SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Builders FirstSource, Inc.
Delaware | 5211 | 52-2084569 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification Number) |
2001 Bryan Street, Suite 1600
Donald F. McAleenan, Esq.
Robert B. Pincus, Esq.
Allison L. Amorison, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square, P.O. Box 636 Wilmington, Delaware 19899-0636 (302) 651-3000 |
J. Scott Hodgkins, Esq.
Latham & Watkins LLP 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 (213) 485-1234 |
|
(Name, address, including zip code, and
telephone
number, including area code, of agent for service) |
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted. |
PRELIMINARY PROSPECTUS | Subject to Completion, dated June 6, 2005 |
Shares
Common Stock
This is the initial public offering of shares of our common stock. No public market currently exists for our common stock. We are offering 7,500,000 shares and the selling stockholders are offering 3,750,000 shares of our common stock. We expect the public offering price to be between $15.00 and $17.00 per share. We will not receive any proceeds from the sale of any shares of our common stock sold by the selling stockholders.
We have applied to have our common stock approved for listing on The Nasdaq National Market under the symbol BLDR.
Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock under Risk factors beginning on page 8 of this prospectus.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
Per Share
Total
$
$
$
$
$
$
$
$
The underwriters may also purchase up to an additional 1,687,500 shares of our common stock from the selling stockholders at the public offering price, less underwriting discounts and commissions payable by the selling stockholders, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $ , and the total proceeds, before expenses, to the selling stockholders will be $ .
The underwriters are offering the common stock as set forth under Underwriting. Delivery of the shares of common stock will be made on or about June , 2005.
UBS Investment Bank | Deutsche Bank Securities |
Robert W. Baird & Co. | BB&T Capital Markets |
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where those offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
TABLE OF CONTENTS
About this prospectus
|
i | |||
Prospectus summary
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1 | |||
Risk factors
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8 | |||
Forward-looking statements
|
19 | |||
Use of proceeds
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20 | |||
Dividend policy
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20 | |||
Capitalization
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21 | |||
Dilution
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22 | |||
Unaudited pro forma financial data
|
23 | |||
Selected historical consolidated financial data
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31 | |||
Managements discussion and analysis of
financial condition and results of operations
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32 | |||
Industry overview and trends
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51 | |||
Business
|
55 | |||
Management
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69 | |||
Executive compensation
|
72 | |||
Principal and selling stockholders
|
79 | |||
Certain related party transactions
|
81 | |||
Description of capital stock
|
82 | |||
Description of certain indebtedness
|
85 | |||
Shares eligible for future sale
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88 | |||
Material United States federal tax
considerations for Non-U.S. holders
|
91 | |||
Underwriting
|
94 | |||
Legal matters
|
98 | |||
Experts
|
98 | |||
Where you can find more information
|
98 | |||
Index to consolidated financial statements
|
F-1 |
About this prospectus
As used in this prospectus, unless the context requires otherwise, we, us, our, or the Company refers to Builders FirstSource, Inc. and its consolidated subsidiaries. All references to fiscal years of the Company in this prospectus refer to years commencing on January 1 of that year and ending on December 31. Unless otherwise indicated, the information in this prospectus assumes no exercise of the Underwriters over-allotment option.
Market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by independent market research firms, or other published independent sources. Some data are based on our good faith estimates that are derived from our review of internal surveys and independent sources. Although we believe that all of the foregoing sources are reliable, we have not independently verified the information. Statements as to our market position relative to our competitors are generally based on management estimates as of the end of fiscal year 2004.
Prospectus summary
The following summary contains basic information about us and this offering. It likely does not contain all the information that is important to you. For a more complete understanding of us and this offering, we encourage you to read this entire document carefully, including the Risk Factors section beginning on page 8 and the financial statements that are included elsewhere in this prospectus.
OUR COMPANY
We are a leading supplier and a fast-growing manufacturer of structural and related building products for residential new construction in the U.S. We believe we are one of the top two suppliers of our product categories to Production Homebuilders, which we define as those U.S. homebuilders that build more than 100 homes per year. Our large scale, full product and service offerings, and unique business model position us to continue growing our sales to Production Homebuilders, the fastest-growing segment of residential homebuilders. We have operations principally in the southern and eastern U.S. with 62 distribution centers and 50 manufacturing facilities. For the year ended December 31, 2004, we generated sales of $2,058.0 million and net income of $51.6 million.
We provide an integrated solution to our customers that combines the manufacturing, supply, and installation of a full range of structural and related building products. Over the past several years, we have significantly increased our sales of products that we manufacture. These products include our factory-built roof and floor trusses, wall panels and stairs, as well as engineered wood products that we design and cut for each home (collectively Prefabricated Components). We also manufacture custom millwork and trim that we market under the Synboard® brand name, as well as aluminum and vinyl windows, and we assemble interior and exterior doors into pre-hung units. Our revenue from these manufactured products totaled $680.4 million for the year ended December 31, 2004, representing 33.1% of total sales. In addition, we supply our customers with a broad offering of professional grade building products not manufactured by us such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing, and gypsum wallboard. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products and services into five principal product categories: Prefabricated Components, Windows & Doors, Lumber & Lumber Sheet Goods, Millwork, and Other Building Products & Services. Over the past five years we have more than doubled the sales of our Prefabricated Components, Windows & Doors, and Millwork product categories, each of which includes both manufactured and distributed products. Products in these categories typically carry a higher margin and provide us with opportunities to cross-sell other products and services, thereby increasing customer penetration. The chart below provides a breakdown of each product categorys contribution to sales in the year ended December 31, 2004.
Sales by Product CategoryYear Ended December 31, 2004
We serve a broad customer base ranging from Production Homebuilders to small custom homebuilders and believe that we are the number one or two building products supplier for single-family residential new construction in approximately 75% of the geographic markets in which we operate. According to 2003 U.S. Census data, we have operations in 20 of the top 50 U.S. Metropolitan Statistical Areas, as ranked by single family housing permits, and approximately 44% of U.S. housing starts occurred in states in which we operate. Our comprehensive product offering featuring over 250,000 SKUs company-wide and our full range of construction services, combined with our scale and experienced sales force, have driven market share gains, particularly with Production Homebuilders.
INDUSTRY OVERVIEW AND TRENDS
Our Industry. We compete in the professional segment (Pro Segment) of the U.S. residential new construction building products supply market, which, according to the Home Improvement Research Institute, has estimated 2004 annual sales of $145.05 billion. The Pro Segment of this market is highly fragmented, with the top ten suppliers accounting for about 12% of the total market according to ProSales Magazine. Our competitors are predominantly small, privately owned companies, most of which have limited access to capital and manufacturing capabilities, and lack the ability to provide a full range of construction services. We do not compete with Home Depot or Lowes, which primarily serve do-it-yourself and professional remodeling customers.
Housing. Our business is driven primarily by the residential new construction market. According to the National Association of Homebuilders, U.S. housing starts were 1.85 million in 2003 and 1.95 million in 2004 and are projected to be 1.94 million in 2005. Several industry sources expect that strong housing demand will continue to be driven over the next decade by:
| new household formations; | |
| increasing homeownership rates; | |
| the size and age of the population; | |
| immigration trends; | |
| an aging housing stock; and | |
| improved financing options for buyers. |
As a result of the recent consolidation activity within the homebuilding industry and market share gains of the larger builders, our customer base has shifted increasingly to Production Homebuilders. The market share of the ten largest Production Homebuilders quadrupled from approximately 5% in 1990 to 20% in 2004, according to Builder Magazine, and is expected to increase to 40% by 2010 according to the National Association of Realtors.
