceably yield up to the Lessor the premises and all erections and additions made upon the same, in good repair in all respect, reasonable use and wear and damage by fire and other unavoidable casualties excepted, as the same now are or may be put in the by the Lessor. (j) That all property of any kind that may be on the premises during the continuance of this lease shall be at the sold risk of the Lessee, and that the Lessor shall not be liable to the Lessee or any other person for any injury, loss, or damage to property or to any person on the premises. (k) That no assent, express or implied, by the Lessor to any breach of any of the Lessee's convenants, shall be deemed to be a waiver of any succeeding breach of the same convenant. (l) That Lessee agrees to accept possession of the demised premises in their present condition, and to allow for changes in such condition which may occur by reasonable deterioration between the date hereof, and the date that Lessee actually occupies said premises. 3. The Lessor covenants that the Lessee shall peaceably hold and enjoy the premises. 4. If the Lessee becomes insolvent or is adjudicated a bankrupt or applies for or takes the benefit of any bankruptcy or insolvent act or any act of statutory provisions for the relief of debtors, now or hereafter enacted, or make a general assigment for the benefit of creditors or if a Receiver or Trustee be appointed for the Lessee's property, the Lessor may give to the Lessee fifteen (15) days' written notice of intention to end the term of the lease, and thereupon at the expiration of said fifteen (15) days, the term under this lease shall expire as fully and completely as if that day were the date herein definitely fixed for the expiration of the term, and the Lessee will then quit and surrender the demised premises to the Lessor, but the Lessee shall remain liable as hereafter provided. If the Lessee shall fail to pay rent reserved hereunder or any part thereof after fifteen (15) days' written notice of same, or shall default in the performance of any other convenant or condition of this lease after thirty (30) days' written notice of same, or if the demised premises become vacant or deserted, the Lessor, by its agents and servants, may immediately, or at any time thereafter, re-enter the demised premises and remove all persons and property therefrom, either by summary proceeding or by any suitable action or proceeding at law, or by force or otherwise, without being liable to indictment, prosecution or damage therefor, and the Lessee, whether or not the premises be re-let as hereinafter provided, shall remain liable to the Lessor for damages equivalent in amount to all of the rent reserved hereunder to the time when this lease would have expired but for such termination, and the same shall be due and payable by the Lessee to the Lessor on the several rent days above specified, and also in case of any such re-entry the Lessee shall pay to the Lessor on demand, as additional damages, all legal and other expenses incurred in removing the Lessee, the commissions for re-letting the demised premises and collecting rent, the cost of redecorating, refinishing, and repairing the demised premises and such other expenses as the Lessor may incur in connection therewith. Upon any such re-entry, the Lessor, at its option, may re-let the demised premises or any part or parts thereof, or for a period extending beyond the date for the expiration of this lease and receive the rents therefor; and the rents collected for the balance of the agreed term of the Lessee on any such re-letting may be applied to pay any of the aforesaid items of "additional damages" remaining unpaid and to the fulfillment and performance of the other covenants of the Lessee hereunder, and the net avails thereof shall be applied by the Lessor on account of any rent unpaid by the Lessee for the remainder of the demised term; but the Lessee, however, shall pay to the Lessor upon each such rent days the amount of any and all deficiencies then existing. 5. In case the premised or any part thereof shall at any time during the said term be destroyed or damaged by fire or other unavoidable casualty so as to be unfit for occupancy and use, and so that the premises cannot be rebuilt or restored by the Lessor within ninety (90) days thereafter, then this lease shall terminate; but if the premises can be rebuilt or restored within ninety (90) days, the Lessor will at its own expense and with due diligence so rebuild or restore the premises, and a just and proportionate part of the rents hereby reserved shall be paid by the Lessee until the premises shall have been so rebuilt or restored. 6. In the event the whole or a substantial part of the premises shall be taken by the city or state or other public authority for any public use, then this lease shall terminate from the time when possession of the whole or of the part so taken shall be required for such public use, and the rents, properly apportioned, shall be paid up to that time; and the Lessee shall not claim or be entitled to any part of the award to be made for damages for such taking for public use, save and except for business interruption and relocation expense, and such taking shall not be deemed a breach of the Lessor's covenant for quiet enjoyment herein before contained. 7. The agreements, conditions, covenants and terms herein contained shall in every case, apply to, be binding upon the inure to the benefit of the respective parties hereto, their heirs, executors, administrators, successors and assigns, with the same force and effect, as if specifically mentioned in each instance where a party hereto is named, provided, however, that not assignment or under-letting by Lessee in violation of the provisions of this lease, shall vest in any such assignee or under-tenant any right or title in or to the leasehold estate hereby created. 8. Lessor shall have a landlord's lien and in addition, is hereby given an express contractual landlord's lien as security for the fixed rent herein reserved, as well as any of the other charges or expenses upon all of the goods, wares, chattels, implements, fixtures, furniture, tools, machinery and other personal property which Lessee now or at any time hereafter placed in or upon the demised premises, all exemptions of said property which Lessee now or at any time hereafter placed in or upon the demised premises, all exemptions of said property or any part of it being hereby waived. 9. Lessee hereby especially convenants and agrees that this lease shall be subject and subordinate to any mortgage or mortgages now on the demised premises. 10. Any notice to be given under the terms of this lease by either party to the other party shall be in writing, and may be effected by personal deliver or sent by registered or certified mail, return receipt requested, postage prepaid, to the respective parties at the following addresses: Lessor: SJ Partnership 7211 Galveston Rd., #710 Houston TX 77034 Lessee: Hughes Supply 11. This lease shall be construed and enforced in accordance with the laws of the State of Texas. 12. As used in this lease, whenever the context so indicates, the gender of all words shall include the masculine, feminine and neuter and the number of all words include the singular and plural 13. This lease, including any exhibits hereto, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings of the parties in connection therewith. No covenants, representations or conditions not expressed in this lease shall be binding upon the parties or shall affect or be effective to interpret, change or restrict the provisions of this Agreement. 14. No modification, cancellation or surrender of this lease shall be effective unless in writing signed by the Lessor and Lessee by their duly authorized officers. 15. If any provision of this lease is or may be held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless survive and continue in full force and effect without being impaired or invalidated in any way. SIGNED this 1 day of April, 1999. SJ PARTNERSHIP, Lessor /s/ David C. Jans BY: DAVID C. JANS, Partner HUGHES SUPPLY, INC. By: /s/ A. Stewart Hall, Jr. ------------------------------ President ADDENDUM TO COMMERCIAL LEASE THIS ADDENDUM TO COMMERCIAL LEASE is made and entered into as of the __day of April, 1999, by and between SJ PARTNERSHIP ("Landlord"), and HUGHES SUPPLY, INC. ("Tenant"). A. Landlord and Tenant, concurrently with this Addendum, entered into a Commercial Lease for the demised premises described therein as 7311 Galveston Rd., #710, Houston, TX, (the "Lease"). B. Landlord and Tenant desire to amend the Lease as set forth below. NOW THEREFORE, in consideration of the mutual covenants contained in the Lease and herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Paragraph 1 of the Lease shall be amended to provide for "the term of five (5) years from the first day of April 1999 to the thirtieth (30th) day of April 2004" as opposed to "the term of five (5) years from the first day of April 1999 to the thirtieth (30th) of April 2004." 2. Paragraph 1 shall be further amended to add a subparagraph (b) which shall state as follows: b.) Provided it is not then in default under the Lease, Tenant may extend the term up to three (3) times for one (1) year per extension by written notice of its election to do so given to Landlord at least ninety (90) days prior to the then current expiration date. The extended term will be on all of the terms and conditions of this Lease. 3. Paragraph 2(b) shall be amended to read as follows: (deletions struck through, additions underlined): (a) that it will pay the said rent at the times and in the manner aforesaid. That it will during the said term insure and keep insured the said building from loss or damage by fire in at least the sum of $250,000.00 by insurance companies, of recognized responsibility licensed to do business in this state, and that it will pay all the premiums necessary for those purposes within ten (10) days after the same shall become due and will promptly deliver to the Landlord the policies of insurance and the receipts from such premiums; Provided, that if the Lessee shall at any time fail to insure or keep insured as aforesaid, the Landlord may do all things necessary to effect or maintain such insurance, and any reasonable moneys expended by it for that purpose shall be repayable by the Tenant on demand, may be recovered as rent in arrears. Any policies obtained by Tenant will name Landlord as an additional named insured. 4. Paragraph 2(c) shall be amended to add the following sentence: It is the intent of the parties that Tenant will only be required to make repairs or replacements which are not structural in nature. 5. Paragraph 2(e) shall be deleted as it reads in the Lease and replaced as follows: Tenant agrees to indemnify and save harmless Landlord and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Tenant of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed after commencement of the Term and which was caused by or brought onto the Premises by Tenant or Tenant's agents, contractors, employees, licensees and invitees; or (c) as a result of any violation by Tenant of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Tenant's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease; provided, however, that Tenant will not be liable for the acts of any other tenants of said property. 6. Paragraph 2(f) of the Lease shall be amended to read as follows: (additions underlined): That it will use the premises for the storage, distribution and sale of any and all products sold by the Tenant or for any other lawful purpose. Tenant will not make or suffer any unlawful, improper, or offensive use of the premises, or any use or occupancy thereof contrary to any law of the state or any ordinance of said city now or hereafter made, or which shall be injurious to any person or property, or which shall be liable to endanger or affect any insurance on the said building or to increase the premium thereof. 7. Paragraph 2(g) of the Lease shall be amended to add the following sentence: Provided however, Tenant may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Tenant, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Tenant's issued and outstanding shares, or which succeeds to the entire business of Tenant through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Tenant. Subtenants or assignees will become liable directly to Landlord for all obligations of Tenant hereunder, without relieving Tenant's liability. 8. Paragraph 2(h) of the Lease shall be amended to provide that the Landlord may enter the premises at "all reasonable times" as opposed to "?seasonable? times". 2 9. Paragraph 2(i) of the Lease shall be amended to add the following sentence: Provided however, Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, futures and equipment which Tenant has placed in the Premises, provided that during such removal Tenant will make all reasonable repairs necessary to return the Premises to its original condition, reasonable wear and tear excepted. 10. Paragraph 2(i) of the Lease shall be amended to add the following language to the end of the provision: unless caused by the negligence or willful neglect of the Landlord. 11. Paragraph 4 of the Lease shall be amended to delete the first paragraph in its entirety with the remaining paragraph to be amended to read as follows (deletions struck through, additions underlined): If the Tenant shall fail to pay rent reserved hereunder or any part thereof after fifteen (15) days' written notice of same, or shall default in the performance of any other covenant or condition of this Lease after thirty (30) days' written notice of same, the Landlord, by its agents and servants, may immediately, or at and time thereafter, re-enter the demised premises, either by summary proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damage therefor, and the Tenant, shall remain liable to the Landlord for the deficiency, if any, between Tenant's rent hereunder and the price obtained by Landlord on reletting, and also in case of any such re-entry the Tenant shall pay to the Landlord on demand, as additional damages, all legal and other expenses incurred in removing the Tenant, the commissions for re-letting the demised premises and collecting rent, the cost of redecorating, refinishing, and repairing the demised premises and such other expenses as the Landlord may incur in connection therewith. Upon any such re-entry, the Landlord, at its option, may re-let the demised premises or any part or parts thereof, for the remainder of the demised terms or any part or parts thereof, or for a period extending beyond the date for the expiration of this Lease and receive the rents therefor; and the rents collected for the balance of the agreed term of the Tenant on any such re-letting shall be applied to pay any of the aforesaid items of "additional damages" remaining unpaid and to the fulfillment and performance of the other covenants of the Tenant hereunder, and the net avails thereof shall be applied by the Landlord on account of any rent unpaid by the Tenant for the remainder of the demised term; but the Tenant, however, shall pay to the Landlord upon each such rent days the amount of any and all deficiencies then existing. In any case, Landlord will use best efforts to mitigate Tenant's damages. No termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, will affect Landlord's right to collect rent for the period prior to the 3 termination thereof. Pursuit of any of the foregoing remedies will not preclude pursuit of any other remedies provided by law. 12. Paragraph 6 of the Lease shall be amended to delete all text in the provision which comes after the semi colon (;) to be amended to read as follows: Provided, however, such termination will be without prejudice to the rights of either Landlord or Tenant to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Tenant nor Landlord will have any rights in any award made to the other by any condemnation authority. 13. Paragraph 8 of the Lease shall be deleted in its entirety. 14. Paragraph 9 of the Lease shall be amended to add the following sentence: Provided, however, as a condition to such subordination, Landlord must secure from each mortgagee a nondisturbance agreement acceptable to Tenant providing that in the event of a foreclosure, the mortgagee will recognize the validity of this Lease and, provided that Tenant is not in default, will not disturb tenant's possession or its rights under this Lease. 15. Paragraph 10 of the Lease shall be amended to provide for the address of Tenant as follows: Hughes Supply, Inc. 20 North Orange Ave., Suite 200 Orlando, Florida 32801 Attention: Mark Scimeca, Esquire, Associate General Counsel Phone: (407) 841-4755; Fax: (407) 649-3018 16. The following paragraphs shall be added as additional provisions to the Lease: (a) Landlord warrants as of the commencement date of this Lease that the Premises are structurally sound and that all electrical, lighting, utility, fire safety, HVAC, and all operating systems are in good working condition and are not in need of repair. (a.2) Tenant will have the right, at its expense, to undertake a Phase I Environmental Site Assessment or equivalent (the "Environmental Report") with respect to the Premises. In the event that the results of such Environmental Report are unsatisfactory to Tenant, in its sole discretion, then Tenant will have the right, at any time within forty-five (45) days after commencement of the term of this Lease to terminate this Lease immediately upon written notice to Landlord. (b) Landlord agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), exterior doors of any and 4 all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Landlord will also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the then term, and any other repairs not expressly delegated to Tenant in this Lease. Landlord will also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises, remediate the Premises to comply with any and all environmental laws applicable thereto, and pay for all clean up and disposal costs at no cost to Tenant, unless directly caused by Tenant, its employees, agents or contractors. Notwithstanding anything to the contrary set forth elsewhere in this Lease, in the event the installation of sprinkler and fire protection systems on the Premises is required by applicable law, ordinances, regulations or governmental requirements for Tenant's current or future use of the Premises at any time during the term of this Lease or any renewals thereof, Landlord, at Landlord's sole expense and without materially interfering with Tenant's operations on the Premises, shall immediately install on the Premises, and subsequently maintain, repair, modify and replace as necessary to comply with applicable law, ordinances, regulations and governmental requirements, all such required sprinkler and fire protection systems. (c) Landlord agrees to indemnify and save harmless Tenant and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Lease term: (a) as a result of any violation by Landlord or prior owners or occupants of the Premises of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed prior to commencement of the Lease term; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Landlord's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease. (d) Landlord will pay all real property taxes which may be assessed by any lawful authority against the Premises. (e) Should Landlord fail to perform any of its obligations hereunder, Landlord will have a period of thirty (30) days after its receipt of written notice from Tenant of a failure of performance within which to commence a cure of that failure. Failure of Landlord to commence that cure within the 30-day period or to effect that 5 cure within that 30-day period will be an event of default under this Lease and Tenant may, at its option, elect to: (a) terminate this Lease upon thirty (30) days written notice to Landlord; (b) bring an action to require specific performance of Landlord's obligations; (c) provide Landlord with an additional period of time within which to effect that cure; (d) commence such cure itself, and Tenant may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Tenant hereunder, or require that Landlord immediately reimburse Tenant for its expenses; provided, however, in the event of an emergency, Tenant may immediately effect a cure of Landlord's failure should Landlord fail to act immediately to do so, without the requirement of any notice by Tenant to Landlord; and/or (e) pursue any other remedies provided herein or provided by law. (f) Landlord warrants that Landlord owns the Premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Tenant's intended use of the Premises; that the Premises has legal, direct, pedestrian and vehicular access to and from and abuts one or more publicly dedicated roads; that the Premises are in compliance with all applicable laws, regulations and ordinances; that all computerized elements (defined to include all computer hardware and software and all equipment and systems containing or utilizing computer hardware and software) that are located within, operate within, benefit or serve all or any portion of either the Premises or any common areas appurtenant to or necessary to the normal use and operation of the Premises (the "Computerized Elements") are able to (a) accurately and properly recognize, manipulate and compare (in the normal functioning of such Computerized Elements) all dates, including without limitation the Year 2000 as a Leap Year and all dates thereafter, and (b) accurately and properly perform calculations and functions that rely on the ability to recognize, manipulate or compare such dates, and (c) operate in accordance with the specifications and manuals for such Computerized Elements (such Computerized Elements may include, by way of example and not limitation, elevators, security systems, access gates, utility systems, fire protection systems, telephone systems, lighting systems and HVAC systems); to the best of Landlord's knowledge, that past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Landlord has not received a citation from any regulatory agency for noncompliance with environmental laws; that, other than the following matters: NONE, Landlord has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Tenant, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Landlord, anyone claiming by, 6 through or under Landlord, or any other party, except as otherwise specifically provided in this Lease. (g) If Tenant remains in possession of the Premises after expiration of the term hereof, with Landlord's acquiescence and without any express agreement of the parties, Tenant will be a tenant-at-will at the rental rate in effect at end of the Lease; and there will be no renewal of this Lease by operation of law. (h) This Lease will not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which will set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Tenant's rights under this Lease including, without limitation, all rights of first refusal and options to purchase provided hereunder, if any. If Tenant records the Memorandum of Lease, Tenant agrees to pay all recording fees and taxes required by reason of the recording of the Memorandum of Lease. (i) Landlord and Tenant shall each indemnify, defend and save the other harmless from and against any broker commissions, or fees or claims for commissions or fees arising under the indemnifying party which indemnification will expressly survive the termination of this Lease. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to Commercial Lease to be executed effective the date first above written. WITNESSES: LANDLORD: "SJ PARTNERSHIP" Witnesses: /s/ Kenneth D. Owen By: /s/ David Jans ------------------------------ --------------------------------- Printed: Kenneth D. Owen Printed: David Jans ---------------------- ---------------------------- Title: Partner ------------------------------ /s/ Carolyn McCurdy ------------------------------ Printed: Carolyn McCurdy ---------------------- 7 WITNESSES: "TENANT" HUGHES SUUPPLY, INC., a Florida corporation /s/ Marjorie H. Fitton By: /s/ A. Stewart Hall, Jr. ------------------------------ --------------------------------- Printed: Majorie H. Fitton Printed: A. Stewart Hall, Jr. ---------------------- ---------------------------- /s/ Jean Smith Title: President ---------------------- ------------------------------ Printed: JEAN SMITH ---------------------- 8 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment"), made and entered into as of December 31, 2001, by and between Hughes Supply, Inc., a Florida corporation (the "Assignor"), and Southwest Stainless, L.P., a Delaware limited partnership ("Assignee"). W I T N E S S E T H: WHEREAS, due to legal, tax and compliance costs in Texas, Assignor has decided to convey its assets in Texas to one of its wholly owned subsidiaries; and WHEREAS, Assignor and Assignee desire for Assignor to assign all of Assignor's rights, title and interest in and to all real property leases including without limitation to those leases set forth in Exhibit "A", attached hereto and incorporated herein by this reference located in Texas (collectively, "Leases") to Assignee and for Assignee to receive and assume such rights, title and interest to the Leases; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Assignment by Assignor. Effective immediately, Assignor hereby assigns, transfers and sets over to Assignee all of Assignor's rights, title and interest in and to all of the Leases. 2. Assumuption by Assignee. Effective immediately, Assignee hereby accepts the foregoing assignment of and assumes the Leases. 3. Governing Law. This Assignment shall be construed and enforced in accordance with the laws of Texas, but without regard to principles of such laws relating to conflicts of laws. Any action to construe or enforce this Assignment shall be brought in the proper court in the State of Texas. 4. Counterparts. This Assignment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. 5. Notwithstanding anything to the contrary contained herein, nothing contained herein shall release Assignor from any Lease or other obligation Assignor may have to any third party. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. "Assignor" Hughes Supply, Inc. By: /s/ Benjamin P. Butterfield -------------------------------- Name: Benjamin P. Butterfield Title: Secretary & General Counsel "Assignee" SOUTHWEST STAINLESS, L.P., By: Z&L Acquisition Corp. Its: General Partner By: /s/ Benjamin P. Butterfield -------------------------------- Name: Benjamin P. Butterfield Title: Assistant Secretary Exhibit A Legal Description Lease Agreement dated April 1, 1999 between S. J. Partnership (the "Landlord") and Hughes Supply, Inc. ("Tenant"), as amended, for that certain real property located in Houston, Texas (the "Lease"). EX-10.21 5 d59199_ex10-21.txt LEASE AGREEMENT WITH STANWOOD LIMITED Exhibit 10.21 LEASE AGREEMENT THIS LEASE (this "Lease") is made on July 3, 2003, by and between STANWOOD LIMITED PARTNERSHIP, a Georgia limited partnership, first party, hereinafter referred to as "Landlord", and HUGHES SUPPLY, INC., a Florida corporation, second party, hereinafter referred to as "Tenant" who covenant and agree as follows: 1. Premises. Landlord, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Tenant, has leased and rented, and by these presents does lease and rent, unto said Tenant, and said Tenant hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements located at 2751 Miller Road, Decatur, Georgia, including, without limitation, an approximately 50,000 square foot building on approximately 5.978 acres, all as set forth in Exhibit "A" attached hereto and made a part hereof. 2. Term. Tenant shall have and hold the Premises for a term of ten (10) years, said term to begin on the earlier of (a) August 1, 2003; or (b) that date on which Tenant takes occupancy of the Premises (the "Commencement Date"), and to end on July 31, 2013. Provided it is not then in default under the Lease, Tenant may extend the term up to four (4) times for five (5) year(s) per extension by written notice of its election to do so given to Landlord at least ninety (90) days prior to the then-current expiration date. The extended term will be on all of the terms and conditions of this Lease. 3. Rental. For the first year of the Lease, Tenant will pay a yearly rental of $224,000.00. The yearly rental will be due and payable in equal monthly installments of $18,666.67 in advance on the 1st day of each and every calendar month during the term of this Lease and any renewal thereof. The first payment of such yearly rental is to be made on the Commencement Date. All rental due and payable under this Lease shall be made payable to: Stanwood Limited Partnership and delivered to the following address: 8314 Forest Gate Boulevard, Sugar Land, Texas 77479 or such other address as Landlord may designate in writing to Tenant from time to time. For questions regarding payment of rental under this Lease, Tenant may call: Mike Stanwood at the following phone number: 713-943-3790. During each lease year commencing August 1, 2004, Tenant covenants and agrees to pay to Landlord as annual base rental an amount equal to the product obtained by multiplying the annual base rental for the first lease year (the "Base Rent") by a fraction, the numerator of which will be the CPI-U, as that term is defined below, for the eleventh month of the immediately prior lease year, and the denominator of which will be the CPI-U for July, 2003. In no event, however, will the increase for any one year exceed three percent (3%) over the rent paid for the immediately preceding year. The annual base rental computed in accordance with this Paragraph will be paid in equal installments in advance on the first day of each calendar month of the applicable lease year. The CPI-U will mean the "Consumer Price Index-Seasonally Adjusted U.S. City Average For All Items For All Urban Consumers, (1982-84=100)," published monthly in the "Monthly Labor Review" of the Bureau of Labor Statistics of the United States Department of Labor. If the CPI-U is discontinued, the "Consumer Price Index-Seasonally Adjusted U.S. City Average For All Items For Urban Wage Earners and Clerical Workers (1982-84=100)," published monthly in the "Monthly Labor Review" of the Bureau of Labor Statistics of the United States Department of Labor (the "CPI-W"), will be used for making the computation set forth above. If the CPI-W is discontinued, comparable statistics on the purchasing power of the consumer dollar published by the Bureau of Labor Statistics of the United States Department of Labor will be used for making the computation set forth above. If the Bureau of Labor Statistics will no longer maintain statistics on the purchasing power of the consumer dollar, comparable statistics published by a responsible financial periodical or recognized authority agreeable to the parties will be used for making the computation set forth above. If the base year "(1982-84=100)" or other base year used in computing the CPI-U is changed, the figures used in making the computation above will be changed accordingly, so that all increases in such price index are taken into account notwithstanding any such change in the base year. 4. Utility Bills. Tenant will pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Tenant in connection therewith. If Tenant does not pay same, Landlord may pay the same, and such payment will be added to the rental of the Premises. 5. Taxes. Tenant will pay all real property taxes which may be assessed by any lawful authority against the Premises. Landlord will be responsible for payment of all special assessments imposed upon the Premises. Tenant will pay any and all ad valorem taxes assessed against the personal property located on the Premises, during the entire term thereof, except for the tax year in which this Lease commences. Tenant shall have the right, at Tenant's sole expense, to appeal any and all taxes applicable to the Premises and Landlord agrees that Landlord will cooperate with Tenant reasonably and sign all documents reasonably required in connection with any such appeal. Tenant may delay payment of any portion of such taxes which are the subject of an appeal until the resolution of such appeal, in which event Tenant shall be solely responsible for the payment of any penalties, interest, or additional taxes which result from such delay. Notwithstanding the foregoing, Tenant shall not permit the filing of a tax lien against the Premises. Landlord represents that the taxing authority(ies) for the Premises are as follows: Dekalb County, Georgia, true, correct and complete copies of all of the most recent bills relating to real property taxes due and payable on the Premises are attached as Exhibit "B" to this Lease, and the tax parcel identification number(s) for the Premises are as follows:16 024 01 013. Landlord shall pay all sales, excise or other taxes due and payable on the rents paid by Tenant hereunder. 6. Insurance. Tenant shall carry, at Tenant's sole cost and expense and throughout the term of this Lease and all renewals and extensions thereof: (a) "All Risk" insurance coverage on the demised Premises in an amount not less than the full insurable value (the term "full insurable value" will mean the actual replacement cost, excluding foundation and excavation costs, as reasonably determined by Landlord; Landlord represents that the current estimated replacement cost of all buildings and related improvements contained within the Premises is $2,000,000.00 and the current estimated value of the land, not including any improvements, contained within 2 the Premises is $(400,000.00); (b) insurance coverage on all equipment, fixtures and appliances owned by Tenant; and (c) comprehensive general liability insurance coverage with respect to the Premises in an amount not less than $1,000,000.00 per occurrence and $5,000,000.00 in the aggregate. Tenant shall name Landlord as an additional insured under all insurance policies required to be maintained hereunder and furnish evidence of such coverages and additional insured status in the form of certificates of insurance to Landlord prior to the commencement of the term of this Lease and at least fifteen (15) days prior to the earlier of the commencement of each year of the term of this Lease or the date upon which such insurance coverage would otherwise lapse if not renewed. All insurance provided for in this Lease will be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in the state in which the Premises are located. If Tenant provides any insurance required by this Lease in the form of a blanket policy, Tenant shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Landlord so requires, the policies of insurance provided for will be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies will, to the extent obtainable, provide that any loss will be payable to Landlord or to the holder of any mortgage notwithstanding any act or negligence of Tenant which might otherwise result in forfeiture of such insurance. All such policies will, to the extent obtainable, contain an agreement by the insurers that such policies will not be canceled without at least thirty (30) days prior written notice to Landlord and to the holder of any mortgage to whom loss hereunder may be payable. 7. Maintenance and Repairs by Tenant. Landlord warrants as of the commencement date of this Lease that the Premises are structurally sound and that all electrical, lighting, utility, fire safety, HVAC, and all operating systems are in good working condition and are not in need of repair. In addition, Landlord warrants and shall be responsible for any and all HVAC repairs (unless caused by Tenant's negligence) which may arise during the first year of the Lease term. Except as set forth in Paragraph 8, Tenant will, at its own expense, keep and maintain the interior of the Premises, including floor coverings, exterior doors, windows and all systems pertaining to electrical, HVAC, and lighting. Tenant will also perform exterior lawn and landscaping maintenance. It is the intent of the parties that Tenant will only be required to make repairs or replacements which are not structural in nature. 