Prefabricated Components. The growing use of Prefabricated Components in the homebuilding process represents a major trend within the residential new construction building products supply market, with the use of manufactured panels in new homes having increased by over 60% from 1997 to 2003 according to the Engineered Wood Association. In response to this trend, we have increased our manufacturing capacity and our ability to provide customers with Prefabricated Components such as roof and floor trusses, stairs, wall panels, and engineered wood.
Builders value the many benefits of using these products, including:
| reduced cycle time and carrying costs; |
| increased product quality; and |
| cost savings from the reduction of expensive on-site labor and material waste. |
Once established as a preferred supplier of Prefabricated Components, we are typically able to cross-sell additional products and services as our customers increasingly seek integrated solutions.
OUR COMPETITIVE STRENGTHS
We believe our sales, earnings, and cash flow will be driven by our competitive strengths:
| Leading Positions in Growing Markets. |
| We believe that we are the number one or two building products supplier for single-family residential new construction in approximately 75% of the geographic markets in which we operate. | |
| We are also the largest supplier of our product categories to the Production Homebuilders in our geographic markets as a whole. | |
| Our facilities are strategically located in many of the fastest-growing markets in the southern and eastern U.S. |
| Unique Business Model. |
| Integrated business model across our network of 62 distribution centers and 50 manufacturing facilities. | |
| Highly customized, proprietary information technology system drives internal efficiencies allowing us to respond rapidly to our customers and reduce their administrative costs. | |
| A one-stop-shop approach that combines a full line of structural building products and services, substantially reducing the cost and burden to our customers of dealing with multiple suppliers. |
| Full Offering of Manufactured Products and Construction Services. |
| We have significantly increased our sales of manufactured products, which provide us with higher margins and increased opportunities to cross-sell other products to our customers. | |
| Our ability to supply our own manufactured products strengthens our customer relationships by helping homebuilders reduce costs and cycle time. | |
| We also provide our customers with a full range of services, including professional installation, turn-key framing and shell construction, and design. |
| Superior Customer Service. |
| Our salespeople act as trusted advisors and on-site consultants to the homebuilder and are involved in each important step of the construction process. | |
| Our large delivery fleet and comprehensive inventory management system enable us to provide just-in-time product delivery. |
| Attractive Cost Position. |
| We have used our position as one of the few large-scale competitors in our industry to create an attractive cost position, with 80% of our non-lumber product purchases being made pursuant to company-wide agreements. | |
| Our distribution centers average $32.6 million of annual sales, which is higher than any of our competitors that have annual sales in excess of $1 billion according to their public filings, company web sites, and ProSales Magazine. | |
| Our scale allows us to leverage our fixed costs, including occupancy, location management, supervisory labor, and corporate overhead, to lower our costs per sales dollar. | |
| Selling, general, and administrative expenses have declined as a percentage of sales from 21.4% in 2001 to 18.3% for 2004. |
| Experienced Management Team. |
| We have a dedicated management team with extensive experience and expertise in the manufacturing, distribution, and marketing of building products. | |
| Our senior management team, including our three regional group presidents, has a total of over 175 years of industry experience. | |
| This team has successfully led us through various industry cycles, economic conditions, and capital structures and has demonstrated the ability to grow manufacturing businesses, introduce new product lines, expand into new geographic markets, and target and integrate acquisitions while improving operational and working capital efficiencies. |
Although we believe that the factors described above will drive our sales, earnings, and cash flow and provide us with opportunities to grow, we have a substantial amount of indebtedness and there are a number of other risks and uncertainties that may affect our financial condition, results of operation, and cash flows. See Risk Factors for a description.
OUR STRATEGY
Our strategy is to leverage our competitive strengths to grow sales, earnings, and cash flow and remain the preferred supplier to the homebuilding industry.
| Increase Customer Penetration through Incremental Sales of Manufactured Products and Services. |
| Organically grow unit volumes and revenues by providing existing customers with incremental value-added products and services. | |
| Increase sales of manufactured products, which are higher margin and less price sensitive than lumber products and are growing in demand by homebuilders. | |
| Grow sales of construction services. |
| Target Production Homebuilders. |
| Leverage geographic breadth and scale to continue to grow our sales to the Production Homebuilders as they continue to gain market share. | |
| From 2001 to 2004, our sales to the ten largest Production Homebuilders increased from $260.8 million to $451.8 million. |
| Expand through New Manufacturing and Distribution Centers in Existing and Contiguous Markets. |
| Increase market penetration through the introduction of additional distribution and manufacturing facilities. | |
| Selectively seek expansion opportunities that will enable us to grow in the multi-family and commercial end markets. |
| Focus on Cost, Working Capital, and Operating Improvements. |
| Continue to focus on expenses and working capital to remain a low cost supplier. | |
| Maintain a continuous improvement, best practices operating philosophy and regularly implement new initiatives to reduce costs, increase efficiency, and reduce working capital. |
| Pursue Strategic Acquisitions. |
| Geographic expansion and continued growth of our Prefabricated Components business. | |
| We do not currently operate in a number of attractive homebuilding markets, including in the western and southwestern U.S. and parts of the Midwest. | |
| Our senior management team has the experience and ability to identify acquisition candidates and integrate acquisitions, having acquired and integrated 23 companies since 1998. |
OUR BACKGROUND
Our company was formed in 1998 through a partnership between JLL Partners, Inc. (JLL Partners), and certain members of the existing management team. Since 1998, the Company has successfully acquired and integrated 23 companies and is currently managed as three operating groups with centralized financial and operational oversight.
OUR PRINCIPAL INVESTORS
Affiliates of JLL Partners, Inc. control JLL Building Products, LLC which owns 94.6% of our outstanding common stock. Founded in 1988, JLL Partners is among the leading private equity investment firms in the country with $2.2 billion in committed capital currently under management. JLLs investment philosophy is to partner with exceptional managers to grow and improve quality companies. JLL has invested in a wide variety of sectors, with portfolio companies that have included AdvancePCS, C.H.I. Overhead Doors, Foodbrands America, IASIS Healthcare, Mosaic Sales Solutions, Motor Coach Industries, and PGT Industries.
RECENT DEVELOPMENTS
On May 24, 2005, our board of directors and our stockholders approved a 1-for-10 reverse stock split of our common stock.
After the reverse stock split, effective May 24, 2005, each holder of record held one share of common stock for every 10 shares held immediately prior to the effective date. As a result of the reverse stock split, the board of directors also exercised its discretion under the anti-dilution provisions of our 1998 Stock Incentive Plan to adjust the number of shares underlying stock options and the related exercise prices to reflect the change in the share price and outstanding shares on the date of the reverse stock split. The effect of fractional shares is not material.
Following the effective date of the reverse stock split, the par value of the common stock remained at $0.01 per share. As a result, we have reduced the common stock in our consolidated balance sheets and statements of changes in shareholders equity (deficit) included herein on a retroactive basis for all periods presented, with a corresponding increase to additional paid-in capital. All share and per-share amounts and related disclosures in this prospectus have also been retroactively adjusted for all periods presented to reflect the 1-for-10 reverse stock split.
On February 11, 2005 we entered into a $350.0 million senior secured credit facility with a syndicate of banks. The new credit facility is composed of a $225.0 million six-and-a-half year term loan, a $110.0 million five-year revolver, and a $15.0 million pre-funded letter of credit facility to be available at any time during the six-and-a-half year term. In addition, on February 11, 2005, we issued $275.0 million aggregate principal amount of second priority senior secured floating rate notes due 2012. See Description of Certain Indebtedness for a summary of the terms of the new senior secured credit facility and the floating rate notes. With the proceeds from these transactions, we repaid existing indebtedness and paid a $201.2 million, or $8.00 per share, dividend to stockholders and a $36.4 million payment (including applicable payroll taxes of $0.6 million) to holders of stock options, as well as expenses of the new senior secured credit facility and floating rate notes.
Our principal executive offices are located at 2001 Bryan Street, Suite 1600, Dallas, Texas 75201, our telephone number is (214) 880-3500, and our internet address is www.bldr.com.
The offering
Except as otherwise indicated, all share information in this prospectus is based on the number of shares outstanding on May 15, 2005 and:
| assumes an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus; |
| assumes completion of the 1-for-10 reverse stock split of our common stock effective on May 24, 2005; |
| excludes 4,451,659 shares of common stock subject to outstanding stock options with a weighted average exercise price of $3.11 per share; and |
| excludes 2.2 million shares of common stock available for future grant or issuance under our 2005 equity incentive plan. |
The following table sets forth a summary of consolidated financial information and other data for each of the periods or at each date indicated. The summary historical consolidated statement of operations and balance sheet data as of December 31, 2004, 2003, and 2002 and for each of the three fiscal years ended December 31, 2004 has been derived from the consolidated financial statements of the Company, which have been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm for the Company. The summary historical financial information as of and for the three months ended March 31, 2005 and for the three months ended March 31, 2004 has been derived from the unaudited condensed consolidated financial statements of the Company included elsewhere herein and reflects all adjustments that, in the opinion of the management of the Company, are necessary for a fair presentation of such information.
All information included in the following tables should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and with the consolidated financial statements and related notes, included elsewhere in this prospectus.
Three months ended | ||||||||||||||||||||||
or at March 31, | Year ended or at December 31, | |||||||||||||||||||||
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2005 | 2004 | 2004 | 2003(1) | 2002(1) | ||||||||||||||||||
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(in thousands, except per share amounts) | ||||||||||||||||||||||
Restated | Restated | |||||||||||||||||||||
Statement of operations data:
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Sales
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$ | 509,342 | $ | 429,354 | $ | 2,058,047 | $ | 1,675,093 | $ | 1,500,006 | ||||||||||||
Cost of sales
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388,407 | 333,577 | 1,574,535 | 1,300,410 | 1,155,375 | |||||||||||||||||
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Gross margin
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120,935 | 95,777 | 483,512 | 374,683 | 344,631 | |||||||||||||||||
Selling, general and administrative expenses
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96,902 | 82,513 | 376,096 | 327,027 | 308,060 | |||||||||||||||||
Stock compensation expense(2)
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36,364 | 437 | | | | |||||||||||||||||
Facility closure costs
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| | | 1,171 | 750 | |||||||||||||||||
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Income (loss) from operations
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(12,331 | ) | 12,827 | 107,416 | 46,485 | 35,821 | ||||||||||||||||
Other expense, net
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| | | 620 | 2,220 | |||||||||||||||||
Interest expense
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19,204 | 6,506 | 24,458 | 11,124 | 12,055 | |||||||||||||||||
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Income (loss) from continuing operations
before income taxes |
(31,535 | ) | 6,321 | 82,958 | 34,741 | 21,546 | ||||||||||||||||
Income tax expense (benefit)
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(12,675 | ) | 2,433 | 31,480 | 13,343 | 8,611 | ||||||||||||||||
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Income (loss) from continuing operations
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(18,860 | ) | 3,888 | 51,478 | 21,398 | 12,935 | ||||||||||||||||
Income (loss) from discontinued operations, net
of tax
|
| 246 | 103 | (3,822 | ) | (2,980 | ) | |||||||||||||||
Cumulative effect of change in accounting
principle, net of tax
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| | | | (19,504 | ) | ||||||||||||||||
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Net income (loss)
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$ | (18,860 | ) | $ | 4,134 | $ | 51,581 | $ | 17,576 | $ | (9,549 | ) | ||||||||||
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Income (loss) from continuing operations per
sharebasic(3)
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$ | (0.75 | ) | $ | 0.15 | $ | 2.05 | $ | 0.85 | $ | 0.51 | |||||||||||
Income (loss) from continuing operations per
sharediluted(3)
|
(0.75 | ) | 0.15 | 1.93 | 0.85 | 0.51 | ||||||||||||||||
Weighted average shares outstandingbasic(3)
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25,148 | 25,138 | 25,135 | 25,204 | 25,363 | |||||||||||||||||
Weighted average shares
outstandingdiluted(3)
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25,148 | 25,633 | 26,714 | 25,252 | 25,411 | |||||||||||||||||
Balance sheet data (end of period):
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Cash and cash equivalents
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$ | 12,121 | $ | 50,628 | $ | 5,585 | $ | 2,248 | ||||||||||||||
Total assets
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709,460 | 697,011 | 622,128 | 530,965 | ||||||||||||||||||
Total debt, including current portion
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510,205 | 313,480 | 168,533 | 129,706 | ||||||||||||||||||
Shareholders equity (deficit)
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(9,156 | ) | 210,890 | 298,933 | 282,789 | |||||||||||||||||
Other financial data:
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Depreciation and amortization (excluding
discontinued operations)
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$ | 4,712 | $ | 4,823 | $ | 19,350 | $ | 20,187 | $ | 20,745 | ||||||||||||
Capital expenditures (excluding acquisitions)
|
5,487 | 4,119 | 20,718 | 15,592 | 15,061 |
(1) |
See Note 3 to our audited consolidated
financial statements, included elsewhere herein,
regarding the restatement of our previously issued financial statements. |
(2) | Represents cash payments made to stock option holders (including applicable payroll taxes) in lieu of adjusting exercise prices in conjunction with our recapitalization transactions. For the year ended December 31, 2004, stock compensation expense is classified as selling, general and administrative expenses. There was no stock compensation expense for the years ended December 31, 2003 and 2002. |
(3) | Reflects the impact of the 1-for-10 reverse stock split as discussed in Note 6 to the March 31, 2005 unaudited condensed consolidated financial statements, included elsewhere herein. |
Risk factors
An investment in shares of our common stock involves risks. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before deciding to buy shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy shares of our common stock. The risks and uncertainties described below are not the only ones we face.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
The Industry in Which We Operate Is Dependent upon the Homebuilding Industry, the Economy, and Other Important Factors.
The building products supply industry is highly dependent on new home construction, which in turn is dependent upon a number of factors, including demographic trends, interest rates, tax policy, employment levels, consumer confidence, and the economy generally. Unfavorable changes in demographics or a weakening of the national economy or of any regional or local economy in which we operate could adversely affect consumer spending, result in decreased demand for homes, and adversely affect our business. Production of new homes may also decline because of shortages of qualified tradesmen, reliance on inadequately capitalized sub-contractors, and shortages of materials. In addition, the homebuilding industry is subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design and safety, construction, and similar matters, including regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area. Increased regulatory restrictions could limit demand for new homes and could negatively affect our sales and earnings. Because we have substantial fixed costs, relatively modest declines in our customers production levels could have a significant adverse impact on our financial condition, results of operations and cash flows.
The Building Supply Industry Is Cyclical and Seasonal.
The building products supply industry is subject to cyclical market pressures. Prices of building products are subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition, market speculation, government regulation, and trade policies, as well as from periodic delays in the delivery of lumber and other products. For example, prices of wood products, including lumber and panel products, are subject to significant volatility and directly affect our sales and earnings. Our Lumber & Lumber Sheet Goods product category represented 39.6% of total sales in the year ended December 31, 2004. We have no ability to control the timing and amount of pricing changes for building products. In addition, the supply of building products fluctuates based on available manufacturing capacity, and a shortage of capacity or excess capacity in the industry can result in significant increases or declines in market prices for those products, often within a short period of time. Such price fluctuations can adversely affect our financial condition, results of operations and cash flows.