8. Repairs by Landlord. Landlord agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), sewer/septic systems, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Landlord will also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the then term, and any other repairs not expressly delegated to Tenant in this Lease. Landlord will also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises, remediate the Premises to comply with any and all environmental laws applicable thereto, and 3 pay for all clean up and disposal costs at no cost to Tenant, unless directly caused by Tenant, its employees, agents or contractors. Notwithstanding anything to the contrary set forth elsewhere in this Lease, in the event the installation of sprinkler and fire protection systems on the Premises is required by applicable law, ordinances, regulations or governmental requirements for Tenant's current or future use of the Premises at any time during the term of this Lease or any renewals thereof, Landlord, at Landlord's sole expense and without materially interfering with Tenant's operations on the Premises, shall immediately install on the Premises, and subsequently maintain, repair, modify and replace as necessary to comply with applicable law, ordinances, regulations and governmental requirements, all such required sprinkler and fire protection systems. 9. Destruction of or Damage to the Premises. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease will terminate as of the date of such destruction, and rental will be accounted for as between Landlord and Tenant as of that date. If the Premises are damaged but not wholly destroyed by any of such casualties, rental will abate in such proportion as use of the Premises has been destroyed, and Landlord will restore the Premises to substantially the same condition as before the damage as speedily as practicable, whereupon full rental will recommence; however, if the damage will be so extensive the same cannot be reasonably repaired and restored within three (3) months' time from the date of the casualty, then either Landlord or Tenant may cancel this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. In such event, rental will be apportioned and paid up to the date of such casualty. 10. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the building or openings cut through the roof are allowed without the prior written consent of Landlord, which consent will not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Landlord acknowledges that Tenant has the right, but not the obligation, to make improvements to the outside storage areas, including, without limitation, paving, laying crushed stone (or similar materials) and fencing, and Landlord hereby consents to same. 11. Removal of Fixtures. Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Tenant has placed in the Premises, provided that during such removal Tenant will make all reasonable repairs necessary to return the Premises to its original condition, reasonable wear and tear excepted. 12. Return of the Premises. Tenant agrees to return the Premises to Landlord at the expiration or prior termination of this Lease in good condition and repair, reasonable wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 13. Condemnation. If the whole of the Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Landlord sells the Premises under threat of condemnation, then in either of said events the term hereby granted will cease from the time when possession thereof is taken by public authorities, and rental will be accounted for as 4 between Landlord and Tenant as of that date. Such termination, however, will be without prejudice to the rights of either Landlord or Tenant to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Tenant nor Landlord will have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Tenant, then this Lease will continue in effect and Landlord, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore the Premises as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction, and Landlord will not be under any duty to expend amounts in excess of the award received by Landlord. Rent, taxes and other charges payable by Tenant will equitably abate while Landlord's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which, at Tenant's sole discretion, is determined not to materially affect Tenant's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 14. Compliance with Laws, Etc. Tenant agrees, at its own expense and solely in relation to those portions of the Premises which Tenant is required to maintain or repair under Paragraph 7, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Tenant's specific use of said Premises. Notwithstanding the foregoing, the Tenant will not be liable for: (a) repairs, alterations, replacements or retrofitting required by the accessibility or path of travel requirements set forth in Title III of the Americans With Disabilities Act of 1990, 42 USC ss.12101, et seq. and regulations and guidelines promulgated thereunder, as amended from time to time (collectively, the "ADA"); (b) removal or abatement of asbestos containing materials or suspect asbestos containing materials; (c) repairs, alterations or replacements required to comply with federal, state or local indoor air quality laws, rules or regulations; (d) repairs or replacements incident to CFC conversions for heating and cooling systems; (e) installation, modification or upgrade of fire protection and sprinkler systems; or (f) repairs, alterations or replacements described in Paragraph 8. Landlord agrees to promptly comply with any other governmental or regulatory requirements if not made necessary by reason of Tenant's occupancy of the Premises or relating to those portions of the Premises which Landlord is required to maintain or repair under Paragraph 8. Notwithstanding anything to the contrary contained elsewhere in this Lease, Tenant shall not under any circumstances be responsible for curing or liable for any costs associated with any aspect of the Premises which was not, at the time Tenant first takes possession of the Premises pursuant to this Lease, in compliance with all applicable laws, rules, regulations, ordinances, codes, permits, approvals, guidelines, conditions, restrictive covenants, mandates, moratoria, development criteria, consent decrees, orders, judgments, decisions, determinations and the like affecting the Premises (collectively, the "Pre-existing Non-compliance Problems"). Landlord shall be solely responsible for immediately curing all Pre-existing Non-compliance Problems at Landlord's sole expense and shall be liable for all costs relating directly or indirectly to such Pre-existing Non-Compliance Problems. 5 15. Assignment. Except as set forth below, Tenant may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Landlord of its intent to assign or sublease. Tenant may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Tenant, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Tenant's issued and outstanding shares, or which succeeds to the entire business of Tenant through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Tenant. Subtenants or assignees will become liable directly to Landlord for all obligations of Tenant hereunder, without relieving Tenant's liability. 16. Mortgagee's Rights. Tenant's rights will be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Landlord, and Tenant agrees, at Landlord's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Landlord must secure from each mortgagee a nondisturbance agreement acceptable to Tenant providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Tenant is not in default, will not disturb Tenant's possession or its rights under this Lease. 17. Use of the Premises. The Tenant may use the Premises for warehouse, sales and office purposes and for any other lawful purpose. Tenant shall also have the exclusive right to use the existing machinery currently located in the Premises. The Premises will not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 18. Signs. Tenant will have the right to erect at Tenant's sole expense signage at the entrance to and upon the Premises, including but not limited to a customary trade sign identifying the business of Tenant. The erection of signage by Tenant will be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Tenant will remove the signage thus erected, and will repair any damage or disfigurement, caused by such removal. All signage proposed by Tenant shall be subject to Landlord's review and approval, which approval shall not be unreasonably withheld, conditioned or delayed. 19. Entry for Carding, etc. Landlord may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Landlord may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Landlord under the terms hereof. 20. Indemnity. Landlord agrees to indemnify and save harmless Tenant and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Lease term: (a) as a result of any violation by Landlord or prior owners or occupants of the Premises of any applicable federal, state or local environmental laws or 6 regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed prior to commencement of the Lease term; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by the ADA; or (d) as a result of any of Landlord's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease. Tenant agrees to indemnify and save harmless Landlord and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Tenant of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed after commencement of the Term and which was caused by or brought onto the Premises by Tenant or Tenant's agents, contractors, employees, licensees and invitees; or (c) as a result of any violation by Tenant of the accessibility or path of travel requirements imposed by the ADA; or (d) as a result of any of Tenant's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease; provided, however, that Tenant will not be liable for the acts of any other tenants of said property. 21. Default of Tenant. It is mutually agreed that in the event: (a) the rent herein reserved is not paid at the time and place when and where due and Tenant fails to pay said rent within five (5) days after written demand from Landlord; or (b) Tenant will fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and will not cure such failure within thirty (30) days after notice to Tenant of such failure to comply or such additional time period as may reasonably be necessary to effect a cure of the default provided that Tenant commences and diligently pursues a cure of the default; or (c) Tenant causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Landlord to Tenant demanding cure, THEN in any of such events, Landlord will have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: (i) Landlord may terminate this Lease, in which event Tenant will immediately surrender the Premises to Landlord. Tenant agrees to indemnify Landlord for all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or (ii) Landlord, as Tenant's agent, without terminating this Lease, may terminate Tenant's right of possession, and, at Landlord's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Landlord deems proper. Tenant will be liable to Landlord for the deficiency, if any, between Tenant's rent hereunder and the price obtained by Landlord on reletting. Pursuit of any of the foregoing remedies will not preclude pursuit of any of the other remedies herein provided or any other 7 remedies provided by law. In any case, Landlord will use best efforts to mitigate Tenant's damages. Any notice in this provision may be given by Landlord or its attorney. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, will affect Landlord's right to collect rent for the period prior to the termination thereof. 22. Default of Landlord. Should Landlord fail to perform any of its obligations hereunder, Landlord will have a period of thirty (30) days after its receipt of written notice from Tenant of a failure of performance within which to commence a cure of that failure. Failure of Landlord to commence that cure within the 30-day period or to effect that cure within that 30-day period will be an event of default under this Lease and Tenant may, at its option, elect to: (a) terminate this Lease upon thirty (30) days written notice to Landlord; (b) bring an action to require specific performance of Landlord's obligations; (c) provide Landlord with an additional period of time within which to effect that cure; (d) commence such cure itself, and Tenant may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Tenant hereunder, or require that Landlord immediately reimburse Tenant for its expenses; provided, however, in the event of an emergency, Tenant may immediately effect a cure of Landlord's failure should Landlord fail to act immediately to do so, without the requirement of any notice by Tenant to Landlord; and/or (e) pursue any other remedies provided herein or provided by law. 23. Warranties. Landlord warrants that Landlord owns the Premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and un-violated restrictive covenants which do not materially adversely affect Tenant's intended use of the Premises; that the Premises has legal, direct, pedestrian and vehicular access to and from and abuts one or more publicly dedicated roads; that the Premises are in compliance with all applicable laws, regulations and ordinances; to the best of Landlord's knowledge, that past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Landlord has not received a citation from any regulatory agency for noncompliance with environmental laws; that, other than the following matters: NONE, Landlord has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls, lead, lead dust, asbestos, asbestos containing materials, oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively, "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Tenant, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Landlord, anyone claiming by, through or under Landlord, or any other party, except as otherwise specifically provided in this Lease. 24. Holding Over. If Tenant remains in possession of the Premises after expiration of the term hereof, with Landlord's acquiescence and without any express agreement of the parties, Tenant will be a tenant-at-will at the rental rate in effect at end of the Lease; and there will be no renewal of this Lease by operation of law. 25. Notices. Any notice given pursuant to this Lease will be in writing and sent by 8 certified mail to: (a) Landlord: Stanwood Limited Partnership 8314 Forest Gate Boulevard Sugar Land, Texas 77479 Attention: Mike Stanwood Phone No.:713-943-3790 / Fax No.: 713-948-5632 or to such other address as Landlord may hereafter designate in writing to Tenant. (b) Tenant: Hughes Supply, Inc. 20 North Orange Avenue, Suite 200 Orlando, Florida 32801 Attention: Mark Scimeca, Esquire, Associate General Counsel Phone No.: (407) 841-4755 / Fax No.: (407) 649-3018 or to such other address as Tenant may hereafter designate in writing to Landlord. 26. Construction of Lease Terms. The terms of this Lease will not be construed more strongly against any party, regardless of which party was responsible for the preparation and drafting of this Lease. 27. Attorneys and Other Professional Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorneys', paralegals', accountants', consultants', and experts' fees and expenses of litigation at all trial, appellate and alternative dispute resolution levels and forums. For purposes of this paragraph, a party is to be considered the prevailing party if: (a) it initiated the litigation and obtains (by judgment or agreement) substantially the relief sought; or (b) it did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 28. Waiver of Rights. No failure of Landlord to exercise any power given Landlord hereunder, or to insist upon strict compliance by Tenant with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof will constitute a waiver of Landlord's right to demand exact compliance with the terms hereof. 29. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto will be cumulative but not restrictive to those given by law. 30. Time of Essence. Time is of the essence of this Agreement. 31. Environmental Site Assessment. Tenant will have the right, at its expense, to undertake a Phase I Environmental Site Assessment or equivalent (the "Environmental Report") 9 with respect to the Premises. In the event that the results of such Environmental Report are unsatisfactory to Tenant, in its sole discretion, then Tenant will have the right, at any time within forty-five (45) days after commencement of the term of this Lease to terminate this Lease immediately upon written notice to Landlord. 32. Definitions. "Landlord" as used in this Lease will include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Tenant" will include second party, its heirs and representatives, assigns and successors, and if this Lease will be validly assigned, or sublet, will include also Tenant's assignees or sub-Tenants, as to the Premises covered by such assignment or sub-lease. "Landlord" and "Tenant" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 33. Entire Agreement. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, will be of any force or effect. 34. Severability and Governing Law. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance will, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, will not be affected thereby, and each term, covenant or condition of this Lease will be valid and enforceable to the fullest extent permitted by law. This Lease shall be governed by and construed in accordance with the law of the state in which the Premises are located. 35. Brokerage. Each of Landlord and Tenant warrants to the other that no commissions are payable or due to any broker or finder in connection with this Lease and each of Landlord and Tenant agrees to indemnify, defend and hold the other harmless from and against any commissions or fees or claims for commissions or fees arising under the indemnifying party, which indemnification will expressly survive the termination of this Lease. [SIGNATURES ATTACHED ON FOLLOWING PAGES] 10 IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. "LANDLORD" Witnesses: STANWOOD LIMITED PARTNERSHIP, a Georgia limited partnership /s/ Jeff LeGrand By: /s/ Michael Stanwood - --------------------------------- ----------------------------------- Stanwood Limited Partnership Printed: Jeff LeGrand Printed: Michael Stanwood ------------------------ ------------------------------ Title: President -------------------------------- /s/ Sherry Berkley - --------------------------------- Printed: Sherry Berkley ------------------------- "TENANT" HUGHES SUPPLY, INC., a Florida corporation /s/ Laurie L. Bergstresser By: /s/ Mark D. Scicneca - --------------------------------- ----------------------------------- Printed: Laurie L. Bergstresser Printed: Mark D. Scicneca ------------------------ ------------------------------ Title: Secretary -------------------------------- /s/ Sharonda N. Alicea - --------------------------------- Printed: Sharonda N. Alicea ------------------------- 11 EXHIBIT "A" (Legal Description of Property) EXHIBIT A Legal Description of Property ALL THAT TRACT OR PARCEL OF LAND lying and being in Land Lot 24 of the 16th District of DeKalb County, Georgia, and being more particularly described as follows: TO FIND THE TRUE POINT OF BEGINNING, commence at a point formed by the intersection of the eastern right-of-way line of Lithonia Way (having a 60-foot right-of-way width) and the southern right-of-way line of Snapfinger Woods Drive (having a variable right-of-way width), said point also being the northwestern corner of property now or formerly owned by John W. Rooker; thence leaving the eastern right-of-way line of Lithonia Way run along the southern right-of-way line of Snapfinger Woods Drive the following six (6) courses and distances and following the curvature thereof; (1) North 89(degree) 55(degree) 02" East a distance of 160.00 feet to a point;(2) North 88(degree) 20'30" East a distance of 123.51 feet to a point; (3) North 86(degree) 58' 20" East a distance of 189.82 feet to a point: (4) North 88(degree) 43' 00" East a distance of 200.00 feet to a point; (5) along the arc of a 2,161.68-foot radius curve to the right having an arc distance of 221.80 feet to a point located at the northeastern corner of property now or formerly owned by John W. Rooker and the northwestern corner of property now or formerly owned by Thomas G. Hill (said arc being subtended by a chord lying to the south thereof bearing South 88' 20' 38" East and being 221.70 feet in length); and (6) South 85(degree) 37' 42" East a distance of 93.22 feet to a point located on the southwestern right-of-way line of Miller Road (having a 70-foot right-of-way width); thence leaving the southern right-of-way line of Snapfinger Woods Drive run along the southwestern right-of-way line of Miller Road run the following three (3) courses and distances; (1) South 71(degree) 51' 17" East a distance of 36.13 feet to a point; (2) South 68(degree) 15' 59" East a distance of 62.42 feet to a point; and (3) South 62(degree) 17' 07" East a distance of 18.96 feet to an one-half (1/2) inch rebar set, said rebar set being the TRUE POINT OF BEGINNING; from the TRUE POINT OF BEGINNING, as thus established, thence continue along the southwestern right-of-way line of Miller Road run the following five (5) courses and distances and following the curvature thereof; (1) South 62(degree) 71' 07" East a distance of 29.64 feet to a point; (2) along the arc of a 464.77-foot radius curve to the right having an arc distance of 133.38 feet to a point (said arc being subtended by a chord lying to the southwest thereof bearing South 54(degree) 03' 49" East and being 132.92 feet in length); (3) along the arc of a 639.07-foot radius curve to the right having an arc distance of 228.21 feet to a point (said arc being subtended by a chord lying to the southwest thereof bearing South 32(degree) 55' 20" East and being 285.78 feet in length); (4) South 20(degree) 00' 09" East a distance of 64.02 feet to a point; and (5) South 17(degree) 34' 22" East a distance of 220.85 feet to an one-half (1/2) inch rebar set located at the northeastern corner of property now or formerly owned by Bessemer Properties, Incorporated; thence leaving the southwestern right-of-way line of Miller Road run along the northern boundary line of property now or formerly owned by Bessemer Properties, Incorporated South 79(degree) 44' 00 '1 West a distance of 497.84 feet to an one-half (1/2) inch rebar set located on the eastern boundary line of property now or formerly owned by National Service Industries; thence leaving the northern boundary line of property now or formerly owned by Bessemer Properties, Incorporated run along the eastern boundary line of property now or formerly owned by National Service Industries North 12(degree) 37' 55" West a distance of 326.59 feet to an one-half (1/2) inch rebar set located at the southeastern corner of property now or formerly owned by John W. Rooker and the northeastern corner of property now or formerly owned by National Service Industries; thence leaving the northeastern corner of property now or formerly owned by National Service Industries run along the eastern boundary of property now or formerly owned by John W. Rooker North 02(degree) 41' 38" West a distance of 278.41 feet to an one-half (1/2) inch rebar set located at the southwestern corner of property now or formerly owned by Thomas G. Hill; thence leaving the eastern boundary line of property now or formerly owned by John W. Rooker, run along the southwestern, southern, southeastern and eastern boundary line of property now or formerly owned by Thomas G. Hill the following five (5) courses and distances: (1) South 63(degree) 55' 54" East a distance of 39.37 feet to an one-half (1/2) inch rebar set; (2) South 71(degree) 41' 32" East a distance of 32.26 feet to an one-half (1/2) inch rebar set; (3) South 75(degree) 54' 23" East a distance of 27.70 feet to an one-half (1/2) inch rebar set; (4) North 82(degree) 37' 22" East a distance of 67.91 feet to an one-half (1/2) inch rebar set; (5) North 16(degree) 54' 27" East a distance of 125.20 feet to a point located on the southwestern right-of-way line of Miller Road, said point being the TRUE POINT OF BEGINNING. The above-described property contains 5.9788 acres (260,435 square feet) and is shown on, and described according to, that certain survey prepared for Desert Sierra Properties, Inc. by Loo-Turley & Associates, P.C. (Richard Loo, Georgia Registered Land Surveyor No. 2129), dated April 13, 1993, which survey is incorporated herein by this reference and made a part of this description. 12 EXHIBIT "B" (TAX BILLS) RESSLEY'S REAL ESTATE TAX SERVICE LL 24 DIST 16 LOT [ILLEGIBLE] P.O. BOX 2297, PEACHTREE CITY, GA 30269 ------ ----- ----- --- PHONE: 770-487-4376 FAX: 770-487-0793 S/D COUNTY Dekalb ---------------- DATE EXAMINED 6-3-03 ----------------- CAPTION 2751 MILLER RD [ILLEGIBLE] MAP REF. 16-024-01-013 ------------------- ------------------------------ [ILLEGIBLE] ------------------- ===================================================================================================== CHAIN OF TITLES | VERIFY TAX DESCRIPTION TO YOUR LEGAL - ----------------------------------------------- DESCRIPTION [ILLEGIBLE] 7711-767 | - ----------------------------------------------- Desert Sierra Prop. | - ----------------------------------------------- 5.97 AC | - ----------------------------------------------- | - ----------------------------------------------- NO LIABILITY FOR FIFA TRANSFERS | - ----------------------------------------------- ALL FIFA'S SUBJECT TO BE SOLD AT ANY TIME | - ----------------------------------------------- PAYOFF GOOD THRU ===================================================================================================== YEAR CITY TAXES | STATE AND COUNTY TAXES - ----------------------------------------------------------------------------------------------------- | 1996 ----------------------------------------------------------------------------------------------- | - ----------------------------------------------------------------------------------------------------- | 1997 ----------------------------------------------------------------------------------------------- | - ----------------------------------------------------------------------------------------------------- | 1998 ----------------------------------------------------------------------------------------------- | - ----------------------------------------------------------------------------------------------------- | 1999 ----------------------------------------------------------------------------------------------- | - ----------------------------------------------------------------------------------------------------- | 2000 ----------------------------------------------------------------------------------------------- | - ----------------------------------------------------------------------------------------------------- | 2001 ----------------------------------------------------------------------------------------------- | - ----------------------------------------------------------------------------------------------------- Base = | Base = ----------------------------------------------------------------------------------------------- Exempt | Exempt n/a ----------------------------------------------------------------------------------------------- Assessment | Assessment 649160 2002 ----------------------------------------------------------------------------------------------- City of Atlanta Sanitary Tax Not Checked | Bill # ----------------------------------------------------------------------------------------------- To Pay | To Pay ----------------------------------------------------------------------------------------------- Date Paid | Date Paid 12/24 - ----------------------------------------------------------------------------------------------------- Amount Paid Amount Paid 25158.36 - ----------------------------------------------------------------------------------------------------- STREET IMPROVEMENTS CITY OF ATLANTA WATER BILL NOT CHECKED - ----------------------------------------------------------------------------------------------------- County Sanitary Tax Bill No. 1012651600 Call for Payoff ------------------------------------------------------------------------- County Water Bill No. 209324411 PD THRU 5-9-03 ---------------------------------------------------------------------------------
Property Information Results [LOGO] Print Print this page for your records [IMAGE] - -------------------------------- Property Tax Information Results [IMAGE] Secure - -------------------------------- with [ILLEGIBLE] For additional assistance, contact (404) 298-4000. ============================================================================================= Property Identification Property Value/ Billing Assessment Parcel ID Number 16 024 01 013 Pin Number 3553799 Taxable Year 2003 Property Address 2751 MILLER RD UNI Land Value $364,000 Property Type Real Estate Building Value $1,536,200 Tax District 04 Unincorporated Misc. Improvement Value $68,600 Owner Information Personal Property Value $0 Owner DESERT SIERRA PROPERTIES INC. Total Value $1,968,800 Co-Owner 40% Taxable $787,520 Assessment Owner Address 015853 OLDEN ST SYLMAR, CA 91342 Special Billing No Special Billing Address Homestead Exemption Address Information available Property Deed/ Exemption Type Plat/Description Value Exemption Amount $0.00 Deed Type Limited Warranty Deed Deed Book/Page 07711/0767 Other Exemption Information Plat Book/Page / 29 X 133 X 288 X 64 X 220 X Exemption Type Description 1 497 X 326....5.97AC 7-16-93 Value Exemption Amount $0.00 Description 2 Description 3 Tax Information Summary Property Characteristics/ Taxable Year 2002 Sales Information Millage Rate 0.03781 NBHD Code 9038 A 5% penalty will be assessed Acreage [ILLEGIBLE] on any unpaid balance Zoning Type Office Institution after 11/15/2002 Zoning District 01 2nd Installment Amount $0.00 Property Class 13 Total Taxes Billed View Details $25,158.36 Year Built Total Taxes Paid $25,158.36 Air Conditioning N Total Taxes Due $0.00 Fireplaces O Escrow Agency None Stories 1 Square Footage 49,950 Dilinquent Taxes/ Bedrooms 0 Tax Sale Information Bathrooms 4-Fixtures Baths: 0 3-Fixtures Baths: 0 Tax Sale File Number 2-Fixtures Baths: 0 FiFa-GED Book/Page Extra Fixtures: 0 Levy Date Last Sold Date 06/10/1993 Sale Date Last Sold Price Delinquent Amount Due $418,500.00 Appeal Status Appeal Code Change Notice Date 04/12/2003 Hearing Date =============================================================================================