In addition, although weather patterns affect our results of operations throughout the year, adverse weather historically has reduced construction activity in the first and fourth quarters in our markets. To the extent that hurricanes, severe storms, floods, or other natural disasters or similar events occur in the markets in which we operate, our business may be adversely affected. We anticipate that fluctuations from period to period will continue in the future.
Product Shortages, Loss of Key Suppliers, and Our Dependence on Third-Party Suppliers and Manufacturers Could Affect Our Financial Health.
Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply from manufacturers and other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities. However, the loss of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier arrangements could adversely impact our financial condition, results of operations and cash flows.
Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Failure by our suppliers to continue to supply us with products on commercially reasonable terms, or at all, could have a material adverse effect on our financial condition, results of operations and cash flows.
The Loss of Any of Our Significant Customers Could Affect Our Financial Health.
Our 10 largest customers generated approximately 22% of our sales in the year ended December 31, 2004, and our largest customer accounted for almost 4.2% of our sales in that same period. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at current levels. Production Homebuilders and other customers may seek to purchase some of the products that we currently sell directly from manufacturers, or they may elect to establish their own building products manufacturing and distribution facilities. In addition, continued consolidation among Production Homebuilders could also result in a loss of some of our present customers to our competitors, and the loss of one or more of our significant customers or a deterioration in our relations with any of them could significantly affect our financial condition, results of operations and cash flows. Furthermore, our customers are not required to purchase any minimum amount of products from us. The contracts into which we have entered with most of our professional customers typically provide that we supply particular products or services for a certain period of time when and if ordered by the customer. Should our customers purchase our products in significantly lower quantities than they have in the past, such decreased purchases could have a material adverse effect on our financial condition, results of operations and cash flows.
Our Industry is Highly Fragmented and Competitive, and Increased Competitive Pressure May Adversely Affect Our Results.
The building products supply industry is highly fragmented and competitive. We face significant competition from local and regional building materials chains, as well as from privately-owned single site enterprises. Any of these competitors may (i) foresee the course of market development more accurately than do we, (ii) develop products that are superior to our products, (iii) have the ability to produce similar products at a lower cost, (iv) develop stronger relationships with local homebuilders, or (v) adapt more quickly to new technologies or evolving customer requirements than do we. As a result, we may not be able to compete successfully with them. In addition, home center retailers, which have historically concentrated their sales efforts on retail consumers and small contractors, may in the future intensify their marketing efforts to professional homebuilders. Furthermore, certain product manufacturers sell and distribute their products directly to Production Homebuilders, and the volume of such direct sales could increase in the future. Additional manufacturers of products distributed by us may elect to sell and distribute directly to homebuilders in the future or enter into exclusive supplier arrangements with other distributors. Finally, we may not be able to maintain our costs at a level sufficiently low for us to compete effectively. If we are unable to compete effectively, our financial condition, results of operations and cash flows will be adversely affected.
We Are Subject to Competitive Pricing Pressure From Our Customers.
Production Homebuilders historically have exerted significant pressure on their outside suppliers to keep prices low because of their increasing market share and their ability to leverage such market share in the highly fragmented building products supply industry. Continued consolidation among Production Homebuilders, and changes in Production Homebuilders purchasing policies or payment practices, could result in increased pricing pressure. If we are unable to generate sufficient cost savings in the future to offset any price reductions, our financial condition, results of operations, and cash flows may be adversely affected.
Our Level of Indebtedness Could Adversely Affect our Ability to Raise Additional Capital to Fund Our Operations, Limit Our Ability to React to Changes in the Economy or Our Industry, and Prevent Us from Meeting Our Obligations under Our Debt Instruments.
As of March 31, 2005, after giving effect to the application of the net proceeds of this offering, our total indebtedness would have been $400.2 million. See Capitalization for additional information.
Our substantial debt could have important consequences for you, including:
| increasing our vulnerability to general economic and industry conditions; |
| requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities; |
| exposing us to the risk of increased interest rates because certain of our borrowings, including the floating rate notes and borrowings under the new senior secured credit facility, will be at variable rates of interest; |
| limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and |
| limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt. |
In addition, some of our debt instruments, including those governing our senior secured credit facility and our floating rate notes, contain cross-default provisions which could result in our debt, under a number of debt instruments even if we default on only one debt instrument, being declared immediately due and payable. In such event, it is unlikely that we would be able to satisfy our obligations under all of such accelerated indebtedness simultaneously.
We May Incur Additional Indebtedness
We may incur additional indebtedness under our new senior secured credit facility, which provides for up to $110.0 million of revolving credit borrowings and a $15.0 million pre-funded letter of credit facility. In addition, we and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured debt, subject to the restrictions contained in the credit agreement governing our new senior secured credit facility and the indenture relating to our floating rate notes. See Description of Certain Indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify.
Our Debt Instruments Contain Various Covenants That Limit Our Ability to Operate Our Business.
Our financing arrangements, including our new senior secured credit facility and the indenture governing our floating rate notes, contain various provisions that limit our ability to, among other things:
| transfer or sell assets, including the equity interests of our restricted subsidiaries, or use asset sale proceeds; |
| incur additional debt; |
| pay dividends or distributions on our capital stock or repurchase our capital stock; |
| make certain restricted payments or investments; |
| create liens to secure debt; |
| enter into transactions with affiliates; |
| merge or consolidate with another company; and |
| engage in unrelated business activities. |
In addition, our new senior secured credit facility requires us to meet specified financial ratios. These covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with these and other provisions of the indenture governing our floating rate notes and the new senior secured credit facility may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. The breach of any of these covenants, including those contained in our new senior secured credit facility and the indenture governing our floating rate notes, could result in a default under our indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.
We Are a Holding Company and Conduct All of Our Operations through Our Subsidiaries. Therefore, We Rely on Dividends, Interest, and Other Payments, Advances, and Transfers of Funds from Our Subsidiaries to Meet Our Debt Service and Other Obligations. As a Result, We May Not Be Able to Generate Sufficient Cash to Service All of Our Indebtedness and May Be Forced to Take Other Actions to Satisfy Our Obligations under Our Indebtedness, Which May Not Be Successful.
We are a holding company that derives all of our operating income from our subsidiaries. All of our assets are held by our direct and indirect subsidiaries, and we rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries in the form of dividends and other payments or distributions, to meet our debt service obligations. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiaries, the new senior secured credit facility, the terms of the indenture governing the floating rate notes, and the covenants of any future outstanding indebtedness we or our subsidiaries incur.
Our financial condition and operating performance and that of our subsidiaries is also subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium and liquidated damages, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The credit agreement governing our new senior secured credit facility and the indenture governing the floating rate notes will restrict our ability to dispose of assets and use the proceeds from such disposition. We may not be able to consummate those dispositions or be able to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due.
Our Continued Success Will Depend on Our Ability to Retain Our Key Employees and to Attract and Retain New Qualified Employees.
Our success depends in part on our ability to attract, hire, train, and retain qualified managerial, sales, and marketing personnel. We face significant competition for these types of employees in our industry. We may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully. In addition, key personnel may leave us and compete against us. Our success also depends to a significant extent on the continued service of our senior management team. We may be unsuccessful in replacing key managers who either quit or retire. The loss of any member of our senior management team or other experienced, senior employees could impair our ability to execute our business plan and growth strategy, cause us to lose customers and reduce our net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event, our financial condition, results of operations, and cash flows could be adversely affected.