For Additional assistance, contact (404) 298-4000 -Back- EX-10.22 6 d59199_ex10-22.txt LEASE AGREEMENT WITH SWS-GA REALTY Exhibit 10.22 STATE OF GEORGIA Lithonia, Georgia COUNTY OF DEKALB LEASE AGREEMENT THIS LEASE (this "Lease") made this the 13th day of May, 1996, by and between SWS-GA REALTY, INC., a Georgia corporation, and STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, collectively first party, hereinafter referred to as "Lessor," and HUGHES SUPPLY, INC., a Florida corporation, second party, hereinafter referred to as "Lessee." W I T N E S S E T H: 1. Premises. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Lessee, has leased and rented, and by these presents does lease and rent, unto said Lessee, and said Lessee hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements located at 2331 Varkel Way, Lithonia, Georgia 30058, including, without limitation, the approximately 2.566 acres of real property and a one-story metal building and other improvements thereon described in the survey made Exhibit A to this Lease. 2. Warranties. Lessor warrants that Lessor owns the premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Lessee's intended use of the Premises; that the Premises abuts one or more publicly dedicated roads; that the Premises do not, as of the date of this Lease, and will not, by reason of the commencement of the term of this Lease, fail to conform to all applicable building ordinances, laws and regulations in any respect which will materially adversely interfere with Lessee's use of the Premises for its intended purposes; that Lessee's proposed use of the Premises is consistent with the zoning classification applicable to the Premises; that Lessor's past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Lessor has not received a citation from any regulatory agency for noncompliance with environmental laws; that Lessor has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Lessee, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Lessor, anyone claiming by, through or under Lessor, or any other party, except as otherwise specifically provided in this Lease. The foregoing covenant of quiet enjoyment includes the right of Lessee to use the property as it is currently used, including, but not limited to, outside storage. The parties each acknowledge that by acceptance of the Premises, Lessee does not waive its rights pursuant to the covenant of quiet enjoyment hereunder. 3. Term. The initial term of this Lease shall be for three (3) years, said term to begin on the 13th day of May, 1996 (the "Commencement Date") and end on the 12th day of May, 1999 (the "Initial Term"). The Initial Term of this Lease may be extended, at the option of the Lessee, for up to two (2) successive periods of three (3) years (each such period of three (3) years herein sometimes referred to as an "Extended Term") as follows: First Extended Term - May 13, 1999 to May 12, 2002. Second Extended Term - May 13, 2002 to May 12, 2005. The option to extend shall be exercised by the Lessee by giving notice to the Lessor not more than twelve (12) nor less than six (6) months prior to the expiration of the then existing term. Each Extended Term shall be upon the same terms, covenants, and conditions as provided in the Lease. Any termination of this Lease during the Initial Term or any Extended Term shall terminate all rights of any further extension hereunder. The use of the word "Term" herein shall be deemed to include the Initial Term as well as any Extended Term. 4. Rental. As rent for the Premises, Lessee shall pay to Lessor in advance on the first day of each calendar month of the Term the sum of $5,250.00 per month, being at the rate of $63,00.00 per annum; provided, however, on each anniversary of the Commencement Date during the Term, the annual rent shall be increased over the rent for the prior lease year by an amount equal to the percentage increase in the CPI from the first month of the previous lease year to such anniversary date. Such adjustment, however, shall not result in any instance in a reduction of the annual rent, nor shall any annual rent adjustment result in an increase in the annual rent by an amount in excess of 3% of the previous year's rent. For purposes of this Lease, "CPI" refers to the Consumer Price Index for All Urban Consumers (CPI-U), All Items, U.S. City Average (1982-1984 equals 100), published by the United States Department of Labor, Bureau of Labor Statistics. If the CPI is discontinued, such other index as published by the Department of Labor, Bureau of Labor statistics, or its successor agency, in substitution therefor or replacement thereof shall be used for making said computations. If the Department of Labor or its successor agency shall no longer maintain such statistics, comparable statistics published by a responsible financial periodical or recognized authority selected by the Lessor and Lessee shall be used for making said Computations. If the base years "(1982-1984 equals 100)" or other base year used in computing the Index is changed, the figures used in making said adjustment shall be changed 2 accordingly so that all increases in the CPI, or any substituted or replacement index, as the case may be, are taken into account notwithstanding any such change in the base year. 5. Utility Bills, Lessee shall pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Lessee in connection therewith. If Lessee does not pay same, Lessor may pay the same, and such payment shall be added to the rental of the Premises. 6. Ad Valorem Taxes. Lessee shall pay all real property taxes, special and general assessments, water and sewer assessments and other rents, rates, and changes and other guaranteed impositions of every kind and nature extraordinary as well as ordinary relating to the premises or any business conduct thereon. Lessee shall also pay any and all ad valorem taxes assessed against the personal property located on the Premises during the Term. 7. Insurance. Lessee will carry, at Lessee's sole cost and expense, "All Risk" Insurance Coverage on the Premises in an amount not less than the full insurable value. The term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, as determined by Lessor. Such policies shall name Lessor as an additional named insured. All insurance provided for in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in this state. At least fifteen (15) days prior to the expiration date of any policy, the original renewal policy for such insurance shall be delivered by Lessee to Lessor. With fifteen (15) days after the premium on any policy shall become due and payable, Lessor shall be furnished with satisfactory evidence of its payment. If Lessee provides any insurance required by this Lease in the form of a blanket policy, Lessee shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Lessor so requires, the policies of insurance provided for shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies shall, to the extent obtainable, provide that any loss shall be payable to Lessor or to the holder of any mortgage notwithstanding any act or negligence of Lessee which might otherwise result in forfeiture of such insurance. All such policies shall, to the extent obtainable, contain an agreement by the insurers that such policies shall not be cancelled without at least thirty (30) days prior written notice to Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Lessee will carry at Lessee's own expense insurance coverage on ail equipment, fixtures and appliances. 3 8. Maintenance and Repairs by Lessee. Lessor warrants as of the Commencement Date of this Lease that the Premises are structurally sound and that all lighting and all operating systems are in good condition and are not in need of repair. Except as set forth in Paragraph 9, Lessee shall, at it's own expense, keep and maintain the interior of the Premises, including all systems pertaining to water, sewer, electrical, heating, ventilation, air conditioning and lighting. Lessee shall also perform exterior lawn maintenance. It is the intent of the parties that Lessee shall only be required to make minor repairs not repairs or replacements which are structural in nature, extra ordinary or capital in nature, or those which will increase the value of the Premises subsequent to the end of the Term. In addition, the Lessee shall not be required to repair latent defects in the Premises. 9. Repairs by Lessor. Lessor agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Lessor shall also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the Term and any other repairs not expressly delegated to Lessee in this Lease. Lessor shall also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises and remediate the Premises to comply with any and all environmental laws applicable thereto, and to pay for all clean-up and disposal costs at no cost to Lessee, unless directly caused by Lessee, its employees, agents or contractors. 10. Destruction of or Damage to the Premises. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction, and rental shall be accounted for as between Lessor and Lessee as of that date. If the Premises are damaged, but not wholly destroyed by any of such casualties, rental shall abate in such proportion as use of the Premises has been destroyed, and Lessor shall restore the Premises to substantially the same condition as before the damage as speedily as practicable, whereupon full rental shall recommence; provided further, however, that if the damage shall be so extensive the same cannot be reasonably repaired and restored within three (3) months time from the date of the casualty, then either Lessor or Lessee may cancel this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. And, in such event, rental shall be apportioned and paid up to the date of such casualty. 11. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the building or openings cut through the roof are allowed without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. 12. Removal of Fixtures. Lessee may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Lessee has placed in the Premises, provided Lessee repairs all damages to the Premises caused by such removal. 4 13. Return of the Premises. Lessee agrees to return the Premises to Lessor at the expiration, or prior termination, of this Lease in good condition and repair, reasonable wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 14. Condemnation. If the whole of the leased Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Lessor sells the Premises under threat of condemnation, then in either of said events, the Term shall cease from the time when possession thereof is taken by public authorities, and rental shall be accounted for as between Lessor and Lessee as of that date. Such termination, however, shall be without prejudice to the rights of either Lessor or Lessee to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Lessee, nor Lessor, shall have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Lessee, then this Lease shall continue in effect and Lessor, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the building on the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore it as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction of the building, and Lessor will not be under any duty to expend amounts in excess of the award received by Lessor. Rent, taxes and other charges payable by Lessee will equitably abate while Lessor's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which does not materially affect Lessee's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 15. Governmental Orders. Lessee agrees, at its own expense and solely in relation to those portions of the Premises which Lessee is required to maintain or repair under Paragraph 8, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Lessee's specific use of said Premises. Notwithstanding the foregoing, the Lessee shall not be liable for: (a) repairs, alterations, replacements or retrofitting required by the accessibility or path of travel requirements set forth in Title III of the Americans With Disabilities Act of 1990, 42 USC ss. 2101, et seq. and regulations and guidelines promulgated thereunder, as amended from time to time (collectively referred to as "ADA"); (b) removal or abatement of ACMs; (c) repairs, alterations or replacements required to comply with federal, state or local indoor air quality laws, rules or regulations; (d) repairs or replacements incident to CFC conversions for heating and cooling systems; (e) installation of fire sprinkler systems; or (f) repairs, alterations or replacements described in Paragraph 9. Lessor agrees to promptly comply with any other governmental or regulatory requirements if not made necessary by reason of Lessee's occupancy of the Premises or relating to those portions of the Premises which Lessor is required to maintain or repair under Paragraph 9. 5 16. Assignment. Except as set forth below, Lessee may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Lessor of its intent to assign or sublease. Lessee may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Lessee, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Lessee's issued and outstanding shares, or which succeeds to the entire business of Lessee through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Lessee. Subtenants or assignees shall become liable directly to Lessor for all obligations of Lessee hereunder, without relieving Lessee's liability. 17. Mortegee's Rights. Lessee's rights shall be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Lessor, and Lessee agrees, at Lessor's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Lessor must secure from each mortgagee a nondisturbance agreement acceptable to Lessee providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Lessee is not in default, will not disturb Lessee's possession or its rights under this Lease. 18. Use of the Premises. The Lessee may use the Premises for office/warehouse and distribution purposes, including outdoor storage, or for any other lawful purpose. The Premises shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 19. Signs. Lessee shall have the right to erect at Lessee's sole expense a sign at the entrance to the Premises. This sign shall not be other than a customary trade sign identifying the business of Lessee. The erection of this sign by Lessee shall be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Lessee shall remove the sign thus erected, and shall repair any damage or disfigurement, caused by such removal. 20. Reservation of Right to Sell. Lessor shall have the right to sell the Premises during the term of this Lease, subject to the following: a. Lessor agrees to give notice of each proposed sale, including the purchase price and all other terms and conditions, to Lessee; b. Lessee will have the right to purchase the Premises at the purchase price and on the other terms and conditions offered by Lessor or offered to Lessor by the third party (which offer Lessor wishes to accept), by giving notice to Lessor within 20 business days after Lessor has notified Lessee of the terms of Lessor's proposed sale; and 6 c. If Lessee does not give notice of the exercise of its option within such time, Lessor will have the right to sell the Premises upon the terms stated in the offer made or received by Lessor, but not upon terms more favorable to the purchaser, unless Lessor again gives notice pursuant to subparagraph a, above, and Lessee does not exercise its option based upon the new terms. 21. Entry for Carding, etc. Lessor may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Lessor may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Lessor under the terms hereof. 22. Indemnity. Lessor agrees to indemnify and save harmless Lessee and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Lessor of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials ("Environmental Laws") relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar conditions which occurred or first arose prior to commencement of the Term and during the period of Lessor's ownership of the Premises; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Lessor's representations and warranties being untrue. These indemnities shall survive the expiration, cancellation or termination of the Lease. Lessee agrees to indemnify and save harmless Lessor and its stockholders, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of Lessee's use and occupancy of the Premises, including, without limitation, any violation by Lessee of any Environmental Laws relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar condition which occurred or first arose after the commencement of the Term. These indemnities shall survive for a period of three (3) years following the expiration, cancellation or termination of this Lease. 23. Cancellation of Lease by Lessor. It is mutually agreed that in the event: a. The rent herein reserved is not paid at the time and place when and where due and Lessee fails to pay said rent within five (5) days after written demand from Lessor; or 7 b. Lessee shall fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after notice to Lessee of such failure to comply or such additional time period as may reasonably necessary to effect a cure of the default provided that Lessee commences and diligently pursues a cure of the default; or c. Lessee causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Lessor to Lessee demanding cure; in any of such events, Lessor shall have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: i. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor. Lessee agrees to indemnify Lessor for all loss and damage which Lessor may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or ii. Lessor, as Lessee's agent, without terminating this Lease, may terminate Lessee's right of possession, and, at Lessor's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Lessor deems proper. Lessee shall be liable to Lessor for the deficiency, if any, between Lessee's rent hereunder and the price obtained by Lessor on reletting. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. In any case, Lessor shall use best efforts to mitigate Lessee's damages. Any notice in this provision may be given by Lessor or its attorney. 24. Effects of Termination of the Lease. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, shall affect Lessor's right to collect rent for the period prior to the termination thereof. 25. Default of Lessor. Should Lessor fail to perform any of its obligations hereunder, Lessor shall have a period of 30 days after its receipt of written notice from Lessee of a failure of performance within which to commence a cure of that failure. Failure of Lessor to commence that cure within the 30-day period or to effect that cure within that 30-day period shall be an event of default under this Lease and Lessee may, at its option, elect to: a. Terminate this Lease upon 30 days written notice to Lessor; b. Bring an action to require specific performance of Lessor's obligations; c. Provide Lessor with an additional period of time within which to effect that cure; 8 d. Commence such cure itself, and Lessee may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Lessee hereunder, or require that Lessor immediately reimburse Lessee for its expenses; provided, however, in the event of an emergency, Lessee may immediately effect a cure of Lessor's failure should Lessor fail to act immediately to do so, without the requirement of any notice by Lessee to Lessor; and/or e. Pursue any other remedies provided herein or provided by law. 26. Purchase Option. Lessee shall have the option to purchase the Premises at Fair Market Value, payable in cash at closing, said option being exercisable by Lessee at any time during the Term by written notice given by Lessee to Lessor. If this option is exercised by Lessee, closing shall be held within sixty (60) days of the notice of exercise at a time and place, and on a date, reasonably satisfactory to Lessor and Lessee (the Term shall be extended, if necessary, through and including the date of closing). Title to the Premises shall be conveyed free of any liens or encumbrances, and subject only to current year's ad valorem taxes, applicable building restrictions, easements for utilities servicing the Premises, and such other conditions of title as may not, in Lessee's sole discretion, adversely affect the use of the Premises by Lessee or as may be approved by Lessee (the "Permitted Exceptions"). Immediately following the date of exercise of this option, Lessor shall furnish Lessee with a commitment for a standard owner's title insurance policy, ATLA Form B, reflecting only Permitted Exceptions and standard printed exceptions (the "Commitment"). Immediately following closing, Lessor shall furnish Lessee with an owner's title insurance policy issued in conformity with the Commitment. The cost of the title insurance Commitment and policy shall be borne by Lessor; provided, however, that the cost of any special endorsements shall be borne by Lessee; and, further provided, that if Lessee obtains a mortgage title insurance policy at closing, the cost of the combined owner's and mortgagee's policies shall be divided equally between Lessor and Lessee. Ad valorem taxes, rent due under the Lease, utilities and any insurance or other prepaid items assumed by the Lessee shall be prorated as of the date of closing. Title to the Premises shall be conveyed by general warranty deed in form acceptable for recording, subject only to the Permitted Exceptions. Lessor and Lessee shall each bear their respective costs in connection with exercise of the option and the closing, including attorney's fees. Lessee shall bear the cost of recording the deed, the cost of any survey obtained by Lessee, and all costs related to any financing obtained by Lessee. Except for any prepaid rent, Lessee is not entitled to a credit for rental payments paid by the Lessee during the Term of the Lease. The Lessor and Lessee shall attempt to determine the Fair Market Value by mutual agreement within fifteen (15) days after Lessee gives notice of its exercise of the option. However, if the parties cannot reach agreement on the Fair Market Value, the following provisions shall apply: a. Lessor and Lessee shall each select a qualified real estate appraiser within the next fifteen (15) days. Each appraiser must demonstrate to the reasonable 9 satisfaction of both Lessor and Lessee that he has significant experience in appraising similar properties. b. The Fair Market Value shall be determined by the appraisers within thirty (30) days thereafter. Each of the appraisers shall be instructed to prepare an appraisal of the Premises in accordance with the following instructions: The method of valuing the property shall use any one or a combination of appropriate appraisal methodologies (i.e., replacement cost, comparable sales, and income); provided, however, that any valuation based upon the income approach (i.e., the capitalization of net rental amounts abstracted from comparable real estate leased for similar uses) shall exclude from consideration this Lease and the rental provided for herein. The appraised value is to be a single value, not a range of values and not a schedule of different values based upon different methodologies or different assumptions. The value of any alterations, additions or improvements to the Premises made by Lessee shall be included in the determination of Fair Market Value. If the appraised values determined by the two appraisers do not differ by more than ten percent (l0%), the purchase price shall be the average of the two values. If the difference is more than ten percent (l0%), and the two appraisers cannot agree upon a value (in which event such agreed value shall be binding upon Lessor and Lessee), the two appraisers shall select a third appraiser within fifteen (15) days thereafter. The third appraiser shall be instructed to select a value within the range of values established by the initial two (2) appraisals, within twenty (20) days after his appointment, following the instructions set forth above, and the Fair Market Value so selected by the third appraiser shall be binding upon Lessor and Lessee as the purchase price for the Premises. 27. Holding Over. If Lessee remains in possession of the Premises after expiration of the term hereof, with Lessor's acquiescence and without any express agreement of the parties, Lessee shall be a tenant-at-will at the rental rate in effect at end of the Lease; and there shall be no renewal of this Lease by operation of law. 28. Notices. Any notice given pursuant to this Lease shall be in writing and sent by certified mail to: a. Lessor: c/o SWS-GA Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, Alabama 35203 or to such other address as Lessor may hereafter designate in writing to Lessee. 10 b. Lessee: Hughes Supply, Inc. 20 North Orange Avenue Suite 200 Orlando, Florida 32801 Attention: J. Stephen Zepf or to such other address as Lessee may hereafter designate in writing to Lessor. 29. Memorandum of Lease and Option. This Lease shall not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which shall set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Lessee's rights under this Lease, including the purchase option provided for in paragraph 26 of this Lease. If Lessee records the Memorandum of Lease and Option, Lessee agrees to pay all related recording fees and taxes. 30. Attorneys' Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorneys' fees and expenses of litigation. For purposes of this Paragraph, a party is to be considered the prevailing party if: a. It initiated the litigation and obtains (by judgment oral agreement) substantially the relief sought; or b. It did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 31. Waiver of Rights. No failure of Lessor to exercise any power given Lessor hereunder, or to insist upon strict compliance by Lessee with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Lessor's right to demand exact compliance with the terms hereof. 32. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative but not restrictive to those given by law. 33. Time of Essence. Time is of the essence of this Agreement. 34. Definitions. "Lessor" as used in this Lease shall include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Lessee" shall include second party, its assigns and successors, and if this Lease shall be validly assigned, or sublet, shall include also Lessee's assignees or sub-lessees, as to the Premises covered by such assignment or sub-lease. "Lessor" and "Lessee" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 11 35. Miscellaneous. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, shall be of any force or effect. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance shall; to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. SWS-GA REALTY, INC. By: /s/ James Davis ---------------------------- Its: Vice-President -------------------------- STANWOOD INTERESTS LIMITED PARTNERSHIP By: Stanreal, LLC, its General Partner /s/ Michael L. Stanwood ---------------------------- Michael L. Stanwood HUGHES SUPPLY, INC. By: /s/ David H. Hughes ---------------------------- Its: Chairman --------------------------- 12 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that James D. Davis, whose name as Vice President of SWS-GA REALTY, INC., a Georgia corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that MICHAEL L. STANWOOD, whose name as President, of STANREAL, LLC, a Texas limited liability company, the General Partner of STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said partnership on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- 13 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that David H. Hughes, whose name as Chairman of HUGHES SUPPLY, INC. a Florida corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- 14 [MAP] EXHIBIT A (PAGE 1) LEGAL DESCRIPTION [ILLEGIBLE] EXHIBIT A (PAGE 2) Hughes Supply, Inc. New Location Insurance Information - -------------------------------------------------------------------------------- Please complete the following information required to establish insurance coverage for new branch locations: 1) New branch name: SOUTHWEST GEORGIA Street (physical) address: 2331 Varkel Way City, State, Zip Code: Lithonia, GA 30058 Location code (branch number): 009040 Expected date branch will open: May 13, 1996 2) Maximum anticipated inventory value: $2,024,665.22 Maximum anticipated furniture and fixtures value: $ 183,526.28 Total contents value (total of above): $2,208,191.50 3) Is this new location located within an already existing HSI branch? No If yes, please disregard questions 4 through 9. 4) Building construction type (metal, concrete, etc.): Metal 5) Approximate age of building (in years): 10 years 6) Total building square footage: 15,000 sq. ft. 7) Please check one of the following: |_| (a) The building is owned by Hughes Supply, Inc. or leased from Hughes, Inc. |X| (b) The building is leased from an outside party (other than Hughes, Inc.) and insurance coverage is required to be provided by Hughes Supply, Inc. under the terms of the lease agreement. |_| (c) The building is leased from an outside party (other than Hughes, Inc.) and insurance coverage is not required to be provided by Hughes Supply, Inc. under the terms of the lease agreement. 8) If you checked (a) or (b) in question 7 above, please indicate the value of the building: $331,000.00 9) If this new location replaces another existing location (i.e. due to a move) and the old location is no longer owned or occupied by Hughes Supply. Inc., please complete the following information: Old branch name: N/A Street (physical) address: ________________ City, State, Zip Code: ________________ March 19, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED VIA OVERNIGHT MAIL SWS-GA Realty, Inc. Stanwood Interests Limited Partnership 320 Park Place Tower c/o Michael L. Stanwood 2001 Park Place North 8505 Monroe Road Birmingham, AL 35203 Houston, TX 77061 Re: Branch No. 9040 Atlanta SWS Lease Agreement dated May 13, 1996 by and between SWS-GA Realty, Inc., and Stanwood Interests Limited Partnership, as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional three (3) years. The extended term will commence May 13, 1999 and will expire May 12, 2002, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Pat Chilton, Branch Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: SWS-GA Realty, Inc. By: Date: --------------------------------- -------------- Landlord Landlord Consent: Accepted and Agreed to by: Stanwood Interests Limited Partnership By: Date: --------------------------------- -------------- Landlord April 1, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED VIA OVERNIGHT MAIL SWS-GA Realty, Inc. Stanwood Interests Limited Partnership 320 Park Place Tower c/o Michael L. Stanwood 2001 Park Place North 8505 Monroe Road Birmingham, AL 35203 Houston, TX 77061 Re: Branch No. 9040 Atlanta SWS Lease Agreement dated May 13, 1996 by and between SWS-GA Realty, Inc., and Stanwood Interests Limited Partnership, as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional five (5) years. The extended term will commence May 13, 1999 and will expire May 12, 2004, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Pat Chilton, Branch Manager (via inter-branch mail) Jeff Clyne, General Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: SWS-GA Realty, Inc. By: Date: --------------------------------- --------------- Landlord Landlord Consent: Accepted and Agreed to by: Stanwood Interests Limited Partnership By: Date: --------------------------------- --------------- Landlord EX-10.23 7 d59199_ex10-23.txt LEASE AGREEMENT WITH SWS-TX REALTY Exhibit 10.23 Sub-ITEM (a) STATE OF TEXAS 8511 Monroe, Houston, Texas COUNTY OF HARRIS LEASE AGREEMENT THIS LEASE (this "Lease") made this the 13th day of May, 1996, by and between SWS-TX REALTY, INC., a Texas corporation, first party, hereinafter referred to as "Lessor," and HUGHES SUPPLY, INC., a Florida corporation, second party, hereinafter referred to as "Lessee." W I T N E S S E T H: 1. Premises. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Lessee, has leased and rented, and by these presents does lease and rent, unto said Lessee, and said Lessee hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements located at 8511 Monroe Boulevard, Houston, Texas 77075, including, without limitation, approximately .75 acres of real property described in Exhibit A to this Lease, and a 15,000 (plus or minus) square foot warehouse and office building described and located on the plat plan attached to this Lease as Exhibit B. 2. Warranties. Lessor warrants that Lessor owns the premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Lessee's intended use of the Premises; that the Premises abuts one or more publicly dedicated roads; that the Premises do not, as of the date of this Lease, and will not, by reason of the commencement of the term of this Lease, fail to conform to all applicable building ordinances, laws and regulations in any respect which will materially adversely interfere with Lessee's use of the Premises for its intended purposes; that Lessee's proposed use of the Premises is consistent with the zoning classification applicable to the Premises; that Lessor's past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Lessor has not received a citation from any regulatory agency for noncompliance with environmental laws; that Lessor has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Lessee, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Lessor, anyone claiming by, through or under Lessor, or any other party, except as otherwise specifically provided in this Lease. If any of title exceptions to the Premises are hereinafter found to exist, such exceptions will not materially affect Lessee's use of the Premises. 3. Term. The initial term of this Lease shall be for three (3) years, said term to begin on the 13th day of May, 1996 (the "Commencement Date") and end on the 12th day of May, 1999 (the "Initial Term"). The Initial Term of this Lease may be extended, at the option of the Lessee, for up to two (2) successive periods of three (3) years (each such period of three (3) years herein sometimes referred to as an "Extended Term") as follows: First Extended Term - May 13, 1999 to May 12, 2002. Second Extended Term - May 13, 2002 to May 12, 2005. The option to extend shall be exercised by the Lessee by giving notice to the Lessor not more than twelve (12) nor less than six (6) months prior to the expiration of the then existing term. Each Extended Term shall be upon the same terms, covenants, and conditions as provided in the Lease. Any termination of this Lease during the Initial Term or any Extended Term shall terminate all rights of any further extension hereunder. The use of the word "Term" herein shall be deemed to include the Initial Term as well as any Extended Term. 4. Rental. As rent for the Premises, Lessee shall pay to Lessor in advance on the first day of each calendar month of the Term the sum of $3,610.00 per month, being at the rate of $43,320.00 per annum; provided, however, on each anniversary of the Commencement Date during the Term, the annual rent shall be increased over the rent for the prior lease year by an amount equal to the percentage increase in the CPI from the first month of the previous lease year to such anniversary date. Such adjustment, however, shall not result in any instance in a reduction of the annual rent, nor shall any annual rent adjustment result in an increase in the annual rent by an amount in excess of 3% of the previous year's rent. For purposes of this Lease, "CPI" refers to the Consumer Price Index for All Urban Consumers (CPI-U), All Items, U.S. City Average (1982-1984 equals 100), published by the United States Department of Labor, Bureau of Labor Statistics. If the CPI is discontinued, such other index as published by the Department of Labor, Bureau of Labor statistics, or its successor agency, in substitution therefor or replacement thereof shall be used for making said computations. If the Department of Labor or its successor agency shall no longer maintain such statistics, comparable statistics published by a responsible financial periodical or recognized authority selected by the Lessor and Lessee shall be used for making said computations. If the base years "(1982-1984 equals 100)" or other base year used in computing the Index is changed, the figures used in making said adjustment shall be changed accordingly so that all increases in the CPI, or any substituted or replacement index, as the case may be, are taken into account notwithstanding any such change in the base year. 2 5. Utility Bills. Lessee shall pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Lessee in connection therewith. If Lessee does not pay same, Lessor may pay the same, and such payment shall be added to the rental of the Premises. 6. Ad Valorem Taxes. Lessee shall pay all real property taxes, special and general assessments, water and sewer assessments and other rents, rates, and changes and other guaranteed impositions of every kind and nature extraordinary as well as ordinary relating to the premises or all business conduct thereon. Lessee shall also pay any and all ad valorem taxes assessed against the personal property located on the Premises during the Term. 7. Insurance. Lessee will carry, at Lessee's sole cost and expense, "All Risk" Insurance Coverage on the Premises in an amount not less than the full insurable value. The term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, as determined by Lessor. Such policies shall name Lessor as an additional named insured. All insurance provided for in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in this state. At least fifteen (15) days prior to the expiration date of any policy, the original renewal policy for such insurance shall be delivered by Lessee to Lessor. With fifteen (15) days after the premium on any policy shall become due and payable, Lessor shall be furnished with satisfactory evidence of its payment. If Lessee provides any insurance required by this Lease in the form of a blanket policy, Lessee shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Lessor so requires, the policies of insurance provided for shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies shall, to the extent obtainable, provide that any loss shall be payable to Lessor or to the holder of any mortgage notwithstanding any act or negligence of Lessee which might otherwise result in forfeiture of such insurance. All such policies shall, to the extent obtainable, contain an agreement by the insurers that such policies shall not be cancelled without at least thirty (30) days prior written notice to Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Lessee will carry at Lessee's own expense insurance coverage on all equipment, furniture and appliances. 8. Maintenance and Repairs by Lessee, Lessor warrants as of the Commencement Date of this Lease that the Premises are structurally sound and that all lighting and all operating systems are in good condition and are not in need of repair. Except as set forth in 3 Paragraph 9, Lessee shall, at it's own expense, keep and maintain the interior of the Premises, including all systems pertaining to water, sewer, electrical, heating, ventilation, air conditioning and lighting. Lessee shall also perform exterior lawn maintenance. It is the intent of the parties that Lessee shall only be required to make minor repairs not repairs or replacements which are structural in nature, extra ordinary or capital in nature, or those which will increase the value of the Premises subsequent to the end of the Term. In addition, the Lessee shall not be required to repair latent defects in the Premises. 9. Repairs by Lessor. Lessor agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Lessor shall also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the Term and any other repairs not expressly delegated to Lessee in this Lease. Lessor shall also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises and remediate the Premises to comply with any and all environmental laws applicable thereto, and to pay for all clean-up and disposal costs at no cost to Lessee, unless directly caused by Lessee, its employees, agents or contractors. 10. Destruction of or Damage to the Premises. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction, and rental shall be accounted for as between Lessor and Lessee as of that date. If the Premises are damaged, but not wholly destroyed by any of such casualties, rental shall abate in such proportion as use of the Premises has been destroyed, and Lessor shall restore the Premises to substantially the same condition as before the damage as speedily as practicable, whereupon full rental shall recommence; provided further, however, that if the damage shall be so extensive the same cannot be reasonably repaired and restored within three (3) months time from the date of the casualty, then either Lessor or Lessee may cancel this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. And, in such event, rental shall be apportioned and paid up to the date of such casualty. 11. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the building or openings cut through the roof are allowed without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. 12. Removal of Fixtures. Lessee may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Lessee has placed in the Premises, provided Lessee repairs all damages to the Premises caused by such removal. 4 13. Return of the Premises. Lessee agrees to return the Premises to Lessor at the expiration, or prior termination, of this Lease in good condition and repair, reasonable wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 14. Condemnation. If the whole of the leased Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Lessor sells the Premises under threat of condemnation, then in either of said events, the Term shall cease from the time when possession thereof is taken by public authorities, and rental shall be accounted for as between Lessor and Lessee as of that date. Such termination, however, shall be without prejudice to the rights of either Lessor or Lessee to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Lessee, nor Lessor, shall have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Lessee, then this Lease shall continue in effect and Lessor, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the building on the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore it as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction of the building, and Lessor will not be under any duty to expend amounts in excess of the award received by Lessor. Rent, taxes and other charges payable by Lessee will equitably abate while Lessor's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which does not materially affect Lessee's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 15. Governmental Orders. Lessee agrees, at its own expense and solely in relation to those portions of the Premises which Lessee is required to maintain or repair under Paragraph 8, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Lessee's specific use of said Premises. Notwithstanding the foregoing, the Lessee shall not be liable for: (a) repairs, alterations, replacements or retrofitting required by the accessibility or path of travel requirements set forth in Title III of the Americans With Disabilities Act of 1990, 42 USC ss. 2101, et seq. and regulations and guidelines promulgated thereunder, as amended from time to time (collectively referred to as "ADA"); (b) removal or abatement of ACMs; (c) repairs, alterations or replacements required to comply with federal, state or local indoor air quality laws, rules or regulations; (d) repairs or replacements incident to CFC conversions for heating and cooling systems; (e) installation of fire sprinkler systems; or (f) repairs, alterations or replacements described in Paragraph 9. Lessor agrees to promptly comply with any other governmental or regulatory requirements if not made necessary by reason of Lessee's occupancy of the Premises or relating to those portions of the Premises which Lessor is required to maintain or repair under Paragraph 9. 5 16. Assignment. Except as set forth below, Lessee may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Lessor of its intent to assign or sublease. Lessee may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Lessee, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Lessee's issued and outstanding shares, or which succeeds to the entire business of Lessee through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Lessee. Subtenants or assignees shall become liable directly to Lessor for all obligations of Lessee hereunder, without relieving Lessee's liability. 17. Mortgagee's Rights. Lessee's rights shall be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Lessor, and Lessee agrees, at Lessor's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Lessor must secure from each mortgagee a nondisturbance agreement acceptable to Lessee providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Lessee is not in default, will not disturb Lessee's possession or its rights under this Lease. 18. Use of the Premises. The Lessee may use the Premises for office/warehouse and distribution purposes, including outdoor storage, or for any other lawful purpose. The Premises shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 19. Signs. Lessee shall have the right to erect at Lessee's sole expense a sign at the entrance to the Premises. This sign shall not be other than a customary trade sign identifying the business of Lessee. The erection of this sign by Lessee shall be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Lessee shall remove the sign thus erected, and shall repair any damage or disfigurement, caused by such removal. 20. Reservation of Right to Sell. Lessor shall have the right to sell the Premises during the term of this Lease, subject to the following: a. Lessor agrees to give notice of each proposed sale, including the purchase price and all other terms and conditions, to Lessee; b. Lessee will have the right to purchase the Premises at the purchase price and on the other terms and conditions offered by Lessor or offered to Lessor by the third party (which offer Lessor wishes to accept), by giving notice to Lessor within 20 business days after Lessor has notified Lessee of the terms of Lessor's proposed sale; and 6 c. If Lessee does not give notice of the exercise of its option within such time, Lessor will have the right to sell the Premises upon the terms stated in the offer made or received by Lessor, but not upon terms more favorable to the purchaser, unless Lessor again gives notice pursuant to subparagraph a, above, and Lessee does not exercise its option based upon the new terms. 21. Entry for Carding, etc. Lessor may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Lessor may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Lessor under the terms hereof. 22. Indemnity. Lessor agrees to indemnify and save harmless Lessee and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Lessor of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials ("Environmental Laws") relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar conditions which occurred or first arose prior to commencement of the Term and during the period of Lessor's ownership of the Premises; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Lessor's representations and warranties being untrue. These indemnities shall survive the expiration, cancellation or termination of the Lease. Lessee agrees to indemnify and save harmless Lessor and its stockholders, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of Lessee's use and occupancy of the Premises, including, without limitation, any violation by Lessee of any Environmental Laws relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar condition which occurred or first arose after the commencement of the Term. These indemnities shall survive for a period of three (3) years following the expiration, cancellation or termination of this Lease. 23. Cancellation of Lease by Lessor. It is mutually agreed that in the event: a. The rent herein reserved is not paid at the time and place when and where due and Lessee fails to pay said rent within five (5) days after written demand from Lessor; or 7 b. Lessee shall fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after notice to Lessee of such failure to comply or such additional time period as may reasonably necessary to effect a cure of the default provided that Lessee commences and diligently pursues a cure of the default; or c. Lessee causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Lessor to Lessee demanding cure; in any of such events, Lessor shall have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: i. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor. Lessee agrees to indemnify Lessor for all loss and damage which Lessor may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or ii. Lessor, as Lessee's agent, without terminating this Lease, may terminate Lessee's right of possession, and, at Lessor's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Lessor deems proper. Lessee shall be liable to Lessor for the deficiency, if any, between Lessee's rent hereunder and the price obtained by Lessor on reletting. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. In any case, Lessor shall use best efforts to mitigate Lessee's damages. Any notice in this provision may be given by Lessor or its attorney. 24. Effects of Termination of the Lease. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, shall affect Lessor's right to collect rent for the period prior to the termination thereof. 25. Default of Lessor. Should Lessor fail to perform any of its obligations hereunder, Lessor shall have a period of 30 days after its receipt of written notice from Lessee of a failure of performance within which to commence a cure of that failure. Failure of Lessor to commence that cure within the 30-day period or to effect that cure within that 30-day period shall be an event of default under this Lease and Lessee may, at its option, elect to: a. Terminate this Lease upon 30 days written notice to Lessor; b. Bring an action to require specific performance of Lessor's obligations; c. Provide Lessor with an additional period of time within which to effect that cure; 8 d. Commence such cure itself, and Lessee may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Lessee hereunder, or require that Lessor immediately reimburse Lessee for its expenses; provided, however, in the event of an emergency, Lessee may immediately effect a cure of Lessor's failure should Lessor fail to act immediately to do so, without the requirement of any notice by Lessee to Lessor; and/or e. Pursue any other remedies provided herein or provided by law. 26. Purchase Option. Lessee shall have the option to purchase the Premises at Fair Market Value, payable in cash at closing, said option being exercisable by Lessee at any time during the Term by written notice given by Lessee to Lessor. If this option is exercised by Lessee, closing shall be held within sixty (60) days of the notice of exercise at a time and place, and on a date, reasonably satisfactory to Lessor and Lessee (the Term shall be extended, if necessary, through and including the date of closing). Title to the Premises shall be conveyed free of any liens or encumbrances, and subject only to current year's ad valorem taxes, applicable building restrictions, easements for utilities servicing the Premises, and such other conditions of title as may not, in Lessee's sole discretion, adversely affect the use of the Premises by Lessee or as may be approved by Lessee (the "Permitted Exceptions"). Immediately following the date of exercise of this option, Lessor shall furnish Lessee with a commitment for a standard owner's title insurance policy, ATLA Form B, reflecting only Permitted Exceptions and standard printed exceptions (the "Commitment"). Immediately following closing, Lessor shall furnish Lessee with an owner's title insurance policy issued in conformity with the Commitment. The cost of the title insurance Commitment and policy shall be borne by Lessor; provided, however, that the cost of any special endorsements shall be borne by Lessee; and, further provided, that if Lessee obtains a mortgage title insurance policy at closing, the cost of the combined owner's and mortgagee's policies shall be divided equally between Lessor and Lessee. Ad valorem taxes, rent due under the Lease, utilities and any insurance or other prepaid items assumed by the Lessee shall be prorated as of the date of closing. Title to the Premises shall be conveyed by general warranty deed in form acceptable for recording, subject only to the Permitted Exceptions. Lessor and Lessee shall each bear their respective costs in connection with exercise of the option and the closing, including attorney's fees. Lessee shall bear the cost of recording the deed, the cost of any survey obtained by Lessee, and all costs related to any financing obtained by Lessee. Except for any prepaid rent, Lessee is not entitled to a credit for rental payments paid by the Lessee during the Term of the Lease. The Lessor and Lessee shall attempt to determine the Fair Market Value by mutual agreement within fifteen (15) days after Lessee gives notice of its exercise of the option. However, if the parties cannot reach agreement on the Fair Market Value, the following provisions shall apply: a. Lessor and Lessee shall each select a qualified real estate appraiser within the next fifteen (15) days. Each appraiser must demonstrate to the reasonable 9 satisfaction of both Lessor and Lessee that he has significant experience in appraising similar properties. b. The Fair Market Value shall be determined by the appraisers within thirty (30) days thereafter. Each of the appraisers shall be instructed to prepare an appraisal of the Premises in accordance with the following instructions: The method of valuing the property shall use any one or a combination of appropriate appraisal methodologies (i.e., replacement cost, comparable sales, and income); provided, however, that any valuation based upon the income approach (i.e., the capitalization of net rental amounts abstracted from consideration this Lease and the rental provided for herein. The appraised value is to be a single value, not a range of values and not a schedule of different values based upon different methodologies or different assumptions. The value of any alterations, additions or improvements to the Premises made by Lessee shall be included in the determination of Fair Market Value. If the appraised values determined by the two appraisers do not differ by more than ten percent (l0%), the purchase price shall be the average of the two values. If the difference is more than ten percent (l0%), and the two appraisers cannot agree upon a value (in which event such agreed value shall be binding upon Lessor and Lessee), the two appraisers shall select a third appraiser within fifteen (15) days thereafter. The third appraiser shall be instructed to select a value within the range of values established by the initial two (2) appraisals, within twenty (20) days after his appointment, following the instructions set forth above, and the Fair Market Value so selected by the third appraiser shall be binding upon Lessor and Lessee as the purchase price for the Premises. 27. Holding Over. If Lessee remains in possession of the Premises after expiration of the term hereof, with Lessor's acquiescence and without any express agreement of the parties, Lessee shall be a tenant-at-will at the rental rate in effect at end of the Lease; and there shall be no renewal of this Lease by operation of law. 28. Notices. Any notice given pursuant to this Lease shall be in writing and sent by certified mail to: a. Lessor: SWS-TX Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, Alabama 35203 or to such other address as Lessor may hereafter designate in writing to Lessee. 10 b. Lessee: Hughes Supply, Inc. 20 North Orange Avenue Suite 200 Orlando, Florida 32801 Attention: J. Stephen Zepf or to such other address as Lessee may hereafter designate in writing to Lessor. 29. Memorandum of Lease and Option. This Lease shall not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which shall set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Lessee's rights under this Lease, including the purchase option provided for in paragraph 26 of this Lease. If Lessee records the Memorandum of Lease and Option, Lessee agrees to pay all related recording fees and taxes. 30. Attorneys' Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorneys' fees and expenses of litigation. For purposes of this Paragraph, a party is to be considered the prevailing party if: a. It initiated the litigation and obtains (by judgment oral agreement) substantially the relief sought; or b. It did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 31. Waiver of Rights. No failure of Lessor to exercise any power given Lessor hereunder, or to insist upon strict compliance by Lessee with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Lessor's right to demand exact compliance with the terms hereof. 32. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative but not restrictive to those given by law. 33. Time of Essence. Time is of the essence of this Agreement. 34. Definitions. "Lessor" as used in this Lease shall include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Lessee" shall include second party, its assigns and successors, and if this Lease shall be validly assigned, or sublet, shall include also Lessee's assignees or sub-lessees, as to the Premises covered by such assignment or sub-lease. "Lessor" and "Lessee" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 11 35. Miscellaneous. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, shall be of any force or effect. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance shall; to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. SWS-TX REALTY, INC. By: /s/ James D. Davis ---------------------------- Its: Vice-President -------------------------- HUGHES SUPPLY, INC. By: /s/ David H. Hughes ---------------------------- Its: Chairman --------------------------- 12 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that James D. Davis, whose name as Vice-President of SWS-TX REALTY, INC., a Texas corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ [SIGNATURE ILLEGIBLE] -------------------------------- Notary Public My Commission Expires: 10-21-97 --------------------------------- STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that David H. Hughes, whose name as Chairman of HUGHES SUPPLY, INC., a Florida corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me an this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ [SIGNATURE ILLEGIBLE] -------------------------------- Notary Public My Commission Expires: 10-21-97 --------------------------------- 13 EXHIBIT A Being a parcel of land containing 0.7593 acres (33,075 square feet) located in the Southwest corner of the Property. Said parcel of land is more particularly described as follows: BEGINNING at a set 5/8 inch rod in the East right-of-way (R.O.W.) line of Monroe Boulevard (100.00 feet wide), marking the common Northwest corner of a 7.3450 acre tract conveyed to the City of Houston under Volume 7039, Page 265 of the Harris County Deed Records, Harris County, Texas and the Southwest corner of the herein described tract; THENCE, North 00(degree)35'45" West, along said East R.O.W. line, 600.00 feet to a set 5/8 inch iron rod marking the Northwest corner of the herein described tract, and being in the common line of Lots 27 and 28 of the aforementioned South Houston Gardens, Section 6; THENCE, departing said East R.O.W. line, North 89(degree)23'35" East, along said common lot line, 650.00 feet to a found 5/8 inch iron rod marking the common Southeast corner of the said lot 28 and the northeast corner of Lot 27 and the herein described tract; THENCE, South 00(degree)33'45" East, along the East line of said Lots 27 and 28, 600.00 feet to a set 5/8 inch iron rod marking the common Northeast corner of the aforementioned 7.3450 acre tract, Lot 29 and the Southeast corner of Lot 28 and of the herein described tract; THENCE; South 89(degree)23'35" West, along the common Lot line of said Lots 28 and 29, 650.00 feet to the POINT OF BEGINNING: BEGINNING at the above-referenced POINT OF BEGINNING; thence North 00(degree)35'45" West, along said East R.O.W. line, 135 feet; thence South 89(degree)23'35" East, 245 feet; thence South 00(degree)35'45" East 135 feet; thence North 89(degree)23'35" West 245 feet to POINT OF BEGINNING and containing 0.7593 acres (33,075 square feet) of land more or less. EXHIBIT A - Page 1 of 1 EXHIBIT B [MAP] March 19, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED SWS-TX Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, AL 35203 Re: Branch No. 9015 Houston - Multalloy Lease Agreement dated May 13, 1996 by and between SWS-TX Realty, Inc., as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional three (3) years. The extended term will commence May 13, 1999 and will expire May 12, 2002, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Mike Stanwood, President of Southwest Stainless (via inter-branch mail) Mike Priesmeyer, Branch Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: SWS-TX Realty, Inc. By: Date: ------------------------------- --------------- Landlord August 26, 2002 CERTIFIED MAIL RETURN RECEIPT REQUESTED SWS-TX Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, AL 25203 Re: Lease Agreement dated May 13, 1996, by and between SWS-TX Realty, Inc., a Texas corporation, as Lessor, and Southwest Stainless, L.P., a Delaware limited partnership, as assigned by Assignment and Assumption Agreement by Hughes Supply, Inc., as Lessee. for property located at 8511 Monroe Road, Houston, TX ("Lease"). Dear Lessor: Please be advised that Southwest Stainless, L.P., a wholly-owned subsidiary of Hughes Supply, Inc., has elected to exercise its option to renew the referenced Lease pursuant to Paragraph 3 of the Lease. The Lease is to be renewed under the same terms and conditions as the original Lease with the following modifications: 1. The renewal term will be for an additional period of three (3) years to commence May 13, 2002 and continue through and including May 12, 2005. 2. The rental rate will be adjusted annually in accordance with Paragraph 4 of the Lease. 3. Lessee is required to provide notice of any assignment/transfer of the Lease Pursuant to Paragraph 16 of the Lease. In order to reduce legal, tax and compliance costs in Texas, Lessee is consolidating its operations in Texas. As a result of such consolidation, Lessee assigned its leasehold interest to Southwest Stainless, L.P. and a copy of the Assignment and Assumption Agreement is attached. This assignment is effective immediately and all notices to Lessee regarding the Lease or the premises covered thereby should be sent to the following address: Southwest Stainless, L.P. c/o Hughes Supply, Inc. Attn: Mark Scimeca, Esq., Associate General Counsel 20 North Orange Avenue, Suite 200 Orlando, Florida 32801 4. Lessee is hereby changed to Southwest Stainless, L.P., a Delaware limited partnership effective as of May 13, 1996. SWS-TX Realty, Inc. August 26, 2002 Page Two 5. All other terms and conditions of the Lease shall remain unchanged and in full force and effect. Please indicate the acceptance and agreement of the Lessor to this Letter Agreement by having Lessor sign below and faxing a signed copy of this letter to my attention at (407) 649-3018. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca Associate General Counsel MDS:js Attachment cc: Mike Stanwood (via fax) Mike Cox (via fax) George Urquiola (via inter-office mail) ACCEPTED AND AGREED TO BY: SWS-TX REALTY, INC., a Texas corporation By:_____________________________ Printed:________________________ Title:__________________________ Date:___________________________ ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment"), made and entered into as of May 13, 1996 by and between HUGHES SUPPLY, INC., a Florida corporation (the "Assignor"), and SOUTHWEST STAINLESS, L.P., a Delaware limited partnership ("the Assignee"). W I T N E S S E T H: WHEREAS, due to legal, tax and compliance costs in Texas, Assignor has decided to convey its assets in Texas to one of its wholly owned subsidiaries; and WHEREAS, Assignor and Assignee desire for Assignor to assign all of Assignor's rights, title and interest in and to all real property leases including without limitation to those leases set forth in Exhibit "A", attached hereto and incorporated herein by this reference located in Texas (collectively, "Leases") to Assignee and for Assignee to receive and assume such rights, title and interest to the Leases; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Assignment by Assignor. Effective as of May 13, 1996, Assignor hereby assigns, transfers and sets over to Assignee all of Assignor's rights, title and interest in and to all of the Leases. 2. Assumption by Assignee. Effective as of May 13, 1996, Assignee hereby accepts the foregoing assignment of and assumes the Leases. 3. Governing Law. This Assignment shall be construed and enforced in accordance with the laws of Texas, but without regard to principles of such laws relating to conflicts of laws. Any action to construe or enforce this Assignment shall be brought in the proper court in the State of Texas. 4. Counterparts. This Assignment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. 5. Notwithstanding anything to the contrary contained herein, nothing contained herein shall release Assignor from any Lease or other obligation Assignor may have to any third party. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. "Assignor" HUGHES SUPPLY, INC., a Florida corporation By:_______________________________ Name: ________________________ Title:________________________ "Assignee" SOUTHWEST STAINLESS, L.P., a Delaware limited partnership By: Z&L Acquisition Corp., a Delaware corporation Its: General Partner By:_______________________________ Name: ________________________ Title: _______________________ EXHIBIT "A" Lease Agreement dated May 13, 1996 between SWS-TX Realty, Inc. ("Lessor") and Hughes Supply, Inc. ("Lessee") for real property located at 8505 Monroe Road, Houston, Texas. Lease Agreement dated May 13, 1996 between SWS-TX Realty, Inc. ("Lessor") and Hughes Supply, Inc. ("Lessee") for real property located at 8511 Monroe Street, Houston, Texas. Exhibit 10.23 Sub-ITEM (b) STATE OF TEXAS 8505 Monroe, Houston, Texas COUNTY OF HARRIS LEASE AGREEMENT THIS LEASE (this "Lease") made this the 13th day of May, 1996, by and between SWS-TX REALTY, INC., a Texas corporation, first party, hereinafter referred to as "Lessor," and HUGHES SUPPLY, INC., a Florida corporation, second party, hereinafter referred to as "Lessee." W I T N E S S E T H: 1. Premises. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Lessee, has leased and rented, and by these presents does lease and rent, unto said Lessee, and said Lessee hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements located at 8505 Monroe Boulevard, Houston, Texas 77075, including, without limitation, approximately 8.2 acres of real property described in Exhibit A to this Lease, and 44,500(plus or minus) square foot building as described in Exhibit B to this Lease. 2. Warranties. Lessor warrants that Lessor owns the premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Lessee's intended use of the Premises; that the Premises abuts one or more publicly dedicated roads; that the Premises do not, as of the date of this Lease, and will not, by reason of the commencement of the term of this Lease, fail to conform to all applicable building ordinances, laws and regulations in any respect which will materially adversely interfere with Lessee's use of the Premises for its intended purposes; that Lessee's proposed use of the Premises is consistent with the zoning classification applicable to the Premises; that Lessor's past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Lessor has not received a citation from any regulatory agency for noncompliance with environmental laws; that Lessor has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Lessee, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Lessor, anyone claiming by, through or under Lessor, or any other party, except as otherwise specifically provided in this Lease. If any of title exceptions to the Premises are hereinafter found to exist, such exceptions will not materially affect Lessee's use of the Premises. 3. Term. The initial term of this Lease shall be for three (3) years, said term to begin on the 13th day of May, 1996 (the "Commencement Date") and end on the 12th day of May, 1999 (the "Initial Term"). The Initial Term of this Lease may be extended, at the option of the Lessee, for up to two (2) successive periods of three (3) years (each such period of three (3) years herein sometimes referred to as an "Extended Term") as follows: First Extended Term - May 13, 1999 to May 12, 2002. Second Extended Term - May 13, 2002 to May 12, 2005. The option to extend shall be exercised by the Lessee by giving notice to the Lessor not more than twelve (12) nor less than six (6) months prior to the expiration of the then existing term. Each Extended Term shall be upon the same terms, covenants, and conditions as provided in the Lease. Any termination of this Lease during the Initial Term or any Extended Term shall terminate all rights of any further extension hereunder. The use of the word "Term" herein shall be deemed to include the Initial Term as well as any Extended Term. 4. Rental. As rent for the Premises, Lessee shall pay to Lessor in advance on the first day of each calendar month of the Term the sum of $13,150.00 per month, being at the rate of $157,800.00 per annum; provided, however, on each anniversary of the Commencement Date during the Term, the annual rent shall be increased over the rent for the prior lease year by an amount equal to the percentage increase in the CPI from the first month of the previous lease year to such anniversary date. Such adjustment, however, shall not result in any instance in a reduction of the annual rent, nor shall any annual rent adjustment result in an increase in the annual rent by an amount in excess of 3% of the previous year's rent. For purposes of this Lease, "CPI" refers to the Consumer Price Index for All Urban Consumers (CPI-U), All Items, U.S. City Average (1982-1984 equals 100), published by the United States Department of Labor, Bureau of Labor Statistics. If the CPI is discontinued, such other index as published by the Department of Labor, Bureau of Labor statistics, or its successor agency, in substitution therefor or replacement thereof shall be used for making said computations. If the Department of Labor or its successor agency shall no longer maintain such statistics, comparable statistics published by a responsible financial periodical or recognized authority selected by the Lessor and Lessee shall be used for making said computations. If the base years "(1982-1984 equals 100)" or other base year used in computing the Index is changed, the figures used in making said adjustment shall be changed accordingly so that all increases in the CPI, or any substituted or replacement index, as the case may be, are taken into account notwithstanding any such change in the base year. 2 5. Utility Bills. Lessee shall pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Lessee in connection therewith. If Lessee does not pay same, Lessor may pay the same, and such payment shall be added to the rental of the Premises. 6. Ad Valorem Taxes. Lessee shall pay all real property taxes, special and general assessments, water and sewer assessments and other rents, rates, and changes and other guaranteed impositions of every kind and nature extraordinary as well as ordinary relating to the premises or any business conduct thereon. Lessee shall also pay any and all ad valorem taxes assessed against the personal property located on the Premises during the Term. 7. Insurance. Lessee will carry, at Lessee's sole cost and expense, "All Risk" Insurance Coverage on the Premises in an amount not less than the full insurable value. The term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, as determined by Lessor. Such policies shall name Lessor as an additional named insured. All insurance provided for in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in this state. At least fifteen (15) days prior to the expiration date of any policy, the original renewal policy for such insurance shall be delivered by Lessee to Lessor. With fifteen (15) days after the premium on any policy shall become due and payable, Lessor shall be furnished with satisfactory evidence of its payment. If Lessee provides any insurance required by this Lease in the form of a blanket policy, Lessee shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Lessor so requires, the policies of insurance provided for shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies shall, to the extent obtainable, provide that any loss shall be payable to Lessor or to the holder of any mortgage notwithstanding any act or negligence of Lessee which might otherwise result in forfeiture of such insurance. All such policies shall, to the extent obtainable, contain an agreement by the insurers that such policies shall not be cancelled without at least thirty (30) days prior written notice to Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Lessee will carry at Lessee's own expense insurance coverage on all equipment, furniture and appliances. 8. Maintenance and Repairs by Lessee. Lessor warrants as of the Commencement Date of this Lease that the Premises are structurally sound and that all lighting and all operating systems are in good condition and are not in need of repair. Except as set forth in Paragraph 3 9, Lessee shall, at it's own expense, keep and maintain the interior of the Premises, including all systems pertaining to water, sewer, electrical, heating, ventilation, air conditioning and lighting. Lessee shall also perform exterior lawn maintenance. It is the intent of the parties that Lessee shall only be required to make minor repairs not repairs or replacements which are structural in nature, extra ordinary or capital in nature, or those which will increase the value of the Premises subsequent to the end of the Term. In addition, the Lessee shall not be required to repair latent defects in the Premises. 9. Repairs by Lessor. Lessor agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Lessor shall also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the Term and any other repairs not expressly delegated to Lessee in this Lease. Lessor shall also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises and remediate the Premises to comply with any and all environmental laws applicable thereto, and to pay for all clean-up and disposal costs at no cost to Lessee, unless directly caused by Lessee, its employees, agents or contractors. 10. Destruction of or Damage to the Premises. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction, and rental shall be accounted for as between Lessor and Lessee as of that date. If the Premises are damaged, but not wholly destroyed by any of such casualties, rental shall abate in such proportion as use of the Premises has been destroyed, and Lessor shall restore the Premises to substantially the same condition as before the damage as speedily as practicable, whereupon full rental shall recommence; provided further, however, that if the damage shall be so extensive the same cannot be reasonably repaired and restored within three (3) months time from the date of the casualty, then either Lessor or Lessee may cancel this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. And, in such event, rental shall be apportioned and paid up to the date of such casualty. 11. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the building or openings cut through the roof are allowed without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. 12. Removal of Fixtures. Lessee may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Lessee has placed in the Premises, provided Lessee repairs all damages to the Premises caused by such removal. 4 13. Return of the Premises. Lessee agrees to return the Premises to Lessor at the expiration, or prior termination, of this Lease in good condition and repair, reasonable wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 14. Condemnation. If the whole of the leased Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Lessor sells the Premises under threat of condemnation, then in either of said events, the Term shall cease from the time when possession thereof is taken by public authorities, and rental shall be accounted for as between Lessor and Lessee as of that date. Such termination, however, shall be without prejudice to the rights of either Lessor or Lessee to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Lessee, nor Lessor, shall have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Lessee, then this Lease shall continue in effect and Lessor, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the building on the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore it as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction of the building, and Lessor will not be under any duty to expend amounts in excess of the award received by Lessor. Rent, taxes and other charges payable by Lessee will equitably abate while Lessor's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which does not materially affect Lessee's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 15. Governmental Orders. Lessee agrees, at its own expense and solely in relation to those portions of the Premises which Lessee is required to maintain or repair under Paragraph 8, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Lessee's specific use of said Premises. Notwithstanding the foregoing, the Lessee shall not be liable for: (a) repairs, alterations, replacements or retrofitting required by the accessibility or path of travel requirements set forth in Title III of the Americans With Disabilities Act of 1990, 42 USC ss. 2101, et seq. and regulations and guidelines promulgated thereunder, as amended from time to time (collectively referred to as "ADA"); (b) removal or abatement of ACMs; (c) repairs, alterations or replacements required to comply with federal, state or local indoor air quality laws, rules or regulations; (d) repairs or replacements incident to CFC conversions for heating and cooling systems; (e) installation of fire sprinkler systems; or (f) repairs, alterations or replacements described in Paragraph 9. Lessor agrees to promptly comply with any other governmental or regulatory requirements if not made necessary by reason of Lessee's occupancy of the Premises or relating to those portions of the Premises which Lessor is required to maintain or repair under Paragraph 9. 5 16. Assignment. Except as set forth below, Lessee may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Lessor of its intent to assign or sublease. Lessee may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Lessee, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Lessee's issued and outstanding shares, or which succeeds to the entire business of Lessee through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Lessee. Subtenants or assignees shall become liable directly to Lessor for all obligations of Lessee hereunder, without relieving Lessee's liability. 17. Mortgagee's Rights. Lessee's rights shall be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Lessor, and Lessee agrees, at Lessor's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Lessor must secure from each mortgagee a nondisturbance agreement acceptable to Lessee providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Lessee is not in default, will not disturb Lessee's possession or its rights under this Lease. 18. Use of the Premises. The Lessee may use the Premises for office/warehouse and distribution purposes, including outdoor storage, or for any other lawful purpose. The Premises shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 19. Signs. Lessee shall have the right to erect at Lessee's sole expense a sign at the entrance to the Premises. This sign shall not be other than a customary trade sign identifying the business of Lessee. The erection of this sign by Lessee shall be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Lessee shall remove the sign thus erected, and shall repair any damage or disfigurement, caused by such removal. 20. Reservation of Right to Sell. Lessor shall have the right to sell the Premises during the term of this Lease, subject to the following: a. Lessor agrees to give notice of each proposed sale, including the purchase price and all other terms and conditions, to Lessee; b. Lessee will have the right to purchase the Premises at the purchase price and on the other terms and conditions offered by Lessor or offered to Lessor by the third party (which offer Lessor wishes to accept), by giving notice to Lessor within 20 business days after Lessor has notified Lessee of the terms of Lessor's proposed sale; and 6 c. If Lessee does not give notice of the exercise of its option within such time, Lessor will have the right to sell the Premises upon the terms stated in the offer made or received by Lessor, but not upon terms more favorable to the purchaser, unless Lessor again gives notice pursuant to subparagraph a, above, and Lessee does not exercise its option based upon the new terms. 21. Entry for Carding, etc. Lessor may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Lessor may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Lessor under the terms hereof. 22. Indemnity. Lessor agrees to indemnify and save harmless Lessee and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Lessor of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials ("Environmental Laws") relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar conditions which occurred or first arose prior to commencement of the Term and during the period of Lessor's ownership of the Premises; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Lessor's representations and warranties being untrue. These indemnities shall survive the expiration, cancellation or termination of the Lease. Lessee agrees to indemnify and save harmless Lessor and its stockholders, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of Lessee's use and occupancy of the Premises, including, without limitation, any violation by Lessee of any Environmental Laws relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar condition which occurred or first arose after the commencement of the Term. These indemnities shall survive for a period of three (3) years following the expiration, cancellation or termination of this Lease. 23. Cancellation of Lease by Lessor. It is mutually agreed that in the event: a. The rent herein reserved is not paid at the time and place when and where due and Lessee fails to pay said rent within five (5) days after written demand from Lessor; or 7 b. Lessee shall fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after notice to Lessee of such failure to comply or such additional time period as may reasonably necessary to effect a cure of the default provided that Lessee commences and diligently pursues a cure of the default; or c. Lessee causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Lessor to Lessee demanding cure; in any of such events, Lessor shall have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: i. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor. Lessee agrees to indemnify Lessor for all loss and damage which Lessor may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or ii. Lessor, as Lessee's agent, without terminating this Lease, may terminate Lessee's right of possession, and, at Lessor's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Lessor deems proper. Lessee shall be liable to Lessor for the deficiency, if any, between Lessee's rent hereunder and the price obtained by Lessor on reletting. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. In any case, Lessor shall use best efforts to mitigate Lessee's damages. Any notice in this provision may be given by Lessor or its attorney. 24. Effects of Termination of the Lease. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, shall affect Lessor's right to collect rent for the period prior to the termination thereof. 25. Default of Lessor. Should Lessor fail to perform any of its obligations hereunder, Lessor shall have a period of 30 days after its receipt of written notice from Lessee of a failure of performance within which to commence a cure of that failure. Failure of Lessor to commence that cure within the 30-day period or to effect that cure within that 30-day period shall be an event of default under this Lease and Lessee may, at its option, elect to: a. Terminate this Lease upon 30 days written notice to Lessor; b. Bring an action to require specific performance of Lessor's obligations; c. Provide Lessor with an additional period of time within which to effect that cure; 8 d. Commence such cure itself, and Lessee may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Lessee hereunder, or require that Lessor immediately reimburse Lessee for its expenses; provided, however, in the event of an emergency, Lessee may immediately effect a cure of Lessor's failure should Lessor fail to act immediately to do so, without the requirement of any notice by Lessee to Lessor; and/or e. Pursue any other remedies provided herein or provided by law. 26. Purchase Option. Lessee shall have the option to purchase the Premises at Fair Market Value, payable in cash at closing, said option being exercisable by Lessee at any time during the Term by written notice given by Lessee to Lessor. If this option is exercised by Lessee, closing shall be held within sixty (60) days of the notice of exercise at a time and place, and on a date, reasonably satisfactory to Lessor and Lessee (the Term shall be extended, if necessary, through and including the date of closing). Title to the Premises shall be conveyed free of any liens or encumbrances, and subject only to current year's ad valorem taxes, applicable building restrictions, easements for utilities servicing the Premises, and such other conditions of title as may not, in Lessee's sole discretion, adversely affect the use of the Premises by Lessee or as may be approved by Lessee (the "Permitted Exceptions"). Immediately following the date of exercise of this option, Lessor shall furnish Lessee with a commitment for a standard owner's title insurance policy, ATLA Form B, reflecting only Permitted Exceptions and standard printed exceptions (the "Commitment"). Immediately following closing, Lessor shall furnish Lessee with an owner's title insurance policy issued in conformity with the Commitment. The cost of the title insurance Commitment and policy shall be borne by Lessor; provided, however, that the cost of any special endorsements shall be borne by Lessee; and, further provided, that if Lessee obtains a mortgage title insurance policy at closing, the cost of the combined owner's and mortgagee's policies shall be divided equally between Lessor and Lessee. Ad valorem taxes, rent due under the Lease, utilities and any insurance or other prepaid items assumed by the Lessee shall be prorated as of the date of closing. Title to the Premises shall be conveyed by general warranty deed in form acceptable for recording, subject only to the Permitted Exceptions. Lessor and Lessee shall each bear their respective costs in connection with exercise of the option and the closing, including attorney's fees. Lessee shall bear the cost of recording the deed, the cost of any survey obtained by Lessee, and all costs related to any financing obtained by Lessee. Except for any prepaid rent, Lessee is not entitled to a credit for rental payments paid by the Lessee during the Term of the Lease. The Lessor and Lessee shall attempt to determine the Fair Market Value by mutual agreement within fifteen (15) days after Lessee gives notice of its exercise of the option. However, if the parties cannot reach agreement on the Fair Market Value, the following provisions shall apply: a. Lessor and Lessee shall each select a qualified real estate appraiser within the next fifteen (15) days. Each appraiser must demonstrate to the reasonable 9 satisfaction of both Lessor and Lessee that he has significant experience in appraising similar properties. b. The Fair Market Value shall be determined by the appraisers within thirty (30) days thereafter. Each of the appraisers shall be instructed to prepare an appraisal of the Premises in accordance with the following instructions: The method of valuing the property shall use any one or a combination of appropriate appraisal methodologies (i.e., replacement cost, comparable sales, and income); provided, however, that any valuation based upon the income approach (i.e., the capitalization of net rental amounts abstracted from consideration this Lease and the rental provided for herein. The appraised value is to be a single value, not a range of values and not a schedule of different values based upon different methodologies or different assumptions. The value of any alterations, additions or improvements to the Premises made by Lessee shall be included in the determination of Fair Market Value. If the appraised values determined by the two appraisers do not differ by more than ten percent (l0%), the purchase price shall be the average of the two values. If the difference is more than ten percent (l0%), and the two appraisers cannot agree upon a value (in which event such agreed value shall be binding upon Lessor and Lessee), the two appraisers shall select a third appraiser within fifteen (15) days thereafter. The third appraiser shall be instructed to select a value within the range of values established by the initial two (2) appraisals, within twenty (20) days after his appointment, following the instructions set forth above, and the Fair Market Value so selected by the third appraiser shall be binding upon Lessor and Lessee as the purchase price for the Premises. 27. Holding Over. If Lessee remains in possession of the Premises after expiration of the term hereof, with Lessor's acquiescence and without any express agreement of the parties, Lessee shall be a tenant-at-will at the rental rate in effect at end of the Lease; and there shall be no renewal of this Lease by operation of law. 28. Notices. Any notice given pursuant to this Lease shall be in writing and sent by certified mail to: a. Lessor: SWS-TX Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, Alabama 35203 or to such other address as Lessor may hereafter designate in writing to Lessee. b. Lessee: Hughes Supply, Inc. 20 North Orange Avenue Suite 200 Orlando, Florida 32801 Attention: J. Stephen Zepf 10 or to such other address as Lessee may hereafter designate in writing to Lessor. 29. Memorandum of Lease and Option. This Lease shall not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which shall set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Lessee's rights under this Lease, including the purchase option provided for in paragraph 26 of this Lease. If Lessee records the Memorandum of Lease and Option, Lessee agrees to pay all related recording fees and taxes. 30. Attorneys' Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorneys' fees and expenses of litigation. For purposes of this Paragraph, a party is to be considered the prevailing party if: a. It initiated the litigation and obtains (by judgment oral agreement) substantially the relief sought; or b. It did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 31. Waiver of Rights. No failure of Lessor to exercise any power given Lessor hereunder, or to insist upon strict compliance by Lessee with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Lessor's right to demand exact compliance with the terms hereof. 32. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative but not restrictive to those given by law. 33. Time of Essence. Time is of the essence of this Agreement. 34. Definitions. "Lessor" as used in this Lease shall include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Lessee" shall include second party, its assigns and successors, and if this Lease shall be validly assigned, or sublet, shall include also Lessee's assignees or sub-lessees, as to the Premises covered by such assignment or sub-lease. "Lessor" and "Lessee" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 35. Miscellaneous. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, shall be of any force or effect. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance shall; to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, 11 shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. SWS-TX REALTY, INC. By: /s/ James D. Davis ---------------------------- Its: Vice-President -------------------------- HUGHES SUPPLY, INC. By: /s/ David H. Hughes ---------------------------- Its: Chairman --------------------------- 12 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that James D. Davis, whose name as Vice-President of SWS-TX REALTY, INC., a Texas corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same fears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that David H. Hughes, whose name as Chairman of HUGHES SUPPLY, INC., a Florida corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me an this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- 13 EXHIBIT A Being a tract or parcel containing 8.9532 acres (390,000 square feet) of land situated in the Thomas Toby Survey, Abstract Number 814, Harris County, Texas, consisting of portions of Lots 21 and 28 of South Houston Gardens, Section 6, a subdivision of record in Volume 2, Page 74 of the Harris County Map Records, Harris County, Texas, said 8.9532 acre tract being more particularly described as follows: BEGINNING at a set 5/8 inch rod in the East right-of-way (R.O.W.) line of Monroe Boulevard (100.00 feet wide), marking the common Northwest corner of a 7.3450 acre tract conveyed to the City of Houston under Volume 7039, Page 265 of the Harris County Deed Records, Harris County, Texas and the Southwest corner of the herein described tract; THENCE, North 00(degree)3.5'45" West, along said East R.O.W. line, 600.00 feet to a set 5/8 inch iron rod marking the Northwest corner of the herein described tract, and being in the common line of Lots 27 and 28 of the aforementioned South Houston Gardens, Section 6; THENCE, departing said East R.O.W. line, North 89(degree)23'35" East, along said common lot line, 650.W feet to a found 5/8 inch iron rod marking the common Southeast corner of the said lot 28 and the northeast corner of Lot 27 and the herein described tract; THENCE, South 00(degree)33'45" East, along the East line of said Lots 27 and 28,600.00 feet to a set 5/8 inch iron rod marking the common Northeast corner of the aforementioned 7.3450 acre tract, Lot 29 and the Southeast corner of Lot 28 and of the herein described tract; THENCE; South 89(degree)23'35" West, along the common Lot line of said Lots 28 and 29, 650.00 feet to the POINT OF BEGINNING and containing 8.9532 acres (390,000 square feet) of land. LESS AND EXCEPT: A parcel of land containing 0.7593 acres (33,075 square feet) located in the Southwest corner of the Property. Said parcel of land is more particularly described as follows: BEGINNING at the above-referenced POINT OF BEGINNING; thence North 00(degree)35'45" West, along said East R.O.W. line, 135 feet; thence South 89(degree)23'35" East, 245 feet; thence South 00(degree)35'45" East 135 feet; thence North 89(degree)23'35" West 245 feet to POINT OF BEGINNING and containing 0.7593 acres (33,075 square feet) of land. EXHIBIT A - Page 1 of 1 EXHIBIT B [MAP] March 19, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED SWS-TX Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, AL 35203 Re: Branch No. 9010 Houston SWS Lease Agreement dated May 13, 1996 by and between SWS-TX Realty, Inc., as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional three (3) years. The extended term will commence May 13, 1999 and will expire May 12, 2002, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Mike Stanwood, President of Southwest Stainless (via inter-branch mail) Lee Brown, Branch Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: SWS-TX Realty, Inc. By: Date: ------------------------------------ --------------- Landlord ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment"), made and entered into as of May 13, 1996 by and between HUGHES SUPPLY, INC., a Florida corporation (the "Assignor"), and SOUTHWEST STAINLESS, L.P., a Delaware limited partnership ("the Assignee"). W I T N E S S E T H: WHEREAS, due to legal, tax and compliance costs in Texas, Assignor has decided to convey its assets in Texas to one of its wholly owned subsidiaries; and WHEREAS, Assignor and Assignee desire for Assignor to assign all of Assignor's rights, title and interest in and to all real property leases including without limitation to those leases set forth in Exhibit "A", attached hereto and incorporated herein by this reference located in Texas (collectively, "Leases") to Assignee and for Assignee to receive and assume such rights, title and interest to the Leases; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Assignment by Assignor. Effective as of May 13, 1996, Assignor hereby assigns, transfers and sets over to Assignee all of Assignor's rights, title and interest in and to all of the Leases. 2. Assumption by Assignee. Effective as of May 13, 1996, Assignee hereby accepts the foregoing assignment of and assumes the Leases. 3. Governing Law. This Assignment shall be construed and enforced in accordance with the laws of Texas, but without regard to principles of such laws relating to conflicts of laws. Any action to construe or enforce this Assignment shall be brought in the proper court in the State of Texas. 4. Counterparts. This Assignment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. 5. Notwithstanding anything to the contrary contained herein, nothing contained herein shall release Assignor from any Lease or other obligation Assignor may have to any third party. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. "Assignor" HUGHES SUPPLY, INC., a Florida corporation By:_______________________________ Name: ________________________ Title:________________________ "Assignee" SOUTHWEST STAINLESS, L.P., a Delaware limited partnership By: Z&L Acquisition Corp., a Delaware corporation Its: General Partner By:_______________________________ Name: ________________________ Title: _______________________ EXHIBIT "A" Lease Agreement dated May 13, 1996 between SWS-TX Realty, Inc. ("Lessor") and Hughes Supply, Inc. ("Lessee") for real property located at 8505 Monroe Road, Houston, Texas. Lease Agreement dated May 13, 1996 between SWS-TX Realty, Inc. ("Lessor") and Hughes Supply, Inc. ("Lessee") for real property located at 8511 Monroe Street, Houston, Texas. August 26, 2002 CERTIFIED MAIL RETURN RECEIPT REQUESTED SWS-TX Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, AL 25203 Re: Lease Agreement dated May 13, 1996, by and between SWS-TX Realty, Inc., a Texas corporation, as Lessor, and Southwest Stainless, L.P., a Delaware limited partnership, as assigned by Assignment and Assumption Agreement by Hughes Supply, Inc., as Lessee. for property located at 8511 Monroe Road, Houston, TX ("Lease"). Dear Lessor: Please be advised that Southwest Stainless, L.P., a wholly-owned subsidiary of Hughes Supply, Inc., has elected to exercise its option to renew the referenced Lease pursuant to Paragraph 3 of the Lease. The Lease is to be renewed under the same terms and conditions as the original Lease with the following modifications: 1. The renewal term will be for an additional period of three (3) years to commence May 13, 2002 and continue through and including May 12, 2005. 2. The rental rate will be adjusted annually in accordance with Paragraph 4 of the Lease. 3. Lessee is required to provide notice of any assignment/transfer of the Lease Pursuant to Paragraph 16 of the Lease. In order to reduce legal, tax and compliance costs in Texas, Lessee is consolidating its operations in Texas. As a result of such consolidation, Lessee assigned its leasehold interest to Southwest Stainless, L.P. and a copy of the Assignment and Assumption Agreement is attached. This assignment is effective immediately and all notices to Lessee regarding the Lease or the premises covered thereby should be sent to the following address: Southwest Stainless, L.P. c/o Hughes Supply, Inc. Attn: Mark Scimeca, Esq., Associate General Counsel 20 North Orange Avenue, Suite 200 Orlando, Florida 32801 4. Lessee is hereby changed to Southwest Stainless, L.P., a Delaware limited partnership effective as of May 13, 1996. SWS-TX Realty, Inc. August 26, 2002 Page Two 5. All other terms and conditions of the Lease shall remain unchanged and in full force and effect. Please indicate the acceptance and agreement of the Lessor to this Letter Agreement by having Lessor sign below and faxing a signed copy of this letter to my attention at (407) 649-3018. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca Associate General Counsel MDS:js Attachment cc: Mike Stanwood (via fax) Mike Cox (via fax) George Urquiola (via inter-office mail) ACCEPTED AND AGREED TO BY: SWS-TX REALTY, INC., a Texas corporation By:_____________________________ Printed:________________________ Title:__________________________ Date:___________________________ EX-10.24 8 d59199_ex10-24.txt LEASE AGREEMENTS WITH JEM-REALTY Exhibit 10.24 Sub-ITEM (a) STATE OF NORTH CAROLINA Charlotte, North Carolina COUNTY OF MECKLENBURG LEASE AGREEMENT THIS LEASE (this "Lease") made this the 13th day of May, 1996, by and between JEM-REALTY, INC., a Delaware corporation, and STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, collectively first party, hereinafter referred to as "Lessor," and HUGHES SUPPLY, INC., a Florida corporation, second party, hereinafter referred to as "Lessee." W I T N E S S E T H: 1. Premises. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Lessee, has leased and rented, and by these presents does lease and rent, unto said Lessee, and said Lessee hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements located at 629 Pressley Road, Charlotte, North Carolina 28217, including, without limitation, the real property described in Exhibit A to this Lease, and a 11,500 (plus or minus) feet generally described in the plat plan attached to this Lease as Exhibit B. 2. Warranties. Lessor warrants that Lessor owns the premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Lessee's intended use of the Premises; that the Premises abuts one or more publicly dedicated roads; that the Premises do not, as of the date of this Lease, and will not, by reason of the commencement of the term of this Lease, fail to conform to all applicable building ordinances, laws and regulations in any respect which will materially adversely interfere with Lessee's use of the Premises for its intended purposes; that Lessee's proposed use of the Premises is consistent with the zoning classification applicable to the Premises; that Lessor's past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Lessor has not received a citation from any regulatory agency for noncompliance with environmental laws; that Lessor has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Lessee, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Lessor, anyone claiming by, through or under Lessor, or any other party, except as otherwise specifically provided in this Lease. If any of title exceptions to the Premises are hereinafter found to exist, such exceptions will not materially affect Lessee's use of the Premises. 3. Term. The initial term of this Lease shall be for three (3) years, said term to begin on the 13th day of May, 1996 (the "Commencement Date") and end on the 12th day of May, 1999 (the "Initial Term"). The Initial Term of this Lease may be extended, at the option of the Lessee, for up to two (2) successive periods of three (3) years (each such period of three (3) years herein sometimes referred to as an "Extended Term") as follows: First Extended Term - May 13, 1999 to May 12, 2002. Second Extended Term - May 13, 2002 to May 12, 2005. The option to extend shall be exercised by the Lessee by giving notice to the Lessor not more than twelve (12) nor less than six (6) months prior to the expiration of the then existing term. Each Extended Term shall be upon the same terms, covenants, and conditions as provided in the Lease. Any termination of this Lease during the Initial Term or any Extended Term shall terminate all rights of any further extension hereunder. The use of the word "Term" herein shall be deemed to include the Initial Term as well as any Extended Term. 4. Rental. As rent for the Premises, Lessee shall pay to Lessor in advance on the first day of each calendar month of the Term the sum of $6,150.00 per month, being at the rate of $73,800.00 per annum; provided, however, on each anniversary of the Commencement Date during the Term, the annual rent shall be increased over the rent for the prior lease year by an amount equal to the percentage increase in the CPI from the first month of the previous lease year to such anniversary date. Such adjustment, however, shall not result in any instance in a reduction of the annual rent, nor shall any annual rent adjustment result in an increase in the annual rent by an amount in excess of 3% of the previous year's rent. For purposes of this Lease, "CPI" refers to the Consumer Price Index for All Urban Consumers (CPI-U), All Items, U.S. City Average (1982-1984 equals 100), published by the United States Department of Labor, Bureau of Labor Statistics. If the CPI is discontinued, such other index as published by the Department of Labor, Bureau of Labor statistics, or its successor agency, in substitution therefor or replacement thereof shall be used for making said computations. If the Department of Labor or its successor agency shall no longer maintain such statistics, comparable statistics published by a responsible financial periodical or recognized authority selected by the Lessor and Lessee shall be used for making said computations. If the base years "(1982-1984 equals 100)" or other base year used in computing the Index is changed, the figures used in making said adjustment shall be changed accordingly so that all increases in the CPI, or any substituted or replacement index, as the case may be, are taken into account notwithstanding any such change in the base year. 2 5. Utility Bills. Lessee shall pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Lessee in connection therewith. If Lessee does not pay same, Lessor may pay the same, and such payment shall be added to the rental of the Premises. 6. Ad Valorem Taxes. Lessee shall pay all real property taxes, special and general assessments, water and sewer assessments and other rents, rates, and changes and other guaranteed impositions of every kind and nature extraordinary as well as ordinary relating to the premises or ally business conduct thereon. Lessee shall also pay any and all ad valorem taxes assessed against the personal property located on the Premises during the Term. 7. Insurance. Lessee will carry, at Lessee's sole cost and expense, "All Risk" Insurance Coverage on the Premises in an amount not less than the full insurable value. The term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, as determined by Lessor. Such policies shall name Lessor as an additional named insured. All insurance provided for in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in this state. At least fifteen (15) days prior to the expiration date of any policy, the original renewal policy for such insurance shall be delivered by Lessee to Lessor. With fifteen (15) days after the premium on any policy shall become due and payable, Lessor shall be furnished with satisfactory evidence of its payment. If Lessee provides any insurance required by this Lease in the form of a blanket policy, Lessee shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Lessor so requires, the policies of insurance provided for shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies shall, to the extent obtainable, provide that any loss shall be payable to Lessor or to the holder of any mortgage notwithstanding any act or negligence of Lessee which might otherwise result in forfeiture of such insurance. All such policies shall, to the extent obtainable, contain an agreement by the insurers that such policies shall not be cancelled without at least thirty (30) days prior written notice to Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Lessee will carry at Lessee's own expense insurance coverage on all equipment, furniture and appliances. 8. Maintenance and Repairs by Lessee, Lessor warrants as of the Commencement Date of this Lease that the Premises are structurally sound and that all lighting and all operating systems are in good condition and are not in need of repair. Except as set forth in 3 Paragraph 9, Lessee shall, at it's own expense, keep and maintain the interior of the Premises, including all systems pertaining to water, sewer, electrical, heating, ventilation, air conditioning and lighting. Lessee shall also perform exterior lawn maintenance. It is the intent of the parties that Lessee shall only be required to make minor repairs not repairs or replacements which are structural in nature, extra ordinary or capital in nature, or those which will increase the value of the Premises subsequent to the end of the Term. In addition, the Lessee shall not be required to repair latent defects in the Premises. 9. Repairs by Lessor. Lessor agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Lessor shall also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the Term and any other repairs not expressly delegated to Lessee in this Lease. Lessor shall also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises and remediate the Premises to comply with any and all environmental laws applicable thereto, and to pay for all clean-up and disposal costs at no cost to Lessee, unless directly caused by Lessee, its employees, agents or contractors. 10. Destruction of or Damage to the Premises. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction, and rental shall be accounted for as between Lessor and Lessee as of that date. If the Premises are damaged, but not wholly destroyed by any of such casualties, rental shall abate in such proportion as use of the Premises has been destroyed, and Lessor shall restore the Premises to substantially the same condition as before the damage as speedily as practicable, whereupon full rental shall recommence; provided further, however, that if the damage shall be so extensive the same cannot be reasonably repaired and restored within three (3) months time from the date of the casualty, then either Lessor or Lessee may cancel this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. And, in such event, rental shall be apportioned and paid up to the date of such casualty. 11. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the building or openings cut through the roof are allowed without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. 12. Removal of Fixtures. Lessee may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Lessee has placed in the Premises, provided Lessee repairs ail damages to the Premises caused by such removal. 