The Nature of Our Business Exposes Us to Product Liability and Warranty Claims and Other Legal Proceedings.
We are involved in product liability and product warranty claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations and cash flows. We rely on manufacturers and other suppliers to provide us with many of the products we sell and distribute. Because we do not have direct control over the quality of such products manufactured or supplied by such third party suppliers, we are exposed to risks relating to the quality of such products. In addition, we are exposed to potential claims arising from the conduct of home builders and their sub-contractors, for which we may be contractually liable. Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, there can be no assurance that we will be able to maintain such insurance on acceptable terms or that such insurance will provide adequate protection against potential liabilities. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company. In addition, we are involved on an ongoing basis in other legal proceedings. We cannot assure you that any current or future claims will not adversely affect our financial condition, results of operations, and cash flows.
A Range of Factors May Make Our Quarterly Revenues and Earnings Variable.
We have historically experienced, and in the future will continue to experience, variability in revenues and earnings on a quarterly basis. The factors expected to contribute to this variability include, among others, (i) the volatility of prices of lumber and wood products, (ii) the cyclical nature of the homebuilding industry, (iii) general economic conditions in the various local markets in which we compete, (iv) the pricing policies of our competitors, (v) the production schedules of our customers, and (vi) the effects of the weather. These factors, among others, make it difficult to project our operating results on a consistent basis.
We May be Adversely Affected by Any Disruption in Our Information Technology Systems.
Our operations are dependent upon our information technology systems, which encompass all of our major business functions. Our centralized financial reporting system currently draws data from our two enterprise resource planning (ERP) systems. We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, and to coordinate our sales activities across all of our products and services. A substantial disruption in our information technology systems for any prolonged time period could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. As part of our continuing integration of our computer systems, we plan to integrate our two ERPs into a single system. This integration may divert managements attention from our core businesses. In addition, we may experience delays in such integration or problems with the functionality of the integrated system, which could increase the expected cost of the integration. There can be no assurance that such delays, problems, or costs will not have a material adverse effect on our financial condition, results of operations or cash flows.
We May be Adversely Affected by Any Natural or Man-Made Disruptions to Our Distribution and Manufacturing Facilities.
We currently maintain a broad network of distribution and manufacturing facilities throughout the southern and eastern U.S. Any serious disruption to our facilities resulting from fire, earthquake, weather-related events, an act of terrorism, or any other cause could damage a significant portion of our inventory and could materially impair our ability to distribute our products to customers. In addition, we could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility. If any of these events were to occur, our financial condition, results of operations and cash flows could be materially adversely affected.
We May be Unable to Successfully Implement Our Expansion Plans Included in Our Business Strategy.
Our business plan provides for continued growth through acquisitions, particularly in the western and southwestern U.S., and organic growth (see BusinessOur Strategy). Failure to identify and acquire suitable acquisition candidates on appropriate terms could have a material adverse effect on our growth strategy. Moreover, a significant change in our business or the economy, an unexpected decrease in our cash flow for any reason, or the requirements of our new senior secured credit facility could result in an inability to obtain the capital required to effect new acquisitions or expansions of existing facilities. Our failure to make successful acquisitions or to build or expand facilities, including manufacturing facilities, produce saleable product, or meet customer demand in a timely manner could result in damage to or loss of customer relationships. In addition, although we have been successful in the past in integrating 23 acquisitions, we may not be able to integrate the operations of future acquired businesses with our own in an efficient and cost-effective manner or without significant disruption to our existing operations. Acquisitions, moreover, involve significant risks and uncertainties, including difficulties integrating acquired personnel and other corporate cultures into our business, the potential loss of key employees, customers, or suppliers, difficulties in integrating different computer and accounting systems, and exposure to unforeseen liabilities of acquired companies, and the diversion of management attention and resources from existing operations. We may also be required to incur additional debt in order to consummate acquisitions in the future, which debt may be substantial and may limit our flexibility in using our cash flow from operations. Our failure to integrate future acquired businesses effectively or to manage other consequences of our acquisitions, including increased indebtedness, could prevent us from remaining competitive and, ultimately, could adversely affect our financial condition, results of operations and cash flows.
Federal, State and Other Regulations Could Impose Substantial Costs and/or Restrictions on Our Operations That Would Reduce Our Net Income or Could Require Restatement of Our Financial Statements.
We are subject to various federal, state, local, and other regulations, including, among other things, regulations promulgated by the Department of Transportation and applicable to our fleet of delivery trucks, work safety regulations promulgated by the Department of Labors Occupational Safety and Health Administration, employment regulations promulgated by the United States Equal Employment Opportunity Commission, accounting standards issued by the Federal Accounting Standards Board or similar entities, and state and local zoning restrictions and building codes. More burdensome regulatory requirements in these or other areas may increase our general and administrative costs and adversely affect our financial condition, results of operations, and cash flows.
In early 2005, we performed a review of our accounting policies and practices with respect to leases and vendor rebates. As a result of this internal review, we identified errors in accounting practices associated with accounting for leasehold improvements impacting depreciation and vendor rebates and inventory accounting impacting cost of sales. Accordingly, we restated our financial statements for the years ended December 31, 2003 and 2002. The restatement increased income from continuing operations by $0.7 million in 2003 and decreased income from continuing operations by $0.7 million in 2002. There can be no assurances that our financial statements will not be restated again in the future.
We are Subject to Potential Exposure to Environmental Liabilities and Are Subject to Environmental Regulation.
We are subject to various federal, state, and local environmental laws, ordinances, and regulations. Although we believe that our facilities are in material compliance with such laws, ordinances, and regulations, as owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances, without regard to whether we knew of or were responsible for such contamination. No assurance can be provided that remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of unknown environmental conditions or more stringent standards regarding existing residual contamination. More burdensome environmental regulatory requirements may increase our general and administrative costs and adversely affect our financial condition, results of operations, and cash flows.
We May be Adversely Affected by Uncertainty in the Economy and Financial Markets, Including as a Result of Terrorism and the War in the Middle East.
Instability in the economy and financial markets, including as a result of terrorism and the war in the Middle East, may result in a decrease in housing starts, which would adversely affect our business. In addition, the war, related setbacks, or adverse developments, including a retaliatory military strike or terrorist attack, may cause unpredictable or unfavorable economic conditions and could have a material adverse effect on our operating results and financial condition and on our ability to raise capital. Terrorist attacks similar to the ones committed on September 11, 2001, may directly affect our ability to keep our operations and services functioning properly and could have a material adverse effect on our financial condition, results of operations, and cash flows.
Being a Public Company Will Increase Our Administrative Costs.
As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. Under the SEC rules and regulations, as well as those of Nasdaq, our financial compliance costs will increase. Such rules may also make it more difficult and more expensive to obtain director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.
Investor Confidence and the Price of Our Common Stock May Be Adversely Affected if We Are Unable to Comply with Section 404 of the Sarbanes-Oxley Act of 2002.
Upon completion of this offering, we will become an SEC reporting company. As a reporting company, we will be subject to rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our managements report on, and assessment of, the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on managements assessment of the effectiveness of our internal controls over financial reporting and the effectiveness of such internal controls. These requirements will first apply to our annual report for the fiscal year ending December 31, 2006. If we fail to properly assess and/or achieve and maintain the adequacy of our internal controls, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our securities.
Risks Related to the Offering
There Has Been No Prior Public Market for Our Common Stock, and an Active Trading Market May Not Develop.
Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using our shares as consideration.
Our Stock Price May Be Volatile, and You May Lose All or Part of Your Investment.