4 13. Return of the Premises. Lessee agrees to return the Premises to Lessor at the expiration, or prior termination, of this Lease in good condition and repair, reasonable wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 14. Condemnation. If the whole of the leased Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Lessor sells the Premises under threat of condemnation, then in either of said events, the Term shall cease from the time when possession thereof is taken by public authorities, and rental shall be accounted for as between Lessor and Lessee as of that date. Such termination, however, shall be without prejudice to the rights of either Lessor or Lessee to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Lessee, nor Lessor, shall have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Lessee, then this Lease shall continue in effect and Lessor, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the building on the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore it as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction of the building, and Lessor will not be under any duty to expend amounts in excess of the award received by Lessor. Rent, taxes and other charges payable by Lessee will equitably abate while Lessor's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which does not materially affect Lessee's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 15. Governmental Orders. Lessee agrees, at its own expense and solely in relation to those portions of the Premises which Lessee is required to maintain or repair under Paragraph 8, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Lessee's specific use of said Premises. Notwithstanding the foregoing, the Lessee shall not be liable for: (a) repairs, alterations, replacements or retrofitting required by the accessibility or path of travel requirements set forth in Title III of the Americans With Disabilities Act of 1990, 42 USC ss. 2101, et seq. and regulations and guidelines promulgated thereunder, as amended from time to time (collectively referred to as "ADA"); (b) removal or abatement of ACMs; (c) repairs, alterations or replacements required to comply with federal, state or local indoor air quality laws, rules or regulations; (d) repairs or replacements incident to CFC conversions for heating and cooling systems; (e) installation of fire sprinkler systems; or (f) repairs, alterations or replacements described in Paragraph 9. Lessor agrees to promptly comply with any other governmental or regulatory requirements if not made necessary by reason of Lessee's occupancy of the Premises or relating to those portions of the Premises which Lessor is required to maintain or repair under Paragraph 9. 5 16. Assignment. Except as set forth below, Lessee may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Lessor of its intent to assign or sublease. Lessee may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Lessee, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Lessee's issued and outstanding shares, or which succeeds to the entire business of Lessee through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Lessee. Subtenants or assignees shall become liable directly to Lessor for all obligations of Lessee hereunder, without relieving Lessee's liability. 17. Mortgagee's Rights. Lessee's rights shall be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Lessor, and Lessee agrees, at Lessor's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Lessor must secure from each mortgagee a nondisturbance agreement acceptable to Lessee providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Lessee is not in default, will not disturb Lessee's possession or its rights under this Lease. 18. Use of the Premises. The Lessee may use the Premises for office/warehouse and distribution purposes, including outdoor storage, or for any other lawful purpose. The Premises shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 19. Signs. Lessee shall have the right to erect at Lessee's sole expense a sign at the entrance to the Premises. This sign shall not be other than a customary trade sign identifying the business of Lessee. The erection of this sign by Lessee shall be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Lessee shall remove the sign thus erected, and shall repair any damage or disfigurement, caused by such removal. 20. Reservation of Right to Sell. Lessor shall have the right to sell the Premises during the term of this Lease, subject to the following: a. Lessor agrees to give notice of each proposed sale, including the purchase price and all other terms and conditions, to Lessee; b. Lessee will have the right to purchase the Premises at the purchase price and on the other terms and conditions offered by Lessor or offered to Lessor by the third party (which offer Lessor wishes to accept), by giving notice to Lessor within 20 business days after Lessor has notified Lessee of the terms of Lessor's proposed sale; and 6 c. If Lessee does not give notice of the exercise of its option within such time, Lessor will have the right to sell the Premises upon the terms stated in the offer made or received by Lessor, but not upon terms more favorable to the purchaser, unless Lessor again gives notice pursuant to subparagraph a, above, and Lessee does not exercise its option based upon the new terms. 21. Entry for Carding, etc. Lessor may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Lessor may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Lessor under the terms hereof. 22. Indemnity. Lessor agrees to indemnify and save harmless Lessee and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Lessor of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials ("Environmental Laws") relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar conditions which occurred or first arose prior to commencement of the Term and during the period of Lessor's ownership of the Premises; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Lessor's representations and warranties being untrue. These indemnities shall survive the expiration, cancellation or termination of the Lease. Lessee agrees to indemnify and save harmless Lessor and its stockholders, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of Lessee's use and occupancy of the Premises, including, without limitation, any violation by Lessee of any Environmental Laws relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar condition which occurred or first arose after the commencement of the Term. These indemnities shall survive for a period of three (3) years following the expiration, cancellation or termination of this Lease. 23. Cancellation of Lease by Lessor. It is mutually agreed that in the event: a. The rent herein reserved is not paid at the time and place when and where due and Lessee fails to pay said rent within five (5) days after written demand from Lessor; or 7 b. Lessee shall fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after notice to Lessee of such failure to comply or such additional time period as may reasonably necessary to effect a cure of the default provided that Lessee commences and diligently pursues a cure of the default; or c. Lessee causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Lessor to Lessee demanding cure; in any of such events, Lessor shall have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: i. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor. Lessee agrees to indemnify Lessor for all loss and damage which Lessor may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or ii. Lessor, as Lessee's agent, without terminating this Lease, may terminate Lessee's right of possession, and, at Lessor's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Lessor deems proper. Lessee shall be liable to Lessor for the deficiency, if any, between Lessee's rent hereunder and the price obtained by Lessor on reletting. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. In any case, Lessor shall use best efforts to mitigate Lessee's damages. Any notice in this provision may be given by Lessor or its attorney. 24. Effects of Termination of the Lease. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, shall affect Lessor's right to collect rent for the period prior to the termination thereof. 25. Default of Lessor. Should Lessor fail to perform any of its obligations hereunder, Lessor shall have a period of 30 days after its receipt of written notice from Lessee of a failure of performance within which to commence a cure of that failure. Failure of Lessor to commence that cure within the 30-day period or to effect that cure within that 30-day period shall be an event of default under this Lease and Lessee may, at its option, elect to: a. Terminate this Lease upon 30 days written notice to Lessor; b. Bring an action to require specific performance of Lessor's obligations; c. Provide Lessor with an additional period of time within which to effect that cure; 8 d. Commence such cure itself, and Lessee may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Lessee hereunder, or require that Lessor immediately reimburse Lessee for its expenses; provided, however, in the event of an emergency, Lessee may immediately effect a cure of Lessor's failure should Lessor fail to act immediately to do so, without the requirement of any notice by Lessee to Lessor; and/or e. Pursue any other remedies provided herein or provided by law 26. Purchase Option. Lessee shall have the option to purchase the Premises at Fair Market Value, payable in cash at closing, said option being exercisable by Lessee at any time during the Term by written notice given by Lessee to Lessor. If this option is exercised by Lessee, closing shall be held within sixty (60) days of the notice of exercise at a time and place, and on a date, reasonably satisfactory to Lessor and Lessee (the Term shall be extended, if necessary, through and including the date of closing). Title to the Premises shall be conveyed free of any liens or encumbrances, and subject only to current year's ad valorem taxes, applicable building restrictions, easements for utilities servicing the Premises, and such other conditions of title as may not, in Lessee's sole discretion, adversely affect the use of the Premises by Lessee or as may be approved by Lessee (the "Permitted Exceptions"). Immediately following the date of exercise of this option, Lessor shall furnish Lessee with a commitment for a standard owner's title insurance policy, ATLA Form B, reflecting only Permitted Exceptions and standard printed exceptions (the "Commitment"). Immediately following closing, Lessor shall furnish Lessee with an owner's title insurance policy issued in conformity with the Commitment. The cost of the title insurance Commitment and policy shall be borne by Lessor; provided, however, that the cost of any special endorsements shall be borne by Lessee; and, further provided, that if Lessee obtains a mortgage title insurance policy at closing, the cost of the combined owner's and mortgagee's policies shall be divided equally between Lessor and Lessee. Ad valorem taxes, rent due under the Lease, utilities and any insurance or other prepaid items assumed by the Lessee shall be prorated as of the date of closing. Title to the Premises shall be conveyed by general warranty deed in form acceptable for recording, subject only to the Permitted Exceptions. Lessor and Lessee shall each bear their respective costs in connection with exercise of the option and the closing, including attorney's fees. Lessee shall bear the cost of recording the deed, the cost of any survey obtained by Lessee, and all costs related to any financing obtained by Lessee. Except for any prepaid rent, Lessee is not entitled to a credit for rental payments paid by the Lessee during the Term of the Lease. The Lessor and Lessee shall attempt to determine the Fair Market Value by mutual agreement within fifteen (15) days after Lessee gives notice of its exercise of the option. However, if the parties cannot reach agreement on the Fair Market Value, the following provisions shall apply: a. Lessor and Lessee shall each select a qualified real estate appraiser within the next fifteen (15) days. Each appraiser must demonstrate to the reasonable 9 satisfaction of both Lessor and Lessee that he has significant experience in appraising similar properties. b. The Fair Market Value shall be determined by the appraisers within thirty (30) days thereafter. Each of the appraisers shall be instructed to prepare an appraisal of the Premises in accordance with the following instructions: The method of valuing the property shall use any one or a combination of appropriate appraisal methodologies (i.e., replacement cost, comparable sales, and income); provided, however, that any valuation based upon the income approach (i.e., the capitalization of net rental amounts abstracted from consideration this Lease and the rental provided for herein. The appraised value is to be a single value, not a range of values and not a schedule of different values based upon different methodologies or different assumptions. The value of any alterations, additions or improvements to the Premises made by Lessee shall be included in the determination of Fair Market Value. If the appraised values determined by the two appraisers do not differ by more than ten percent (l0%), the purchase price shall be the average of the two values. If the difference is more than ten percent (l0%), and the two appraisers cannot agree upon a value (in which event such agreed value shall be binding upon Lessor and Lessee), the two appraisers shall select a third appraiser within fifteen (15) days thereafter. The third appraiser shall be instructed to select a value within the range of values established by the initial two (2) appraisals, within twenty (20) days after his appointment, following the instructions set forth above, and the Fair Market Value so selected by the third appraiser shall be binding upon Lessor and Lessee as the purchase price for the Premises. 27. Holding Over. If Lessee remains in possession of the Premises after expiration of the term hereof, with Lessor's acquiescence and without any express agreement of the parties, Lessee shall be a tenant-at-will at the rental rate in effect at end of the Lease; and there shall be no renewal of this Lease by operation of law. 28. Notices. Any notice given pursuant to this Lease shall be in writing and sent by certified mail to: a. Lessor: c/o Jem-Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, Alabama 35203 or to such other address as Lessor may hereafter designate in writing to Lessee. 10 b. Lessee: Hughes Supply, Inc. 20 North Orange Avenue Suite 200 Orlando, Florida 32801 Attention: J. Stephen Zepf or to such other address as Lessee may hereafter designate in writing to Lessor. 29. Memorandum of Lease and Option. This Lease shall not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which shall set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Lessee's rights under this Lease, including the purchase option provided for in paragraph 26 of this Lease. If Lessee records the Memorandum of Lease and Option, Lessee agrees to pay all related recording fees and taxes. 30. Attorneys' Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorneys' fees and expenses of litigation. For purposes of this Paragraph, a party is to be considered the prevailing party if: a. It initiated the litigation and obtains (by judgment oral agreement) substantially the relief sought; or b. It did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 31. Waiver of Rights. No failure of Lessor to exercise any power given Lessor hereunder, or to insist upon strict compliance by Lessee with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Lessor's right to demand exact compliance with the terms hereof. 32. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative but not restrictive to those given by law. 33. Time of Essence. Time is of the essence of this Agreement. 34. Definitions. "Lessor" as used in this Lease shall include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Lessee" shall include second party, its assigns and successors, and if this Lease shall be validly assigned, or sublet, shall include also Lessee's assignees or sub-lessees, as to the Premises covered by such assignment or sub-lease. "Lessor" and "Lessee" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 11 35. Miscellaneous. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, shall be of any force or effect. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance shall; to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. JEM-REALTY, INC. By: /s/ James D. Davis ---------------------------- Its: President -------------------------- STANWOOD INTERESTS LIMITED PARTNERSHIP By: Stanreal, LLC, its General Partner /s/ Michael L. Stanwood ---------------------------- Michael L. Stanwood HUGHES SUPPLY, INC. By: David H. Hughes ---------------------------- Its: Chairman -------------------------- 12 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that James D. Davis, whose name as Vice-President of JEM-REALTY, INC., a Delaware corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public My Commission Expires: 2-2-98 --------------------------------- STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that MICHAEL L. STANWOOD, whose name as President of STANREAL, LLC, a Texas limited liability company, the General Partner of STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, is signed to the foregoing instrument and who is known to me, acknowledged before me an this day that, being informed of the contents of said instrument, as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public My Commission Expires: 2-2-98 -------------------------------- 13 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that David H. Hughes, whose name as Chairman of Hughes Supply, Inc., a Florida corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public My Commission Expires: 2-2-98 -------------------------------- EXHIBIT A LEGAL DESCRIPTION OF LAND Lying and being in the City of Charlotte, Mecklenburg County, North Carolina and being more particularly described as follows: Being all of Lots 1 and 2 of Block C of Garden Acres Subdivision as same is shown on a map thereof recorded in Map Book 4, Page 201, Mecklenburg County Public Registry. LESS AND EXCEPT THE FOLLOWING: LEGAL DESCRIPTION OF BUILDING FOOTPRINT That certain one-story brick building located in Charlotte, Mecklenburg County, North Carolina, with a foundation footprint more particularly described as follows: BEGINNING at a point on the northernmost corner of the building, said point being located S. 55-22-19 W. 68.49 feet from an old iron located in the proposed right of way margin of Pressley Road, said iron also being the common corner with property owned, now or formerly, by Exit Fourteen Associates (Deed Book 4815, Page 634); thence from said Point of Beginning S. 51-52-14 E. 45.60 feet to a point; thence S. 38- 15-01 W. 3.00 feet to a point; thence S. 51-52-14 E. 12.00 feet to a point; thence N. 38-15-01 E. 3.00 feet to a point; thence S. 51-52-14 E. 31.30 feet to a point; thence S. 38-15- 01 W. 109.00 feet to a point; thence N. 51-52-14 W. 130.20 feet to a point; thence N. 59-05-12 E. 116.50 feet to the Point and Place of Beginning, all as shown on that certain survey for JR4 Realty, Inc. dated January 26, 1994, last revised May 10, 1994 by Carolina Surveyors, Inc. (Hugh E. White, Jr., NCRLS). TOGETHER WITH an easement for adjacent and subjacent support from the Land described above, and a non-exclusive, perpetual easement over and across the Land for the purposes of (i) a.CC.98, regress, egress, regress, both vehicular and pedestrian to the Building, (ii) maintenance, improvement, replacement and repair of the Building and. its appurtanances (i.e., docks steps, porches) and (iii) parking of automobiles and trucks in the Exclusive Area, as defined in the Reciprocal Easement and Operating Agreement recorded contemporaneously herewith. TOGETHER WITH all rights and obligations as landlord under that certain lease between Ronald W. Kurstin and Jay Sadofsky, as landlord, and Southern School Supply, Inc. (successor to Stone Southern School Supply), as tenant, dated September 30, 1988. -4- LESS AND EXCEPT THE FOLLOWING: LEGAL DESCRIPTION OF AIR RIGHTS The air space above grade over that certain tract or parcel of land lying and being in the City of Charlotte, Mecklenburq County, North Carolina and being more particularly described as follows: Beginning at an old iron located in the proposed right of way margin of Pressley Road, said iron also marking the common corner with property owned, now or formerly, by Exit Fourteen Associates (Deed Book 4815, Page 634), thence N. 72-06-34 W. 76.38 feet to a point in Pressley Road: thence S. 37-53-00 W. 279.38 feet, crossing the proposed right of way margin of Pressley Road at 38.48 feet, to a point: thence N. 51-52-14 W. 168.98 feet to a point on the common boundary of property owned by Exit Fourteen Associates, now or formerly; thence N. 58-56-07 E. 270.59 feet to the Point or Place of Beginning, containing .721 acres all as shown on #at certain As Built Survey for JEM Realty, Inc., dated January 26, 1994, last revised May 10, 1994 by Carolina Surveyor's, Inc. (Hugh E. White, Jr., NCRLS). The Building and Air Rights have been conveyed from Grantor to J. David Fortenbery by deed, recorded simultaneously herewith. TOGETHER WITH all rights and privileges accruing under that certain Reciprocal Easement and Operating Agreement by and between Ronald W. Kurstin and Jay Sadofsky, as owner of the Land, and J. David Fortenbery, as owner of the Building and Air Rights, dated as of the dated hereof and recorded prior hereto. -5- EXHIBIT B [MAP] April 1, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED VIA OVERNIGHT MAIL Jem-Realty, LLC Stanwood Interests Limited Partnership 320 Park Place Tower c/o Michael L. Stanwood 2001 Park Place North 8505 Monroe Road Birmingham, AL 35203 Houston, TX 77061 Re: Branch No. 9011 Southwest Carbon & Alloy Lease Agreement dated May 13, 1996 by and between Jem-Realty, Inc., and Stanwood Interests Limited Partnership, as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional five (5) years. The extended term will commence May 13, 1999 and will expire May 12, 2004, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Steve Armer, Branch Manager (via inter-branch mail) Jeff Clyne, General Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: Jem-Realty, LLC By: _________________________________ Date:_______________ Landlord Landlord Consent: Accepted and Agreed to by: Stanwood Interests Limited Partnership By: _________________________________ Date:_______________ Landlord March 19, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED VIA OVERNIGHT MAIL Jem-Realty, LLC Stanwood Interests Limited Partnership 320 Park Place Tower c/o Michael L. Stanwood 2001 Park Place North 8505 Monroe Road Birmingham, AL 35203 Houston, TX 77061 Re: Branch No. 9017 Charlotte-Multalloy Lease Agreement dated May 13, 1996 by and between Jem-Realty, Inc., and Stanwood Interests Limited Partnership, as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional three (3) years. The extended term will commence May 13, 1999 and will expire May 12, 2002, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Greg Ogburn, Branch Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: Jem-Realty, LLC By: ______________________________ Date:_______________ Landlord Landlord Consent: Accepted and Agreed to by: Stanwood Interests Limited Partnership By: ______________________________ Date:_______________ Landlord ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment"), made and entered into as of December 31, 2001 (the "Effective Date") by and between HUGHES SUPPLY, INC., a Florida corporation (the "Assignor"), and HSI NORTH CAROLINA, LLC, a North Carolina limited liability company ("Assignee"). W I T N E S S E T H: WHEREAS, due to legal, tax and compliance costs in North Carolina, Assognor has decided to convey its assets in North Carolina to a newly formed North Carolina linited liability company; and WHEREAS, Assignor and Assignee desire for Assignor to assign all of Assignor's rights, title and interest in and to all real property leases including without limitation to those leases set forth in Exhibit "A", attached hereto and incorporated herein by this reference located in North Carolina (collectively, "Leases") to Assignee and for Assignee to receive and assume such rights, title and interest to the Leases; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Assignment by Assignor. From and after the Effective Date, Assignor hereby assigns, transfers and sets over to Assignee all of Assignor's rights, title and interest in and to all of the Leases. 2. Assumption by Assignee. From and after the Effective Date, Assignee hereby accepts the foregoing assignment of and assumes the Leases. 3. Governing Law. This Assignment shall be construed and enforced in accordance with the laws of North Carolina, but without regard to principles of such laws relating to conflicts of laws. Any action to construe or enforce this Assignment shall be brought in the proper court in the State of North Carolina. 4. Counterparts. This Assignment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. 5. Notwithstanding anything to the contrary contained herein, nothing contained herein shall release Assignor from any Lease or other obligation Assignor may have to any third party. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. "Assignor" HUGHES SUPPLY, INC., By: Benjamin P. Butterfield Name: Benjamin P. Butterfield Title: Secretary & General Counsel "Assignee" HSI NORTH CAROLINA, LLC By: Benjamin P. Butterfield Name: Benjamin P. Butterfield Title: Secretary EXHIBIT "A" Lease Agreement dated April 3, 2000 between Troy B. Carter ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Fayetteville, N.C. Lease Agreement dated October 1, 1998 between Walker S. Stone d/b/a Liberty Warehouses ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Durham, N.C. Lease dated March 7, 2001 between Cabot Industrial Properties, L.P. ("Landlord") and Hughes Supply, Inc. ("Tenant"), as amended and assigned, for real property located in Monroe, North Carolina Lease dated February 1, 1998 between Five Points Corporation ("Landlord") and Hughes Supply, Inc. ("Tenant") for certain real property located in Albermarle, North Carolina Lease dated January 1, 2000 between Sloan Properties, LLC ("Landlord") and Hughes Supply, Inc. ("Tenant") for that certain real property located in Thomasville, North Carolina Lease dated January 28, 1994 between Swaim Investment Company ("Landlord") and Hughes Supply, Inc. successor by merger to Swaim Supply Company ("Tenant") for that certain real property located in High Point, North Carolina Lease dated January 28, 1994 between Swaim Investment Company ("Landlord") and Hughes Supply, Inc. successor by merger to Swaim Supply Company ("Tenant"), as amended, for that certain real property located in Salisbury, North Carolina Lease dated January 28, 1994 between Swaim Investment Company ("Landlord") and Hughes Supply, Inc. successor by merger to Swaim Supply Company ("Tenant"), as amended, for that certain real property located in Henderson, North Carolina Lease dated March 20, 2000 between CHP of Goldsboro, LLC ("Landlord") and Hughes Supply, Inc. ("Tenant") for that certain real property located in Goldsboro, North Carolina Lease dated May 24, 2001 between Stratford Industrial Associated, LLC ("Landlord") and Hughes Supply, Inc. ("Tenant") for that certain real property located in Winston Salem, North Carolina Lease dated January 19, 1999 between Mr. Kirby M. Crooke and Mrs. Mary Jane Crooke ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Monroe, North Carolina Lease dated March 1, 1999 between W & W Investments ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Rocky Mount, North Carolina Lease dated March 1, 1999 between L & M Investments ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Rocky Mount, North Carolina Lease dated October 31, 2001 between Manna Pro Corporation ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Stanford, North Carolina Lease dated May 19, 1997 between Edbar Associates ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Ashville, North Carolina Lease dated September 30, 1998 between Leonhardt Enterprises ("Landlord") and Hughes Supply, Inc. ("Tenant") for real property located in Concord, North Carolina Lease dated May 13, 1996 between JEM-Realty, Inc. and Stanwood Interests Limited Partnership (collectively "Landlord") and Hughes Supply, Inc. ("Tenant"), as amended for real property located in Charlotte, North Carolina Lease Agreement dated March 13, 1997 between Venture North, LLC ("Landlord") and Hughes Supply, Inc. ("Tenant") for that certain real property located in Wilmington, North Carolina Sublease Agreement dated July 9, 1998 between Hughes Supply, Inc. ("HSI") and LeBleu Corporation ("Subtenant") for that certain real property located in Wilmington, North Carolina Lease Agreement dated December 1, 1997 between I.L. Smith Construction, Inc. ("Landlord") and Hughes Supply, Inc. ("HSI") Sublease Agreement dated January 12, 2001 between Hughes Supply, Inc. ("Sublandlord") and Southeast Ocean Pools, Inc. for that certain real property located in Leland, North Carolina ORL1 #696007 v2 Exhibit 10.24 Sub-ITEM (b) STATE OF TEXAS La Porte, Texas COUNTY OF HARRIS LEASE AGREEMENT THIS LEASE (this "Lease") made this the 13th day of May, 1996, by and between JEM-REALTY, INC., a Delaware corporation, and STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, collectively first party, hereinafter referred to as "Lessor," and HUGHES SUPPLY,INC., a Florida corporation, second party, hereinafter referred to as "Lessee." W I T N E S S E T H: 1. Premises. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Lessee, has leased and rented, and by these presents does lease and rent, unto said Lessee, and said Lessee hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements located at 11835 West Fairmont Parkway, LaPorte, Texas 77571, including, without limitation, approximately 2.323 (plus or minus) acres of real property described in Exhibit A to this Lease together with the warehouse and office facility and other improvements thereon described in Exhibit B to this Lease. 2. Warranties. Lessor warrants that Lessor owns the premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except (for utility easements and unviolated restrictive covenants which do not materially adversely affect Lessee's intended use of the Premises; that the Premises abuts one or more publicly dedicated roads; that the Premises do not, as of the date of this Lease, and will not, by reason of the commencement of the term of this Lease, fail to conform to all applicable building ordinances, laws and regulations in any respect which will materially adversely interfere with Lessee's use of the Premises for its intended purposes; that Lessee's proposed use of the Premises is consistent with the zoning classification applicable to the Premises; that Lessor's past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Lessor has not received a citation from any regulatory agency for noncompliance with environmental laws; that Lessor has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Lessee, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Lessor, anyone claiming by, through or under Lessor, or any other party, except as otherwise specifically provided in this Lease. If any of title exceptions to the Premises are hereinafter found to exist, such exceptions will not materially affect Lessee's use of the Premises. 3. Term. The initial term of this Lease shall be for three (3) years, said term to begin on the 13th day of May, 1996 (the "Commencement Date") and end on the 12th day of May, 1999 (the "Initial Term"). The Initial Term of this Lease may be extended, at the option of the Lessee, for up to two (2) successive periods of three (3) years (each such period of three (3) years herein sometimes referred to as an "Extended Term") as follows: First Extended Term - May 13, 1999 to May 12, 2002. Second Extended Term - May 13, 2002 to May 12, 2005. The option to extend shall be exercised by the Lessee by giving notice to the Lessor not more than twelve (12) nor less than six (6) months prior to the expiration of the then existing term. Each Extended Term shall be upon the same terms, covenants, and conditions as provided in the Lease. Any termination of this Lease during the Initial Term or any Extended Term shall terminate all rights of any further extension hereunder. The use of the word "Term" herein shall be deemed to include the Initial Term as well as any Extended Term. 4. Rental rent for the Premises, Lessee shall pay to Lessor in advance on the first day of each calendar month of the Term the sum of $3,800.00 per month, being at the rate of $45,600.00 per annum; provided, however, on each anniversary of the Commencement Date during the Term, the annual rent shall be increased over the rent for the prior lease year by an amount equal to the percentage increase in the CPI from the first month of the previous lease year to such anniversary date. Such adjustment, however, shall not result in any instance in a reduction of the annual rent, nor shall any annual rent adjustment result in an increase in the annual rent by an amount in excess of 3% of the previous year's rent. For purposes of this Lease, "CPI" refers to the Consumer Price Index for All Urban Consumers (CPI-U), All Items, US City Average (1982-1984 equals 100), published by the United States Department of Labor, Bureau of Labor Statistics. If the CPI is discontinued, such other index as published by the Department of Labor, Bureau of Labor statistics, or its successor agency, in substitution therefor or replacement thereof shall be used for making said computations. If the Department of Labor or its successor agency shall no longer maintain such statistics, comparable statistics published by a responsible financial periodical or recognized authority selected by the Lessor and Lessee shall be used for making said computations. If the base years "(1982-1984 equals 100)" or other base year used in computing the Index is changed, the figures used in making said adjustment shall be changed 2 accordingly so that all increases in the CPI, or any substituted or replacement index, as the case may be, are taken into account notwithstanding any such change in the base year. 5. Utility Bills. Lessee shall pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Lessee in connection therewith. If Lessee does not pay same, Lessor may pay the same, and such payment shall be added to the rental of the Premises. 6. Ad Valorem Taxes. Lessee shall pay all real property taxes, special and general assessments, water and sewer assessments and other rents, rates, and changes and other guaranteed impositions of every kind and nature extraordinary as well as ordinary relating to the premises or any business conduct thereon. Lessee shall also pay any and all ad valorem taxes assessed against the personal property located on the Premises during the Term. 7. Insurance. Lessee will carry, at Lessee's sole cost and expense, "All Risk" Insurance Coverage on the Premises in an amount not less than the full insurable value. The term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, as determined by Lessor. Such policies shall name Lessor as an additional named insured. All insurance provided for in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in this state. At least fifteen (15) days prior to the expiration date of any policy, the original renewal policy for such insurance shall be delivered by Lessee to Lessor. With fifteen (15) days after the premium on any policy shall become due and payable, Lessor shall be furnished with satisfactory evidence of its payment. If Lessee provides any insurance required by this Lease in the form of a blanket policy, Lessee shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Lessor so requires, the policies of insurance provided for shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies shall, to the extent obtainable, provide that any loss shall be payable to Lessor or to the holder of any mortgage notwithstanding any act or negligence of Lessee which might otherwise result in forfeiture of such insurance. All such policies shall, to the extent obtainable, contain an agreement by the insurers that such policies shall not be cancelled without at least thirty (30) days prior written notice to Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Lessee will carry at Lessee's own expense insurance coverage on all equipment, fixtures and appliances. 3 8. Maintenance and Repairs by Lessee. Lessor warrants as of the Commencement Date of this Lease that the Premises are structurally sound and that all lighting and all operating systems are in good condition and are not in need of repair. Except as set forth in Paragraph 9, Lessee shall, at it's own expense, keep and maintain the interior of the Premises, including all systems pertaining to water, sewer, electrical, heating, ventilation, air conditioning and lighting. Lessee shall also perform exterior lawn maintenance. It is the intent of the parties that Lessee shall only be required to make minor repairs not repairs or replacements which are structural in nature, extra ordinary or capital in nature, or those which will increase the value of the Premises subsequent to the end of the Term. In addition, the Lessee shall not be required to repair latent defects in the Premises. 9. Repairs by Lessor. Lessor agrees to maintain and keep in good repair the roof, exterior walls, structural supports (including foundations), exterior doors of any and all buildings located on the Premises, and all water or sewer pipes located underground or in the slab, sidewalks, parking lots, driveways and other vehicular access and maneuvering areas. Lessor shall also be responsible for any repairs or replacements which are structural in nature, which are extraordinary or capital in nature, which will increase the value of the Premises subsequent to the end of the Term and any other repairs not expressly delegated to Lessee in this Lease. Lessor shall also promptly clean up and dispose of any Hazardous Materials found on, in or under any portion of the Premises and remediate the Premises to comply with any and all environmental laws applicable thereto, and to pay for all clean-up and disposal costs at no cost to Lessee, unless directly caused by Lessee, its employees, agents or contractors. 10. Destruction of or Damage to the Premises. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction, and rental shall be accounted for as between Lessor and Lessee as of that date. If the Premises are damaged, but not wholly destroyed by any of such casualties, rental shall abate in such proportion as use of the Premises has been destroyed, and Lessor shall restore the Premises to substantially the same condition as before the damage as speedily as practicable, whereupon full rental shall recommence; provided further, however, that if the damage shall be so extensive the same cannot be reasonably repaired and restored within three (3) months time from the date of the casualty, then either Lessor or Lessee may cancel this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. And, in such event, rental shall be apportioned and paid up to the date of such casualty. 11. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the building or openings cut through the roof are allowed without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. 12. Removal of Fixtures. Lessee may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Lessee has placed in the Premises, provided Lessee repairs all damages to the Premises caused by such removal 4 13. Return of the Premises.. Lessee agrees to return the Premises to Lessor at the expiration, or prior termination, of this Lease in good condition and repair, reasonable wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 14. Condemnation. If the whole of the leased Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Lessor sells the Premises under threat of condemnation, then in either of said events, the Term shall cease from the time when possession thereof is taken by public authorities, and rental shall be accounted for as between Lessor and Lessee as of that date. Such termination, however, shall be without prejudice to the rights of either Lessor or Lessee to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Lessee, nor Lessor, shall have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Lessee, then this Lease shall continue in effect and Lessor, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the building on the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore it as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction of the building, and Lessor will not be under any duty to expend amounts in excess of the award received by Lessor. Rent, taxes and other charges payable by Lessee will equitably abate while Lessor's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which does not materially affect Lessee's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 15. Governmental Orders. Lessee agrees, at its own expense and solely in relation to those portions of the Premises which Lessee is required to maintain or repair under Paragraph 8, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Lessee's specific use of said Premises. Notwithstanding the foregoing, the Lessee shall not be liable for: (a) repairs, alterations, replacements or retrofitting required by the accessibility or path of travel requirements set forth in Title III of the Americans With Disabilities Act of 1990, 42 USC ss. 2101, et seq. and regulations and guidelines promulgated thereunder, as amended from time to time (collectively referred to as "ADA"); (b) removal or abatement of ACMs; (c) repairs, alterations or replacements required to comply with federal, state or local indoor air quality laws, rules or regulations; (d) repairs or replacements incident to CFC conversions for heating and cooling systems; (e) installation of fire sprinkler systems; or (f) repairs, alterations or replacements described in Paragraph 9. Lessor agrees to promptly comply with any other governmental or regulatory requirements if not made necessary by reason of Lessee's occupancy of the Premises or relating to those portions of the Premises which Lessor is required to maintain or repair under Paragraph 9. 5 16. Assignment. Except as set forth below, Lessee may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Lessor of its intent to assign or sublease. Lessee may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Lessee, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Lessee's issued and outstanding shares, or which succeeds to the entire business of Lessee through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Lessee. Subtenants or assignees shall become liable directly to Lessor for all obligations of Lessee hereunder, without relieving Lessee's liability. 17. Mortgagee's Rights. Lessee's rights shall be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Lessor, and Lessee agrees, at Lessor's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Lessor must secure from each mortgagee a nondisturbance agreement acceptable to Lessee providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Lessee is not in default, will not disturb Lessee's possession or its rights under this Lease. 18. Use of the Premises. The Lessee may use the Premises for office/warehouse and distribution purposes, including outdoor storage, or for any other lawful purpose. The Premises shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 19. Signs. Lessee shall have the right to erect at Lessee's sole expense a sign at the entrance to the Premises. This sign shall not be other than a customary trade sign identifying the business of Lessee. The erection of this sign by Lessee shall be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Lessee shall remove the sign thus erected, and shall repair any damage or disfigurement, caused by such removal. 20. Reservation of Right to Sell. Lessor shall have the right to sell the Premises during the term of this Lease, subject to the following: a. Lessor agrees to give notice of each proposed sale, including the purchase price and all other terms and conditions, to Lessee; b. Lessee will have the right to purchase the Premises at the purchase price and on the other terms and conditions offered by Lessor or offered to Lessor by the third party (which offer Lessor wishes to accept), by giving notice to Lessor within 20 business days after Lessor has notified Lessee of the terms of Lessor's proposed sale; and 6 c. If Lessee does not give notice of the exercise of its option within such time, Lessor will have the right to sell the Premises upon the terms stated in the offer made or received by Lessor, but not upon terms more favorable to the purchaser, unless Lessor again gives notice pursuant to subparagraph a, above, and Lessee does not exercise its option based upon the new terms. 21. Entry for Carding, etc. Lessor may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Lessor may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Lessor under the terms hereof. 22. Indemnity. Lessor agrees to indemnify and save harmless Lessee and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Lessor of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials ("Environmental Laws") relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar conditions which occurred or first arose prior to commencement of the Term and during the period of Lessor's ownership of the Premises; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Lessor's representations and warranties being untrue. These indemnities shall survive the expiration, cancellation or termination of the Lease. Lessee agrees to indemnify and save harmless Lessor and its stockholders, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or' losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of Lessee's use and occupancy of the Premises, including, without limitation, any violation by Lessee of any Environmenta1 Laws relating to the Premises; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials as a result of environmental contamination or other similar condition which occurred or first arose after the commencement of the Term. These indemnities shall survive for a period of three (3) years following the expiration, cancellation or termination of this Lease, 23. Cancellation of Lease by Lessor. It is mutually agreed that in the event: a The rent herein reserved is not paid at the time and place when and where due and Lessee fails to pay said rent within five (5) days after written demand from Lessor, or 7 b. Lessee shall fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after notice to Lessee of such failure to comply or such additional time period as may reasonably necessary to effect a cure of the default provided that Lessee commences and diligently pursues a cure of the default; or c. Lessee causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Lessor to Lessee demanding cure; in any of such events, Lessor shall have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: i. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor. Lessee agrees to indemnify Lessor for all loss and damage which Lessor may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or ii. Lessor, as Lessee's agent, without terminating this Lease, may terminate Lessee's right of possession, and, at Lessor's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Lessor deems proper. Lessee shall be liable to Lessor for the deficiency, if any, between Lessee's rent hereunder and the price obtained by Lessor on reletting. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. In any case, Lessor shall use best efforts to mitigate Lessee's damages. Any notice in this provision may be given by Lessor or its attorney. 24. Effects of Termination of the Lease. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, shall affect Lessor's right to collect rent for the period prior to the termination thereof. 25. Default of Lessor. Should Lessor fail to perform any of its obligations hereunder, Lessor shall have a period of 30 days after its receipt of written notice from Lessee of a failure of performance within which to commence a cure of that failure. Failure of Lessor to commence that cure within the 30-day period or to effect that cure within that 30-day period shall be an event of default under this Lease and Lessee may, at its option, elect to: a. Terminate this Lease upon 30 days written notice to Lessor; b. Bring an action to require specific performance of Lessor's obligations; c. Provide Lessor with an additional period of time within which to effect that cure; 8 d. Commence such cure itself, and Lessee may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Lessee hereunder, or require that Lessor immediately reimburse Lessee for its expenses; provided, however, in the event of an emergency, Lessee may immediately effect a cure of Lessor's failure should Lessor fail to act immediately to do so, without the requirement of any notice by Lessee to Lessor; and/or e. Pursue any other remedies provided herein or provided by law. 26. Purchase Option. Lessee shall have the option to purchase the Premises at Fair Market Value, payable in cash at closing, said option being exercisable by Lessee at any time during the Term by written notice given by Lessee to Lessor. If this option is exercised by Lessee, closing shall be held within sixty (60) days of the notice of exercise at a time and place, and on a date, reasonably satisfactory to Lessor and Lessee (the Term shall be extended, if necessary, through and including the date of closing). Title to the Premises shall be conveyed free of any liens or encumbrances, and subject only to current year's ad valorem taxes, applicable building restrictions, easements for utilities servicing the Premises, and such other conditions of title as may not, in Lessee's sole discretion, adversely affect the use of the Premises by Lessee or as may be approved by Lessee (the "Permitted Exceptions"). Immediately following the date of exercise of this option, Lessor shall furnish Lessee with a commitment for a standard owner's title insurance policy, ATLA Form B, reflecting only Permitted Exceptions and standard printed exceptions (the "Commitment"). Immediately following closing, Lessor shall furnish Lessee with an owner's title insurance policy issued in conformity with the Commitment. The cost of the title insurance Commitment and policy shall be borne by Lessor; provided, however, that the cost of any special endorsements shall be borne by Lessee; and, further provided, that if Lessee obtains a mortgage title insurance policy at closing, the cost of the combined owner's and mortgagee's policies shall be divided equally between Lessor and Lessee. Ad valorem taxes, rent due under the Lease, utilities and any insurance or other prepaid items assumed by the Lessee shall be prorated as of the date of closing. Title to the Premises shall be conveyed by general warranty deed in form acceptable for recording, subject only to the Permitted Exceptions. Lessor and Lessee shall each bear their respective costs in connection with exercise of the option and the closing, including attorney's fees. Lessee shall bear the cost of recording the deed, the cost of any survey obtained by Lessee, and all costs related to any financing obtained by Lessee. Except for any prepaid rent, Lessee is not entitled to a credit for rental payments paid by the Lessee during the Term of the Lease. The Lessor and Lessee shall attempt to determine the Fair Market Value by mutual agreement within fifteen (15) days after Lessee gives notice of its exercise of the option. However, if the parties cannot reach agreement on the Fair Market Value, the following provisions shall apply: a. Lessor and Lessee shall each select a qualified real estate appraiser within the next fifteen (15) days. Each appraiser must demonstrate to the reasonable 9 satisfaction of both Lessor and Lessee that he has significant experience in appraising similar properties. b. The Fair Market Value shall be determined by the appraisers within thirty (30) days thereafter. Each of the appraisers shall be instructed to prepare an appraisal of the Premises in accordance with the following instructions: The method of valuing the property shall use any one or a combination of appropriate appraisal methodologies (i.e., replacement cost, comparable sales, and income); provided, however, that any valuation based upon the income approach (i.e., the capitalization of net rental amounts abstracted from comparable real estate leased for similar uses) shall exclude from consideration this Lease and the rental provided for herein. The appraised value is to be a single value, not a range of values and not a schedule of different values based upon different methodologies or different assumptions. The value of any alterations, additions or improvements to the Premises made by Lessee shall be included in the determination of Fair Market Value If the appraised values determined by the two appraisers do not differ by more than ten percent (10%), the purchase price shall be the average of the two values. If the difference is more than ten percent (10%), and the two appraisers cannot agree upon a value (in which event such agreed value shall be binding upon Lessor and Lessee), the two appraisers shall select a third appraiser within fifteen (15) days thereafter. The third appraiser shall be instructed to select a value within the range of values established by the initial two (2) appraisals, within twenty (20) days after his appointment, following the instructions set forth above, and the Fair Market Value so selected by the third appraiser shall be binding upon Lessor and Lessee as the purchase price for the Premises. 27. Holding Over. If Lessee remains in possession of the Premises after expiration of the term hereof, with Lessor's acquiescence and without any express agreement of the parties, Lessee shall be a tenant-at-will at the rental rate in effect at end of the Lease; and there shall be no renewal of this Lease by operation of law. 28. Notices. Any notice given pursuant to this Lease shall be in writing and sent by ceitified mail to: a. Lessor: c/o Jem-Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, Alabama 35203 or to such other address as Lessor may hereafter designate in writing to Lessee. 10 b. Lessee: Hughes Supply, Inc. 20 North Orange Avenue Suite 200 Orlando, Florida 32801 Attention: J. Stephen Zepf or to such other address as Lessee may hereafter designate in writing to Lessor. 29. Memorandum of Lease and Option. This Lease shall not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which shall set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Lessee's rights under this Lease, including the purchase option provided for in paragraph 26 of this Lease. If Lessee records the Memorandum of Lease and Option, Lessee agrees to pay all related recording fees and taxes. 30. Attorneys' Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorneys' fees and expenses of litigation. For purposes of this Paragraph, a party is to be considered the prevailing party if: a. It initiated the litigation and obtains (by judgment oral agreement) substantially the relief sought; or b. It did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 31. Waiver of Rights. No failure of Lessor to exercise any power given Lessor hereunder, or to insist upon strict compliance by Lessee with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Lessor's right to demand exact compliance with the terms hereof. 32. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative but not restrictive to those given by law. 33. Time of Essence. Time is of the essence of this Agreement. 34. Definitions. "Lessor" as used in this Lease shall include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Lessee" shall include second party, its assigns and successors, and if this Lease shall be validly assigned, or sublet, shall include also Lessee's assignees or sub-lessees, as to the Premises covered by such assignment or sub-lease. "Lessor" and "Lessee" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 11 35. Miscellaneous. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, shall be of any force or effect. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance shall; to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. JEM-REALTY, INC. By: /s/ James D. Davis ---------------------------- Its: President -------------------------- STANWOOD INTERESTS LIMITED PARTNERSHIP By: Stanrel, LLC, its General Partner /s/ Michael L. Stanwood -------------------------- Michael L. Stanwood HUGHES SUPPLY, INC. By: /s/ David H. Hughes ---------------------------- Its: Chairman --------------------------- 12 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that James D. Davis, whose name as President of JEM-REALTY, INC., a Delaware corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same fears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that MICHAEL L. STANWOOD, whose name as President, of STANREAL, LLC, a Texas limited liability company, the General Partner of STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- 13 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that David H. Hughes, whose name as Chairman of Hughes Supply, Inc., a Florida corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this 13th day of May, 1996. /s/ Robert A. Paine -------------------------------- Notary Public Robert A. Paine My Commission Expires: 2-2-98 --------------------------------- EXHIBIT A METES AND BOUNDS DESCRIPTION Being a 2.323 acre (101,171 sq. ft.) tract of land comprising part of Richard Pearsall 1/3 League, A-625, La Porte, Harris County, Texas, and further described as all of that certain 2.319 acre tract conveyed by Friendswood Development Corporation to Cajun Investment on Feb. 10, 1983 (Harris County Clerk's File No. H 819145). The 2.323 acre tract as surveyed by H. Carlos Smith, Engineers & Surveyors, Inc. on October 11, 1993, is more particularly described by metes and bounds as follows; COMMENCING at Copperweld 3158 found at the intersection of the North right-of-way line of Fairmont Parkway (250' ROW) with the Northerly extension of the West right-of-way Line of Bay Area Boulevard (150' ROW) and being the Southeast corner of that certain 4.451 acre tract of land conveyed to Bayport Investors (HCCF No. G 816532). Thence S 86 degrees 52 minutes 54 seconds W (Reference Bearing); coincident with the North right-of-way line of Fairmont Parkway; a distance of 595.00 feet to a copperweld found for the Southeast corner of this 2.323 acre tract and the POINT OF BEGINNING. Thence S 86 degrees 52 minutes 54 seconds W; coincident with the North right-of-way line of Fairmont Parkway; a distance of 200.30 feet to a copperweld found for the Southwest corner of this 2.323 acre tract. Thence N 03 degrees 09 minutes 05 seconds W (Call N 03 degrees 07 minutes 06 seconds W) a distance of 505.14 feet to a Copperweld found for the Northwest corner of this 2.323 acre tract. Thence N 86 6 degrees 54 minutes 21 seconds E (Call N 86 degrees 56 minutes 22 seconds E) a distance of 200.30 feet (Call 200 feet) to a Copperweld found for the Northeast corner of this 2.323 acre tract. Thence S 03 degrees 09 minutes 05 seconds E (Call S 03 degrees 07 minutes 06 seconds E); coincident with the West boundary line of that certain 2.5497 acre Westinghouse Electric Corporation tract (HCCF No. H 428711); a distance of 505.06 feet (Call 504.94 feet) returning to the POINT OF BEGINNING. EXHIBIT A - Page 1 of 1 EXHIBIT B [MAP] Hughes Supply, Inc. New Location Insurance Information - ------------------------------------------------------------------------------- Please complete the following information required to establish insurance coverage for new branch locations: 1) New branch name: Southwest Carbon & Alloy Houston Street (physical) address: 11835 Fairmont Parkway City, State, Zip Code: LaPorte, TX 77571 Location code (branch number): 009011 Expected date branch will open: May 13, 1996 2) Maximum anticipated inventory value: $1,000,000.00 Maximum anticipated furniture and fixtures value: $ 5,000.00 ------------- Total contents value (total of above): $1,005,000.00 ------------- 3) Is this new location located within an already existing HSI branch? No If yes, please disregard questions 4 through 9. 4) Building construction type (metal, concrete, etc.): Metal 5) Approximate age of building (in years): 15 years 6) Total building square footage: 10,000 sq. ft. 7) Please check one of the following: |_| (a) The building is owned by Hughes Supply, Inc. or leased from Hughes, Inc. |X| (b) The building is leased korn an outside party (other than Hughes, Inc., and insurance coverage is required to be provided by Hughes Supply, Inc. under the terms of the lease agreement. |_| (c) The building is leased from an outside party (other than Hughes, Inc.) and insurance coverage is not required to be provided by Hughes Supply, Inc. under the terms of the lease agreement. 8) If you checked (a) or (b) in question 7 above, please indicate the value of the building: $275,000.00 9) If this new location replaces another existing location (i.e. due to a move) and the old location is no longer owned or occupied by Hughes Supply, Inc., please complete the following infomation: Old branch name: _______________________ Street (physical) address: _______________________ City, State, Zip Code: _______________________ April 1, 1999 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED VIA OVERNIGHT MAIL Jem-Realty, LLC Stanwood Interests Limited Partnership 320 Park Place Tower c/o Michael L. Stanwood 2001 Park Place North 8505 Monroe Road Birmingham, AL 35203 Houston, TX 77061 Re: Branch No. 9011 Southwest Carbon & Alloy Lease Agreement dated May 13, 1996 by and between Jem-Realty, Inc., and Stanwood Interests Limited Partnership, as Lessor, and Hughes Supply, Inc., as Lessee ("Lease") Dear Sirs: Pursuant to Section 3 of the above referenced Lease, please be advised that Hughes Supply, Inc. has elected to extend the term of the Lease for an additional five (5) years. The extended term will commence May 13, 1999 and will expire May 12, 2004, and will be on all of the terms and conditions of the Lease. Please sign and date the Landlord Consent at the bottom of this letter and return it by overnight mail in the enclosed Federal Express envelope. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel Enclosure c: Steven Armer, Branch Manager (via inter-branch mail) Jeff Clyne, General Manager (via inter-branch mail) Benjamin P. Butterfield, Esquire (via hand delivery) Landlord Consent: Accepted and Agreed to by: Jem-Realty, LLC By: ______________________________ Date:_______________ Landlord Landlord Consent: Accepted and Agreed to by: Stanwood Interests Limited Partnership By: ______________________________ Date:_______________ Landlord ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment"), made and entered into as of May 13, 1996 by and between HUGHES SUPPLY, INC., a Florida corporation (the "Assignor"), and SOUTHWEST STAINLESS, L.P., a Delaware limited partnership ("the Assignee"). W I T N E S S E T H: WHEREAS, Assignor and Assignee desire for Assignor to assign all of Assignor's rights, title and interest in and to all real property leases including without limitation to those leases set forth in Exhibit "A", attached hereto and incorporated herein by this reference located in Texas (collectively, "Leases") to Assignee and for Assignee to receive and assume such rights, title and interest to the Leases; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Assignment by Assignor. Effective as of May 13, 1996, Assignor hereby assigns, transfers and sets over to Assignee all of Assignor's rights, title and interest in and to all of the Leases. 2. Assumption by Assignee. Effective as of May 13, 1996, Assignee hereby accepts the foregoing assignment of and assumes the Leases. 3. Governing Law. This Assignment shall be construed and enforced in accordance with the laws of Texas, but without regard to principles of such laws relating to conflicts of laws. Any action to construe or enforce this Assignment shall be brought in the proper court in the State of Texas. 4. Counterparts. This Assignment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. "Assignor" HUGHES SUPPLY, INC., a Florida corporation By:_________________________________ Name: ____________________________ Title:____________________________ "Assignee" SOUTHWEST STAINLESS, L.P., a Delaware limited partnership By: Z&L Acquisition Corp., a Delaware corporation Its: General Partner By:_______________________________ Name: ____________________________ Title: ___________________________ EXHIBIT "A" Lease Agreement dated May 13, 1996 between JEM-Realty, Inc., a Delaware corporation, and Stanwood Interests Limited Partnership, a Texas limited partnership ("Lessor") and Hughes Supply, Inc., a Florida corporation ("Lessee") for real property located at 11835 West Fairmont Parkway, LaPorte, TX Exhibit 10.24 Sub-ITEM (c) Monroe Road Houston, TX LEASE AGREEMENT (STANDARD/BUILDING) THIS LEASE (this "Lease") made this the 1st day of July, 1998, by and between JEM-REALTY, LLC, a Delaware limited liability company, and STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership, collectively first party, hereinafter collectively referred to as "Landlord", and SOUTHWEST STAINLESS, L.P.. a Delaware limited partnership, second party, hereinafter referred to as "Tenant"; W I T N E S S E T H: 1. Premises. Landlord, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved and contained, to be paid, kept and performed by Tenant, has leased and rented, and by these presents does lease and rent, unto said Tenant, and said Tenant hereby agrees to lease and take upon the terms and conditions which hereinafter appear, the following described property (hereinafter called "Premises") and personal property as hereinafter set forth. The Premises consists of real property and improvements, if any, located at Tract 26 of South Houston Gardens, No. 6, as recorded in Volume 2, Page 74 of the Harris County Map Records, Harris County, Texas. 2. Term. To have and to hold for a term of two (2) years, said term to begin on the 1st day of July, 1998, and to end on the 30th day of June, 2000. 3. Rental. During the initial term of this Lease, Tenant will pay a yearly rental of FIFTY-FOUR THOUSAND DOLLARS ($54,000.00) and the yearly rental will be due and payable in equal monthly installments of FOUR THOUSAND FIVE HUNDRED DOLLARS ($4,500.00) in advance on the 1st day of each and every calendar month during such initial term of this Lease. 4. Utility Bills. Tenant will pay all utility bills of all types, including, but not limited to, water and sewer, natural gas, electricity and sanitary pick up bills for the Premises, or used by Tenant in connection therewith. If Tenant does not pay same, Landlord may pay the same, and such payment will be added to the rental of the Premises. 5. Ad Valorem Taxes. Tenant will pay in the first instance all real property taxes which may be assessed by any lawful authority against the Premises. Tenant shall have the right, at Tenant's sole expense, to appeal any and all taxes applicable to the Premises and Landlord agrees that Landlord will cooperate with Tenant reasonably and sign all documents reasonably required in connection with any such appeal. Tenant may delay payment of any portion of such taxes which are the subject of an appeal until the resolution of such appeal, in which event Tenant shall be solely responsible for the payment of any penalties, interest, or additional taxes which result from such delay. Notwithstanding the foregoing, Tenant shall not permit the filing of a tax lien against the Premises. 6. Insurance. Tenant will carry, at Tenant's sole cost and expense, "All Risk" Insurance Coverage on the demised Premises in an amount not less than the full insurable value. The term "full insurable value" will mean the actual replacement cost, excluding foundation and excavation costs, as reasonably determined by Landlord. Such policies will name Landlord as an additional named insured. All insurance provided for in this Lease will be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in this state. At least fifteen (15) days prior to the expiration date of any policy, the original renewal policy for such insurance will be delivered by Tenant to Landlord. Within fifteen (15) days after the premium on any policy will become due and payable, Landlord will be furnished with satisfactory evidence of its payment. If Tenant provides any insurance required by this Lease in the form of a blanket policy, Tenant will furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If Landlord so requires, the policies of insurance provided for will be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies will, to the extent obtainable, provide that any loss will be payable to Landlord or to the holder of any mortgage notwithstanding any act or negligence of Tenant which might otherwise result in forfeiture of such insurance. All such policies will, to the extent obtainable, contain an agreement by the insurers that such policies will not be canceled without at least thirty (30) days prior written notice to Landlord and to the holder of any mortgage to whom loss hereunder may be payable. Tenant will carry at Tenant's own expense insurance coverage on all equipment, fixtures and appliances. 7. Maintenance. Tenant shall be responsible for maintaining the Premises. 8. Modifications and Alterations to the Premises. No modifications, alterations, or improvements to the Premises are allowed without the prior written consent of Landlord, which consent will not be unreasonably withheld or delayed; provided, however, that Tenant shall be permitted to install, without Landlord's consent, such fences, gates, screening structures, utilities, other improvements and landscaping as Tenant deems necessary or desirable to use the Premises for the permitted uses hereunder. 9. Removal of Fixtures. Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension thereof, remove all personal property, fixtures and equipment which Tenant has placed in the Premises, provided that during such removal Tenant will make all reasonable repairs necessary to return the Premises to its original condition, 2 reasonable wear and tear excepted. 10. Condemnation. If the whole of the Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, be condemned by any legally constituted authority for any public use or purpose or if Landlord sells the Premises under threat of condemnation, then in either of said events the term hereby granted will cease from the time when possession thereof is taken by public authorities, and rental will be accounted for as between Landlord and Tenant as of that date. Such termination, however, will be without prejudice to the rights of either Landlord or Tenant to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither Tenant nor Landlord will have any rights in any award made to the other by any condemnation authority. If there is a partial taking and if it is not so extensive as to render the remaining portion (after restorations) unsuitable for the business of Tenant, then this Lease will continue in effect and Landlord, upon receipt of the award in condemnation, will expeditiously commence and complete all necessary repairs and restorations to the Premises so as to constitute the portion of the building not taken a complete architectural unit and restore the Premises as nearly as practicable to its prior condition; provided, however, that such work does not exceed the scope of the original construction, and Landlord will not be under any duty to expend amounts in excess of the award received by Landlord. Rent, taxes and other charges payable by Tenant will equitably abate while Landlord's repairs and restorations are in process. If a partial taking consists only of a street widening or utility easement which, at Tenant's sole discretion, is determined not to materially affect Tenant's use of the Premises, this Lease will continue in full force and effect without abatement of rent, taxes or other charges. 