The initial public offering price for the shares of our common stock sold in this offering has been determined by negotiation among the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering and the price of our common stock may decline. In addition, the market price of our common stock could be highly volatile and may fluctuate substantially due to many factors, including:
| actual or anticipated fluctuations in our results of operations; |
| variance in our financial performance from the expectations of market analysts; |
| announcements by us or our competitors of significant business developments, changes in customer relationships, acquisitions or expansion plans; |
| changes in the prices of products we sell; |
| our involvement in litigation; |
| our sale of common stock or other securities in the future; |
| market conditions in our industry; |
| changes in key personnel; |
| changes in market valuation or earnings of our competitors; |
| the trading volume of our common stock; |
| changes in the estimation of the future size and growth rate of our markets; and |
| general economic and market conditions. |
In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur substantial costs and our managements attention and resources could be diverted, which could adversely impact our financial condition, results of operations and cash flows.
Investors in This Offering Will Suffer Immediate and Substantial Dilution.
The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Purchasers of our common stock in this offering will experience immediate and substantial dilution, and the exercise of stock options subsequent to this offering will cause investors to experience further dilution, which means that:
| you will pay a price per share that substantially exceeds the per share book value of our assets immediately following the offering after subtracting our liabilities; and |
| the purchasers in this offering will have contributed 99.8% of the total amount to fund us but will own only 23.0% of our outstanding shares. |
If We Fail to Meet the Requirements of The Nasdaq National Market, Our Stock Could Be Delisted, and the Market for Our Stock Could Be Less Liquid.
We have applied to list our common stock on The Nasdaq National Market. There are continuing eligibility requirements of companies listed on The Nasdaq National Market. If we are not able to continue to satisfy the eligibility requirements for The Nasdaq National Market, then our stock may be delisted. Delisting could result in a lower price of our common stock and may limit the ability of our stockholders to sell our stock.
If Securities or Industry Analysts Do Not Publish Research or Reports about Our Business, Our Stock Price and Trading Volume Could Decline.
The trading market for our common stock will likely be significantly influenced by the research and reports that securities or industry analysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. In addition, if one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
The Market Price of Our Common Stock Could Be Negatively Affected by Future Sales of Our Common Stock.
Sales by us or our stockholders of a substantial number of shares of our common stock in the public market following this offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. The shares held by certain of our current officers, and by our directors and principal stockholder following this offering will be subject to lock-up agreements and may
not be sold to the public during the 180-day period following the date of this prospectus without the consent of the underwriters. UBS Securities LLC, as the representative of the underwriters, may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to these lock-up agreements. For more information about these lock-up agreements, see Underwriting. Shares held by our officers, directors and principal stockholder will be considered restricted securities within the meaning of Rule 144 under the Securities Act and, after the lock-up period, will be eligible for resale subject to certain limitations of Rule 144.
The holders of an aggregate of 24,184,737 shares of our common stock, or their permitted transferees, are entitled to rights with respect to the registration of these shares under the Securities Act of 1933. See Description of Capital Stock Registration Rights. In addition to outstanding shares eligible for future sale, 4,451,659 shares of our common stock are issuable under currently outstanding stock options granted to several officers, directors and employees. Following this offering, but not sooner than 90 days thereafter, we intend to file a registration statement on Form S-8 under the Securities Act registering 7,633,509 shares under our stock incentive plan. Shares included in such registration statement will be available for sale in the public market immediately except for shares held by affiliates who will have certain restrictions on their ability to sell. Sales of substantial amounts of common stock in the public market, or the perception that these sales may occur, could materially adversely affect the prevailing market price of our common stock and our ability to raise capital through a public offering of our equity securities. See Shares Eligible for Future Sale.
The Controlling Position of Affiliates of JLL Partners Will Limit Your Ability to Influence Corporate Matters.
Affiliates of JLL Partners control JLL Building Products, LLC, one of the selling stockholders, which, prior to this offering, owns 94.6% of our outstanding common stock and, after this offering, is expected to own 61.6% of our outstanding common stock. Accordingly, following this offering, such affiliates of JLL Partners will have significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that some of our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.
Although we intend to satisfy all applicable Nasdaq corporate governance rules, if JLL Building Products, LLC continues to own more than 50% of our outstanding shares after the consummation of the offering, we intend to avail ourselves of the Nasdaq Rule 4350(c) controlled company exemption that applies to companies in which more than 50% of the stockholder voting power is held by an individual, a group, or another company. This rule will grant us an exemption from the requirements that we have a majority of independent directors on our board of directors and that our compensation and nominating committees be comprised entirely of independent directors. However, we intend to comply with such requirements in the event JLL Building Products, LLCs ownership falls below 50%.
Provisions in Our Charter Documents Could Discourage a Takeover That Stockholders May Consider Favorable.
Provisions in our certificate of incorporation and bylaws, as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
| Our stockholders may not remove a director without cause, and our certificate of incorporation provides for a classified board of directors with staggered, three-year terms. As a result, it could take up to three years for stockholders to replace the entire board. |
| Our board of directors has the exclusive right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors. |
| Our stockholders may not act by written consent. As a result, holders of our capital stock would be able to take actions only at a stockholders meeting. |
| No stockholder may call a special meeting of stockholders. This may make it more difficult for stockholders to take certain actions. |
| We do not have cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates. |
| Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders meeting. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company. |
| Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. |
Our Management Team May Invest or Spend the Proceeds of This Offering in Ways with Which You May Not Agree or in Ways That May Not Yield a Return.
Presently, anticipated uses of the proceeds of this offering include repaying some of our outstanding debt and for other general corporate purposes. Other than with respect to repaying our outstanding debt in the manner described in the Use of Proceeds, we cannot specify with certainty how we will use the net proceeds of this offering. Accordingly, our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value.
Forward-looking statements
This prospectus includes or incorporates forward-looking statements regarding, among other things, our financial condition and business strategy. We have based these forward-looking statements on our current expectations and projections about future events. All statements other than statements of historical facts included in this prospectus, including, without limitation, statements under the headings Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Business, and located elsewhere in this prospectus regarding the prospects of our industry and our prospects, plans, financial position, and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, estimate, anticipate, plan, foresee, believe, or continue, or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in this prospectus, including in conjunction with the forward-looking statements included in this prospectus and under Risk Factors. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this document. These forward-looking statements speak only as of the date of this prospectus. We will not update these statements except as may be required by applicable securities laws. Factors, risks, and uncertainties that could cause actual outcomes and results to be materially different from those projected include, among others:
| Dependence on the homebuilding industry, the economy, and other important factors; |
| Cyclical and seasonal nature of the building products supply industry; |
| Product shortages, loss of key suppliers, and our dependence on third-party suppliers and manufacturers; |
| Loss of significant customers; |
| Competition in the highly fragmented building products supply industry; |
| Pricing pressure from our customers; |
| Our level of indebtedness; |
| Our incurrence of additional indebtedness; |
| Our inability to take certain actions because of restrictions in our debt agreements; |
| Our reliance on our subsidiaries; |
| Dependence on key personnel; |
| Exposure to product liability and warranty claims; |
| Variability of our quarterly revenues and earnings; |
| Disruptions in our information technology systems; |
| Disruptions at our facilities; |
| Our ability to execute our strategic plans; |
| Effects of regulatory conditions on our operations; |
| Exposure to environmental liabilities and regulation; |
| Economic and financial uncertainty resulting from terrorism and war; |
| Costs incurred as a result of becoming a public company; and |
| Our ability to meet the requirements of the Sarbanes-Oxley Act of 2002. |
Use of proceeds
We estimate that we will receive net proceeds from this offering of approximately $110.0 million, based on an assumed initial public offering price of $16.00 per share, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
We intend to use the proceeds of this offering:
| to repay up to $110.0 million of indebtedness under our new $350.0 million senior secured credit facility; |
| to pay the fees and expenses of this offering; and |
| for working capital and general corporate purposes. |
With respect to the $110.0 million indebtedness to be repaid under our new senior secured credit facility with the net proceeds of this offering, we intend to repay outstanding borrowings, if any, under the revolving credit facility and the remainder will be used to repay a portion of the $225.0 million term loan. We incurred such indebtedness in February 2005, when we entered into the new senior secured credit facility. The proceeds of the new senior secured credit facility, together with the proceeds of our $275.0 million floating rate notes, were used to refinance our then-existing indebtedness; pay a $201.2 million dividend to our stockholders; make a $36.4 million cash payment to holders of our stock options (including applicable payroll taxes of $0.6 million); pay the fees and expenses associated with the new senior secured credit facility and the floating rate notes, and for working capital and general corporate purposes.
As of May 31, 2005, the term loan, which matures on August 11, 2011, bore interest at LIBOR plus 2.50% per annum and the revolving credit facility, which matures on February 11, 2010, bore interest at either LIBOR plus 2.50% per annum or a base rate plus 1.50% per annum. As of May 31, 2005, there were no outstanding borrowings under the revolving credit facility.
Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.
Dividend policy
We have not paid regular dividends in the past; and any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our debt instruments, our future earnings, capital requirements, financial condition, future prospects, and other factors that our board of directors may deem relevant. The terms of our new senior secured credit facility and the indenture governing our floating rate notes restrict our ability to pay dividends.
Although we have not paid regular dividends in the past, a dividend was paid to stockholders in the first quarter of 2005 in an aggregate amount of $201.2 million (or $8.00 per share) in connection with the closing of our new senior secured credit facility and floating rate notes, and an aggregate of $139.6 million (or $5.56 per share) of dividends was paid in 2004.
Capitalization
The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2005, on an actual basis and as adjusted to give effect to this offering and the application of the net proceeds from this offering as if it had occurred on March 31, 2005. You should read this table in conjunction with Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations, Unaudited Pro Forma Financial Data and our consolidated financial statements and the notes thereto, each included elsewhere in this prospectus.
March 31, 2005 | ||||||||||
|
||||||||||
Actual | Adjusted | |||||||||
|
||||||||||
(in millions) | ||||||||||
Cash and cash equivalents
|
$ | 12.1 | $ | 12.1 | ||||||
|
|
|||||||||
Debt
|
||||||||||
Term loan
|
$ | 225.0 | $ | 125.0 | ||||||
Floating rate notes
|
275.0 | 275.0 | ||||||||
Revolving credit facility(1)
|
10.0 | | ||||||||
Other debt
|
0.2 | 0.2 | ||||||||
|
|
|||||||||
Total debt
|
510.2 | 400.2 | ||||||||
|
|
|||||||||
Shareholders equity (deficit):
|
||||||||||
Common stock ($0.01 par value, 300 million
shares authorized, 25.1 million and 32.6 million
issued and outstanding at Actual and Adjusted March 31,
2005, respectively
|
0.2 | 0.3 | ||||||||
Additional paid-in capital
|
| 109.9 | ||||||||
Retained earnings (accumulated deficit)
|
(9.4 | ) | (11.0 | ) | ||||||
|
|
|||||||||
Total shareholders equity (deficit)
|
(9.2 | ) | 99.2 | |||||||
|
|
|||||||||
Total capitalization
|
$ | 501.0 | $ | 499.4 | ||||||
|
|
(1) | $110.0 million of unfunded revolving facility commitment; $15.0 million pre-funded letter of credit facility will not be reflected on the balance sheet until drawn upon. |
Dilution
If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after giving effect to this offering. After giving effect to our sale of 7,500,000 shares of our common stock in this offering at an assumed initial public offering price of $16.00 per share, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2005 would have been approximately $(63.8) million, or approximately $(1.96) per share. The difference represents an immediate increase in pro forma net tangible book value of $4.89 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $17.96 per share to new investors.
The following table illustrates the per share dilution to the new investors:
Per Share | ||||||||
|
||||||||
Assumed initial public offering price per share
|
$ | 16.00 | ||||||
Net tangible book value per share as of
March 31, 2005
|
(6.85 | ) | ||||||
Increase in net tangible book value per share
attributable to this offering
|
4.89 | |||||||
|
||||||||
Pro forma net tangible book value per share after
this offering
|
(1.96 | ) | ||||||
|
||||||||
Dilution per share to new investors in this
offering
|
$ | 17.96 | ||||||
|
The following table summarizes, on a pro forma basis as of May 15, 2005, the differences between our existing stockholders and investors in this offering with respect to the total number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders, reduced to the stated value of the common stock due to the effect of special dividends paid in February 2004 and February 2005, and the price per share paid by investors in this offering before deducting estimated underwriting discounts and commissions and our estimated offering expenses:
Shares Purchased | Total Consideration | |||||||||||||||||||
|
|
Average Price | ||||||||||||||||||
Number | Percent | Amount | Percent | Per Share | ||||||||||||||||
|
||||||||||||||||||||
Existing Stockholders
|
25,148,213 | 77.0 | % | $ | 251,482 | 0.2 | % | $ | 0.01 | |||||||||||
New Investors(1)
|
7,500,000 | 23.0 | % | 120,000,000 | 99.8 | % | 16.00 | |||||||||||||
|
|
|
|
|||||||||||||||||
Total
|
32,648,213 | 100.0 | % | 120,251,482 | 100.0 | % | $ | 3.68 | ||||||||||||
|
|
|
|
|
(1) Excludes shares offered by the selling stockholders.
The discussion and tables above exclude 4,451,659 shares of our common stock issuable upon exercise of outstanding options with exercise prices ranging from $1.13 per share to $3.15 per share, and 2.2 million shares of our common stock available for future grant or issuance under our new stock incentive plan. Because the exercise prices of the outstanding options are significantly below the assumed initial offering price, investors purchasing common stock in this offering will suffer additional dilution when and if these options are exercised.
Stock Options. Based on an estimated initial public offering price of $16.00, the intrinsic value of options outstanding at March 31, 2005 was $57.6 million, of which $33.2 million related to vested options and $24.4 million related to unvested options.
Unaudited pro forma financial data
The following unaudited pro forma condensed consolidated balance sheet as of March 31, 2005 is based on the unaudited historical condensed consolidated balance sheet as of March 31, 2005 of Builders FirstSource, Inc. and gives effect to this offering and the use of proceeds therefrom as if it occurred on March 31, 2005.
The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2004 has been derived from our audited consolidated financial statements for the year ended December 31, 2004. The pro forma consolidated statement of operations for the year ended December 31, 2004 gives effect to the following events (the Transactions) as if each occurred on January 1, 2004.