11. Governmental Orders. Tenant agrees, at its own expense and solely in relation to those portions of the Premises which Tenant is required to maintain or repair under Paragraph 7, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Tenant's specific use of said Premises. 12. Assignment. Except as set forth below, Tenant may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without prior written notice to Landlord of its intent to assign or sublease. Tenant may (a) sublet all or part of the Premises to any corporation, the majority of whose shares are owned by Tenant, during the period of such majority ownership only or (b) assign this Lease to any corporation which owns more than fifty percent (50%) of Tenant's issued and outstanding shares, or which succeeds to the entire business of Tenant through purchase, merger, consolidation or reorganization, or to any affiliate sharing common majority ownership with the Tenant. Subtenants or assignees will become liable directly to Landlord for all obligations of Tenant hereunder, without relieving Tenant's liability. 13. Mortgagee's Rights. Tenant's rights will be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Landlord, and Tenant agrees, at Landlord's cost, to execute and deliver such documentation as may be reasonably required by any such mortgagee to effect any subordination. Provided, however, as a condition to such subordination, Landlord must secure from each mortgagee a nondisturbance 3 agreement acceptable to Tenant providing that in the event of a foreclosure the mortgagee will recognize the validity of this Lease and, provided that Tenant is not in default, will not disturb Tenant's possession or its rights under this Lease. 14. Use of the Premises. The Tenant may use the Premises for outside storage of pipe and other construction supplies or for any other lawful purpose. The Premises will not be used for any illegal purposes, nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance, based on the above purposes for which the Premises are leased. 15. Signs. Tenant will have the right to erect at Tenant's sole expense signage at the entrance to and upon the Premises, including but not limited to a customary trade sign identifying the business of Tenant. The erection of signage by Tenant will be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record. On or before termination of this Lease, Tenant will remove the signage thus erected, and will repair any damage or disfigurement, caused by such removal. All signage proposed by Tenant shall be subject to Landlord's review and approval, which approval shall not be unreasonably withheld, conditioned or delayed. 16. Entry for Carding, etc. Landlord may card the Premises "For Rent" or "For Sale" ninety (90) days before the termination of this Lease. Landlord may enter the Premises at reasonable hours during the term of this Lease to exhibit the same to prospective purchasers and to make repairs required of Landlord under the terms hereof. 17. Indemnity. Landlord agrees to indemnify and save harmless Tenant and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Lease term: (a) as a result of any violation by Landlord or prior owners or occupants of the Premises of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed prior to commencement of the Lease term; or (c) as a result of any violation of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Landlord's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease. Tenant agrees to indemnify and save harmless Landlord and its parents, subsidiaries, affiliates, directors, officers, employees, agents, servants, attorneys and representatives from any and all claims, causes of action, damages, fines, judgments, penalties, costs (including environmental clean-up costs and response costs), liabilities, expenses or losses (including without limitation, reasonable attorneys' fees and expenses of litigation) arising during or after the Term: (a) as a result of any violation by Tenant of any applicable federal, state or local environmental laws or regulations, as now or hereinafter in effect, regulating, relating to or imposing liability or imposing standards of conduct concerning any Hazardous Materials; or (b) as a result of the 4 presence, disturbance, discharge, release, removal or cleanup of Hazardous Materials or as a result of environmental contamination or other similar conditions which existed after commencement of the Term and which was caused by or brought onto the Premises by Tenant or Tenant's agents, contractors, employees, licensees and invitees; or (c) as a result of any violation by Tenant of the accessibility or path of travel requirements imposed by ADA; or (d) as a result of any of Tenant's representations and warranties being untrue. These indemnities will survive the expiration, cancellation or termination of the Lease; provided, however, that Tenant will not be liable for the acts of any other tenants of said property. 18. Default of Tenant. It is mutually agreed that in the event: (a) the rent herein reserved is not paid at the time and place when and where due and Tenant fails to pay said rent within five (5) days after written demand from Landlord; or (b) Tenant will fail to comply with any material term, provision, condition, or covenant of this Lease, other than the payment of rent, and will not cure such failure within thirty (30) days after notice to Tenant of such failure to comply or such additional time period as may reasonably be necessary to effect a cure of the default provided that Tenant commences and diligently pursues a cure of the default; or (c) Tenant causes any lien to be placed against the Premises and does not cure the same within thirty (30) days after notice from Landlord to Tenant demanding cure, THEN in any of such events, Landlord will have the option to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: (i) Landlord may terminate this Lease, in which event Tenant will immediately surrender the Premises to Landlord. Tenant agrees to indemnify Landlord for all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises, or through decrease in rent, or otherwise; or (ii) Landlord, as Tenant's agent, without terminating this Lease, may terminate Tenant's right of possession, and, at Landlord's option, enter upon and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Landlord deems proper. Tenant will be liable to Landlord for the deficiency, if any, between Tenant's rent hereunder and the price obtained by Landlord on reletting. Pursuit of any of the foregoing remedies will not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. In any case, Landlord will use best efforts to mitigate Tenant's damages. Any notice in this provision may be given by Landlord or its attorney. No termination of this Lease prior to the normal ending thereof, by lapse of time otherwise, will affect Landlord's right to collect rent for the period prior to the termination thereof. 19. Default of Landlord. Should Landlord fail to perform any of its obligations hereunder, Landlord will have a period of thirty (30) days after its receipt of written notice from Tenant of a failure of performance within which to commence a cure of that failure. Failure of Landlord to commence that cure within the 30-day period or to effect that cure within that 30-day period will be an event of default under this Lease and Tenant may, at its option, elect to: (a) terminate this Lease upon thirty (30) days written notice to Landlord; (b) bring an action to require specific performance of Landlord's obligations; (c) provide Landlord with an additional period of time within which to effect that cure;(d) commence such cure itself, and Tenant may either, at its option, offset any expenses it incurs in effecting such cure against the rent and other charges due and payable by Tenant hereunder, or require that Landlord immediately reimburse Tenant for its expenses; provided, however, in the event of an emergency, Tenant may immediately effect a cure of Landlord's failure should Landlord fail to act immediately to do so, 5 without the requirement of any notice by Tenant to Landlord; and/or (e) pursue any other remedies provided herein or provided by law. 20. Warranties. Landlord warrants that Landlord owns the Premises in fee simple and has the right to enter into this Lease; that the Premises are free from liens and encumbrances except for utility easements and unviolated restrictive covenants which do not materially adversely affect Tenant's intended use of the Premises; that the Premises has legal, direct, pedestrian and vehicular access to and from and abuts one or more publicly dedicated roads; that the Premises are in compliance with all applicable laws, regulations and ordinances; to the best of Landlord's knowledge, that past and current uses of the Premises comply with federal, state and local environmental laws and regulations; that Landlord has not received a citation from any regulatory agency for noncompliance with environmental laws; that Landlord has no knowledge of the presence of fuel storage tanks or of hazardous, toxic, dangerous, or carcinogenic materials, substances or contaminants, formaldehyde, polychlorinated biphenyls ("PCBs"), lead, lead dust, asbestos, asbestos containing materials ("ACMs"), oil, gasoline, other petroleum products or byproducts, radon or other similar materials or substances (collectively "Hazardous Materials") on, in or under the Premises and has no knowledge of any contamination present on, in or under the Premises; and covenants that Tenant, provided it performs all of its obligations under this Lease, will peaceably and quietly enjoy the Premises during the Lease term without any disturbance from Landlord, anyone claiming by, through or under Landlord, or any other party, except as otherwise specifically provided in this Lease. 21. Holding Over. If Tenant remains in possession of the Premises after expiration of the term hereof, with Landlord's acquiescence and without any express agreement of the parties, Tenant will be a tenant-at-will at the rental rate in effect at end of the Lease; and there will be no renewal of this Lease by operation of law. 22. Notices. Any notice given pursuant to this Lease will be in writing and sent by certified mail to: (a) Landlord: Jem-Realty, LLC and Stanwood Interests Limited Partnership c/o Jem-Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, Alabama 35203 or to such other address as Landlord may hereafter designate in writing to Tenant. (b) Tenant: Southwest Stainless, L.P. c/o Hughes Supply, Inc. 20 North Orange Avenue, Suite 200 Orlando, Florida 32801 Attention: Mark Scimeca, Esquire, Associate General Counsel or to such other address as Tenant may hereafter designate in writing to Landlord. 6 23. Memorandum of Lease. This Lease will not be recorded, but the parties agree to execute a Memorandum of this Lease for recording purposes which will set forth the commencement date, the term of the Lease and all extensions, a legal description of the location of the Premises and a description of Tenant's rights under this. If Tenant records the Memorandum of Lease, Tenant agrees to pay all recording fees and taxes required by reason of the recording of the Memorandum of Lease. 24. Construction of Lease Terms. The terms of this Lease will not be construed more strongly against any party, regardless of which party was responsible for the preparation and drafting of this Lease. 25. Attorneys Fees. In any litigation between the parties regarding this Lease, the losing party agrees to pay to the prevailing party its reasonable attorney's fees and expenses of litigation. For purposes of this Paragraph, a party is to be considered the prevailing party if: (a) it initiated the litigation and obtains (by judgment or agreement) substantially the relief sought; or (b) it did not initiate the litigation and the other party does not obtain (by judgment or agreement) substantially the relief sought. 26. Waiver of Rights. No failure of Landlord to exercise any power given Landlord hereunder, or to insist upon strict compliance by Tenant with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof will constitute a waiver of Landlord's right to demand exact compliance with the terms hereof. 27. Rights Cumulative. All rights, powers and privileges conferred hereunder upon the parties hereto will be cumulative but not restrictive to those given by law. 28. Time of Essence. Time is of the essence of this Agreement. 29. Environmental Site Assessment. Tenant will have the right, at its expense, to undertake a Phase I Environmental Site Assessment or equivalent (the "Environmental Report") with respect to the Premises. In the event that the results of such Environmental Report are unsatisfactory to Tenant, in its sole discretion, then Tenant will have the right, at any time within forty-five (45) days after commencement of the term of this Lease to terminate this Lease immediately upon written notice to Landlord. 30. Definitions. "Landlord" as used in this Lease will include first party, its heirs, representatives, assigns, and successors in title to the Premises. "Tenant" will include second party, its heirs and representatives, assigns and successors, and if this Lease will be validly assigned, or sublet, will include also Tenant's assignees or sub-Tenants, as to the Premises covered by such assignment or sub-lease. "Landlord" and "Tenant" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 7 31. Entire Agreement. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, will be of any force or effect. 32. Severability and Governing Law. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance will, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant, or condition to persons, entities or circumstances other than those which or to which sued may be held invalid or unenforceable, will not be affected thereby, and each term, covenant or condition of this Lease will be valid and enforceable to the fullest extent permitted by law. This Lease shall be governed by and construed in accordance with the law of the state in which the Premises are located. 33. Brokerage. Each of Landlord and Tenant warrants to the other that no commissions are payable or due to any other broker or finder in connection with this Lease and each of Landlord and Tenant agrees to indemnify, defend and hold the other harmless from and against any commissions or fees or claims for commissions or fees arising under the indemnifying party, which indemnification will expressly survive the termination of this Lease. IN WITNESS WHEREOF, the parties herein have executed this Lease on the day and year first above written. "LANDLORD" Witnesses: JEM-REALTY, LLC, a Delaware limited liability company ____________________________ By:__________________________ Printed:____________________ Printed:_____________________ Title:_______________________ ____________________________ Printed:____________________ 8 STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership By; Stanreal, LLC, a Texas limited liability company, its sole general partner _____________________________ By:_________________________ Printed:_____________________ Printed:____________________ Title:______________________ _____________________________ Printed:_____________________ "TENANT" SOUTHWEST STAINLESS, L.P., a Delaware limited partnership _____________________________ By: Z & L Acquisition Corp., a Delaware corporation, its sole Printed:_____________________ general partner By:__________________________ _____________________________ Printed:_____________________ Printed:_____________________ Title:_______________________ 9 Prepared by and Return to: Mark Scimeca, Esquire Associate General Counsel Hughes Supply, Inc. 20 N. Orange Avenue, Suite 200 Orlando, Florida 32801 Tel.: (407) 841-4755, ext. 2077 MEMORANDUM OF LEASE THIS MEMORANDUM OF LEASE is entered into as of the 1st day of July, 1998, by and between JEM-REALTY, LLC, a Delaware limited liability company, and STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership (collectively "Landlord"), and SOUTHWEST STAINLESS, L.P., a Delaware limited partnership ("Tenant"). 1. Pursuant to a Lease Agreement (the "Lease") executed by Landlord and Tenant, dated as of July 1, 1998, Landlord has leased to Tenant certain land described as follows: Tract 26 of South Houston Gardens, No. 6, as recorded in Volume 2, Page 74 of the Harris County Map Records, Harris County, Texas, together with all improvements constructed or to be constructed thereon, if any, and all of Landlord's appurtenant rights, privileges and easements (collectively, the "Premises"). 2. The initial term of the Lease shall commence on July 1, 1998, and shall expire on June 30, 2000. 3. This Memorandum of Lease is subject to all of the terms, conditions and understandings set forth in the Lease, which are incorporated herein by reference and made a part hereof, as though copied verbatim herein. The provisions of this Memorandum constitute only a general description of the content of the Lease with respect to matters set forth herein. Accordingly, third parties are advised that the provisions of the Lease itself shall be controlling with respect to all matters set forth herein. In the event of any discrepancy between the provisions of the Lease and this Memorandum, the provisions of the Lease shall take precedence and prevail over the provisions of this Memorandum. 10 EXECUTED as of the date first written above. WITNESSES: LANDLORD: JEM-REALTY, LLC, a Delaware limited liability company ____________________________ By:____________________________________ Printed:____________________ Printed:_______________________________ Title:_________________________________ ____________________________ Printed:____________________ Date Executed by Landlord:_____________ STATE OF ___________________ COUNTY OF __________________ The foregoing instrument was acknowledged before me this __ day of July, 1998, by _______________________________ , as ________________________ of Jem-Realty, LLC, a Delaware limited liability company, on behalf of said limited liability company. She/He is personally known to me or produced the following as identification:_____________________________________. (NOTARY SEAL) ___________________________________ Printed Name:______________________ Notary Public, State of ___________ Commission #:______________________ My commission expires:_____________ 11 STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership By; Stanreal, LLC, a Texas limited liability company, its sole general partner ___________________________ By:______________________________ Printed:___________________ Printed:_________________________ Title:___________________________ ___________________________ Printed:___________________ Date Executed by Landlord:_______ STATE OF __________________ COUNTY OF _________________ The foregoing instrument was acknowledged before me this __ day of July, 1998, by _______________________________ , as of Stanreal, LLC, a Texas limited liability company, as the sole general partner of Stanwood Interests Limited _____________________ Partnership, a Texas limited partnership, on behalf of said limited liability company and limited partnership. She/He is personally known to me or produced the following as identification:_____________________________________. (NOTARY SEAL) _________________________________ Printed Name:____________________ Notary Public, State of _________ Commission #:____________________ My commission expires:___________ 12 TENANT: SOUTHWEST STAINLESS, L.P., a Delaware limited partnership ____________________________ By: Z & L Acquisition Corp., a Delaware corporation, its sole Printed:____________________ general partner By:______________________________ ____________________________ Printed:_________________________ Printed:____________________ Title:___________________________ Date Executed by Tenant:_________ STATE OF ___________________ COUNTY OF___________________ The foregoing instrument was acknowledged before me this __ day of July,1998, by _______________________________ , as _______________________ of Z & L Acquisition Corp., a Delaware corporation, as the sole general partner of Southwest Stainless, L.P., a Delaware limited partnership, on behalf of said corporation and limited partnership. She/He is personally known to me or produced the following as identification:_______________________________. (NOTARY SEAL) _________________________________ Printed Name:____________________ Notary Public, State of _________ Commission #:____________________ My commission expires:___________ FIRST AMENDMENT TO LEASE AGREEMENT This First Amendment to Lease Agreement is entered into this 25th day of February, 2000, by and between JEM-REALTY, LLC, a Delaware limited liability company, and STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership (collectively, "Landlord"), and SOUTHWEST STAINLESS, L.P., a Texas limited partnership ("Tenant"), who covenant and agree as follows: 1. Amendment of Lease. Landlord and Tenant are parties to that certain Lease Agreement dated July 1, 1998, for certain acreage located on Monroe Road in Houston, Texas and more particularly described therein (the "Lease") and hereby amend the Lease as set forth herein. Except as modified herein, the Lease shall remain unchanged and in full force and effect. 2. Extension of Term. The term of the Lease is hereby extended through and including May 12, 2002. Tenant shall have the option (the "Option") of extending the term of the Lease for an additional three (3) years through and including May 12, 2005, upon six (6) months prior written notice to Landlord of Tenant's election to exercise such Option. The period commencing July 1, 2000, and ending May 12, 2002, is referred to herein as the "First Renewal Term." The period commencing May 13, 2002, and ending May 12, 2005, is referred to herein as the "Second Renewal Term." 3. Renewal Rent. Tenant shall pay rental to Landlord throughout the First Renewal Term, and in the event Tenant exercises the Option, throughout the Second Renewal Term, in the same manner provided for in the Lease except as follows: Effective July 1, 2000, the monthly rental rate payable by Tenant to Landlord shall be recalculated to equal the product obtained by multiplying $4,500.00 by a fraction, the numerator of which will be the CPI-U, as that term is defined below, for May 2000 and the denominator of which will be the CPI-U for May 1999. Effective July 1, 2001, and July 1 of each lease year thereafter, the monthly rental rate payable by Tenant to Landlord shall be recalculated to equal the product obtained by multiplying the rental rate in effect at the end of the immediately preceding lease year by a fraction, the numerator of which will be the CPI-U, as that term is defined below, for May of the immediately preceding lease year and the denominator of which will be the CPI-U for May of the lease year which is one (1) year before the immediately preceding lease year. Notwithstanding anything to the contrary contained herein, in no event shall rental payable under the Lease increase more than three percent (3%) from one (1) lease year to the next. Rent for the month of May 2002 shall be prorated through and including May 12, 2002, or in the event Tenant exercises the Option, through and including May 12, 2005. The CPI-U will mean the "Consumer Price Index-Seasonally Adjusted U.S. City Average For All Items For All Urban Consumers, (1982-84=100)," published monthly in the "Monthly Labor Review" of the Bureau of Labor Statistics of the United States Department of Labor. If the CPI-U is discontinued, the "Consumer Price Index-Seasonally Adjusted U.S. City Average For All Items For Urban Wage Earners and Clerical Workers (1982-84=100)," published monthly in the "Monthly Labor Review" of the Bureau of Labor Statistics of the United States Department of Labor (the "CPI-W"), will be used for making the computation set forth above. If the CPI-W is discontinued, comparable statistics on the purchasing power of the consumer dollar published by the Bureau of Labor Statistics of the United States Department of Labor will be used for making the computation set forth above. If the Bureau of Labor Statistics will no longer maintain statistics on the purchasing power of the consumer dollar, comparable statistics published by a responsible financial periodical or recognized authority agreeable to the parties will be used for making the computation set forth above. If the base year "(1982-84=100)" or other base year used in computing the CPI-U is changed, the figures used in making the computation above will be changed accordingly, so that all increases in such price index are taken into account notwithstanding any such change in the base year. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Lease Agreement to be executed effective as of the date first written above. Witnesses: JEM-REALTY, LLC, a Delaware limited liability company __________________________ By:__________________________ Printed:__________________ Printed:_____________________ Title:_______________________ __________________________ Printed:__________________ STANWOOD INTERESTS LIMITED PARTNERSHIP, a Texas limited partnership By: Stanreal, LLC, a Texas limited liability company, its sole general partner __________________________ By:________________________ Printed:__________________ Printed:___________________ Title:_____________________ __________________________ Printed:__________________ SOUTHWEST STAINLESS, L.P., a Delaware limited partnership __________________________ By: Z & L Acquisition Corp., a Delaware Printed:__________________ corporation, its sole general partner By:__________________________ __________________________ Printed:_____________________ Printed:__________________ Title:_______________________ 2 August 26, 2002 CERTIFIED MAIL RETURN RECEIPT REQUESTED Jem-Realty, LLC and Stanwood Interests Limited Partnership c/o Jem-Realty, Inc. 320 Park Place Tower 2001 Park Place North Birmingham, AL 25203 Re: Lease Agreement dated July 1, 1998, as amended by First Amendment to Lease dated February 25, 2000 (the "First Amendment"), by and between Jem-Realty, LLC, a Delaware limited liability company, and Stanwood Interests Limited Partnership, a Texas limited partnership, as Landlord, and Southwest Stainless, L.P., a Delaware limited partnership, as Tenant, for property located at Tract 26 of South Houston Gardens, No. 6, Houston, Harris County, TX ("Lease"). Dear Landlord: Please be advised that Southwest Stainless, L.P., a wholly-owned subsidiary of Hughes Supply, Inc., has elected to exercise its option to renew the referenced Lease pursuant to Paragraph 2 of the First Amendment. The renewal term will be for an additional period of three (3) years to commence May 13, 2002 and continue through and including May 12, 2005. The rental rate will be adjusted annually in accordance with Paragraph 3 of the First Amendment. This letter amendment to the Lease shall also serve to correct the name of Tenant in the First Amendment from and after February 25, 2000 to Southwest Stainless, L.P., a Delaware limited partnership. All other terms and conditions of the Lease shall remain unchanged and in full force and effect. Please indicate the acceptance and agreement of the Landlord to this Letter Agreement by having Landlord sign below and faxing a signed copy of this letter to my attention at (407) 649-3018. Thank you for your assistance with this matter. Very truly yours, Mark Scimeca, Associate General Counsel MDS:js Jem-Realty, LLC and Stanwood Interests Limited Partnership August 26, 2002 Page Two cc: Mike Stanwood (via fax) Mike Cox (via fax) George Urquiola (via inter-office mail) ACCEPTED AND AGREED TO BY: JEM-REALTY, LLC, a Delaware limited liability company By:______________________________ Printed:_________________________ Title:___________________________ Date:____________________________ STANWOOD INTERESTS LIMITED PARTNERSHIP a Texas limited partnership By:______________________________ Printed:_________________________ Title:___________________________ Date:____________________________ EX-21 9 d59199_ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of the Registrant Set forth below is a listing, by name and jurisdiction of incorporation, of each corporation that 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) Carolina Pump & Supply Corporation, a Rhode Island corporation. 2) Century Air Supply, Inc., a Delaware corporation. 3) Century GP Management, LLC, a Delaware limited liability company. 4) Century LP Investments, LLC, a Delaware limited liability company. 5) Century Maintenance, L.P., a Delaware limited partnership. 6) Century Maintenance (Houston), L.P., a Delaware limited partnership. 7) Century Maintenance Management, LLC, a Delaware limited liability company. 8) Century Maintenance Supply, Inc., a Delaware corporation. 9) Century Maintenance Supply - S. Cal., Inc., a Delaware corporation. 10) Century Services, L.P., a Delaware limited partnership. 11) Douglas Leonhardt & Associates, Inc., a North Carolina corporation. 12) Electric Laboratories and Sales Corporation, a Delaware corporation. 13) Gilleland Concrete Products, Inc., a Georgia corporation. 14) HHH, LLC, a Delaware limited liability company. 15) HSI Acquisition Corporation, an Ohio corporation. 16) HSI Funding, LLC, a Delaware limited liability company. 17) HSI Fusion Services, Inc., a Florida corporation. 18) HSI Holdings, Inc., a Delaware corporation. 19) HSI Indiana, LLC, an Indiana limited liability company. 20) HSI IP, Inc., a Delaware corporation. 21) HSI North Carolina LLC, a North Carolina limited liability company. 22) HSI Properties, LLC, a Delaware limited liability company. 23) Hughes Aviation, Inc., a Florida corporation. 24) Hughes Insurance Company, Ltd., a Bermuda company limited by shares. 25) Hughes Insurance Holdings, Inc. (fka Allstate Pool Supplies, Inc.), a Delaware corporation. 26) Hughes MRO, Inc. (fka Chad Supply, Inc.), a Florida corporation. 27) Hughes MRO, L.P., a Delaware limited partnership. 28) Hughes MRO 1, LLC, a Delaware limited liability company. 29) Hughes Supply CA, LLC, a California limited liability company. 30) Hughes Supply Foundation, Inc., a Florida not-for-profit corporation. 31) Hughes Supply IP, Inc., a Delaware corporation. 32) Hughes Supply Management Services, Inc., a Delaware corporation. 33) Hughes Supply Shared Services, Inc., a Delaware corporation. 34) Hughes Supply (VA), Inc. (fka Virginia Water & Waste Supply Company, Inc.), a Virginia corporation. 35) Hughes Water & Sewer Company, a West Virginia corporation. 36) Juno Industries, Inc., a Florida corporation. 37) Kamen Supply Company, Inc., a Kansas corporation. EXHIBIT 21 38) Kingston Pipe Industries, Inc., a Rhode Island corporation. 39) L & T of Delaware, Inc., a Delaware corporation. 40) Merex Corporation, a Texas corporation. 41) Merex De Mexico, Sociedad Anonima De Capital Variable, a Mexico corporation, 75% owned. 42) Merex Diesel Power, Sociedad Anonima De Capital Variable, a Mexico corporation, 75% owned. 43) Metals Inc., an Oklahoma corporation. 44) Metals, Inc. - Gulf Coast Division, an Oklahoma corporation. 45) Mills & Lupton Supply Company, a Tennessee corporation. 46) Moore Electric Supply, Inc., a North Carolina corporation. 47) Mountain Country Supply, Inc., an Arizona corporation. 48) National Powerx, Inc., a Pennsylvania corporation. 49) Olander & Brophy, Inc., a Pennsylvania corporation. 50) One Stop Supply, Inc., a Tennessee corporation. 51) Paine Supply of Jackson, Inc., a Mississippi corporation. 52) Panhandle Pipe & Supply Company, Inc., a West Virginia corporation. 53) Reaction Supply Corporation, a California corporation. 54) Scott-Parish Electrical Supply Company, a North Carolina corporation. 55) Shrader Holding Company, Inc., an Arkansas corporation. 56) Southwest Stainless, L.P., a Delaware limited partnership. 57) Stainless Tubular Products, Inc., an Oklahoma corporation. 58) SWS Acquisition LLC, a Delaware limited liability company. 59) SWS Funding LLC, a Delaware limited liability company. 60) U.S. Fusion Services, Inc., a Louisiana corporation. 61) USCO, Inc., a North Carolina corporation. 62) Utiliserve, Inc. (fka Temple Electric, Inc.), a Delaware corporation. 63) Utiliserve Holdings, Inc. (fka Utiliserve, Inc.), a Delaware corporation. 64) Waterworks Sales Company, a Colorado corporation. 65) Waterworks Holding Co., a Colorado corporation. 66) Warner Waterworks Sales Company of Wyoming, a Wyoming corporation. 67) WCC Merger Corporation, a Georgia corporation. 68) World-Wide Travel Network, Inc., a Florida corporation. 69) Z&L Acquisition Corporation, a Delaware corporation. EX-23 10 d59199_ex23.txt CONSENTS OF PRICEWATERHOUSECOOPERS LLP Exhibit 23 Consent of Independent Certified Public Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-35059, 333-57977, 333-57979, 333-40666, 333-40664, 333-40658, 333-100055, 333-109257, 333-19007, 333-27935) and S-3 No. 333-110150, of Hughes Supply, Inc. of our reports dated April 14, 2004, relating to the financial statements and financial statement schedule, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Orlando, Florida April 14, 2004 EX-31.1 11 d59199_ex31-1.txt CEO CERTIFICATIONS SECTION 302 Exhibit 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Thomas I. Morgan, the president and chief executive officer of Hughes Supply, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Hughes Supply, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2004 By: /s/ Thomas I. Morgan ---------------------------------- Thomas I. Morgan President and Chief Executive Officer EX-31.2 12 d59199_ex31-2.txt CFO CERTIFICATIONS SECTION 302 Exhibit 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, David Bearman, the executive vice president and chief financial officer of Hughes Supply, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Hughes Supply, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2004 By: /s/ David Bearman --------------------------------------- David Bearman Executive Vice President and Chief Financial Officer EX-32.1 13 d59199_ex32-1.txt CEO CERTIFICATIONS SECTION 906 Exhibit 32.1 Form of Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, Thomas I. Morgan, the president and chief executive officer of Hughes Supply, Inc., certify that, to the best of my knowledge, (i) the Form 10-K for the period ended January 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Hughes Supply, Inc. Date: April 14, 2004 By: /s/ THOMAS I. MORGAN -------------------------------------- Thomas I. Morgan President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Hughes Supply, Inc. and will be retained by Hughes Supply, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 14 d59199_ex32-2.txt CFO CERTIFICATIONS SECTION 906 Exhibit 32.2 Form of Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, David Bearman, the executive vice president and chief financial officer of Hughes Supply, Inc., certify that, to the best of my knowledge, (i) the Form 10-K for the period ended January 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Hughes Supply, Inc. Date: April 14, 2004 By: /s/ DAVID BEARMAN ----------------------------------------- David Bearman Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Hughes Supply, Inc. and will be retained by Hughes Supply, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----