Debt financing (closed February 11, 2005):
| We entered into a new $350.0 million senior secured credit facility with a syndicate of banks, which includes a $225.0 million term loan, a $110.0 million long-term revolver, and a $15.0 million prefunded letter of credit. |
| We issued $275.0 million of floating rate notes. |
| We paid the fees and expenses, aggregating $21.1 million, relating to the floating rate notes and the new senior secured credit facility. |
| We entered into an interest rate swap agreement designed to fix $100.0 million of our outstanding senior secured floating rate term loan at an effective rate of 6.62%. The interest rate swap agreement is for a three-year term effective July 1, 2005 where we will pay a fixed rate of 4.12% and receive a variable rate at 90 day LIBOR. |
Offering:
| We issued 7,500,000 shares of common stock in this offering. |
| We repaid $110.0 million of indebtedness with the net proceeds of this offering. |
| We paid the fees and expenses related to this offering. |
The unaudited pro forma condensed consolidated statement of operations for the three-month period ended March 31, 2005 has been derived from our unaudited condensed consolidated financial statements for the three-month period ended March 31, 2005. The pro forma condensed consolidated statement of operations gives effect to each of the events listed above as if each occurred on January 1, 2004. The pro forma condensed consolidated statement of operations for the three months ended March 31, 2005 also excludes stock compensation expense related to the nonrecurring $36.4 million payment made to stock option holders (including applicable payroll taxes of $0.6 million) and approximately $11.4 million of nonrecurring charges associated with the write-off of debt issue costs and a prepayment penalty, each of which are related to the recapitalization. These nonrecurring charges were similarly not reflected in the pro forma consolidated statement of operations for the year ended December 31, 2004.
The unaudited pro forma financial statements should be read in conjunction with the accompanying notes, our historical financial statements and related notes, Managements Discussion and Analysis of Financial Condition and Results of Operations, and other financial information contained in this prospectus. The pro forma information presented herein does not purport to be indicative of the financial position or results of operations that would have actually occurred had the Transactions taken place on the dates indicated or which may occur in the future. Certain pro forma adjustments are based on preliminary estimates and assumptions and are subject to revision upon completion of the Transactions.
We believe the estimates and assumptions used to prepare the unaudited pro forma consolidated financial data provide a reasonable basis for presenting the significant effects of the Transactions and that the pro forma adjustments give appropriate effect to the estimates and assumptions and are properly applied in the unaudited pro forma consolidated financial data.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2005 | ||||||||||||||
|
||||||||||||||
Pro forma | ||||||||||||||
Offering | ||||||||||||||
Historical | adjustments | Pro forma | ||||||||||||
|
||||||||||||||
(in thousands) | ||||||||||||||
Assets
|
||||||||||||||
Cash and cash equivalents
|
$ | 12,121 | $ | 120,000 | (a) | $ | 12,121 | |||||||
(10,000 | )(b) | |||||||||||||
(110,000 | )(c) | |||||||||||||
Accounts receivable, net
|
250,212 | | 250,212 | |||||||||||
Inventories
|
151,924 | | 151,924 | |||||||||||
Other current assets
|
21,098 | | 21,098 | |||||||||||
|
|
|
||||||||||||
Total current assets
|
435,355 | | 435,355 | |||||||||||
Property, plant and equipment, net
|
88,553 | | 88,553 | |||||||||||
Goodwill
|
163,030 | | 163,030 | |||||||||||
Other assets, net
|
22,522 | (2,550 | )(d) | 19,972 | ||||||||||
|
|
|
||||||||||||
Total assets
|
$ | 709,460 | $ | (2,550 | ) | $ | 706,910 | |||||||
|
|
|
||||||||||||
Liabilities and shareholders equity
|
||||||||||||||
Current liabilities:
|
||||||||||||||
Accounts payable
|
$ | 128,961 | $ | | $ | 128,961 | ||||||||
Accrued liabilities
|
59,139 | (969 | )(e) | 58,170 | ||||||||||
Current maturities of long-term debt
|
2,250 | (2,250 | )(c) | | ||||||||||
|
|
|
||||||||||||
Total current liabilities
|
190,350 | (3,219 | ) | 187,131 | ||||||||||
Long-term debt, less current maturities
|
507,955 | (107,750 | )(c) | 400,205 | ||||||||||
Other long-term liabilities
|
20,311 | | 20,311 | |||||||||||
|
|
|
||||||||||||
718,616 | (110,969 | ) | 607,647 | |||||||||||
Commitments and contingencies
|
||||||||||||||
Shareholders equity (deficit):
|
||||||||||||||
Common stock, $0.01 par value, 300,000 shares
authorized; 25,148 and 32,648 issued and outstanding at Actual
and Adjusted March 31, 2005
|
251 | 75 | (a) | 326 | ||||||||||
Additional paid-in capital
|
| 119,925 | (a) | 109,925 | ||||||||||
(10,000 | )(b) | |||||||||||||
Retained earnings (accumulated deficit)
|
(9,407 | ) | (2,550 | )(d) | (10,988 | ) | ||||||||
969 | (e) | |||||||||||||
|
|
|
||||||||||||
Total shareholders equity (deficit)
|
(9,156 | ) | 108,419 | 99,263 | ||||||||||
|
|
|
||||||||||||
Total liabilities and shareholders equity
(deficit)
|
$ | 709,460 | $ | (2,550 | ) | $ | 706,910 | |||||||
|
|
|
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) | Represents estimated proceeds to the Company from the issuance of 7,500,000 shares of common stock in this offering. We will not receive any proceeds from the sale of 3,750,000 shares of common stock sold by the selling stockholders. |
(b) | Represents estimated underwriting discounts, commissions and other expenses associated with this offering. |
(c) | Represents the repayment of indebtedness under our senior secured credit facility. |
(d) | Represents a write-off of unamortized deferred financing costs associated with the repayment of indebtedness under our senior secured credit facility. |
(e) | Represents the income tax effect of adjustment (d) at an incremental tax rate of 38.0%. |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2005 | |||||||||||||||||||||
|
|||||||||||||||||||||
Pro forma | |||||||||||||||||||||
Pro forma | before | Pro forma | |||||||||||||||||||
debt | Offering | Offering | |||||||||||||||||||
Historical | adjustments | adjustments | adjustments | Pro forma | |||||||||||||||||
|
|||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||
Sales
|
$ | 509,342 | $ | | $ | 509,342 | $ | | $ | 509,342 | |||||||||||
Cost of sales
|
388,407 | | 388,407 | | 388,407 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
Gross margin
|
120,935 | | 120,935 | | 120,935 | ||||||||||||||||
Selling, general and administrative expenses
|
96,902 | | 96,902 | | 96,902 | ||||||||||||||||
Stock compensation expense
|
36,364 | (36,364 | )(a) | | | | |||||||||||||||
|
|
|
|
|
|||||||||||||||||
Income (loss) from operations
|
(12,331 | ) | 36,364 | 24,033 | | 24,033 | |||||||||||||||
Interest expense
|
19,204 | (10,058 | )(b) | 9,146 | (1,449 | )(d) | 7,597 | ||||||||||||||
(100 | )(e) | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||
Income (loss) from continuing operations before
income taxes
|
(31,535 | ) | 46,422 | 14,887 | 1,549 | 16,436 | |||||||||||||||
Income tax expense (benefit)
|
(12,675 | ) | 17,640 | (c) | 4,965 | 588 | (c) | 5,553 | |||||||||||||
|
|
|
|
|
|||||||||||||||||
Income (loss) from continuing operations
|
$ | (18,860 | ) | $ | 28,782 | $ | 9,922 | $ | 961 | $ | 10,883 | ||||||||||
|
|
|
|
|
|||||||||||||||||
Income (loss) from continuing operations per
share basic
|
$ | (0.75 | ) | $ | 0.33 | ||||||||||||||||
|
|
||||||||||||||||||||
Income (loss) from continuing operations per
share diluted
|
$ | (0.75 | ) | 0.31 | |||||||||||||||||
|
|
||||||||||||||||||||
Weighted average shares outstanding
basic
|
25,148 | 32,648 | (f) | ||||||||||||||||||
|
|
||||||||||||||||||||
Weighted average shares outstanding
diluted
|
25,148 | 34,916 | (f) | ||||||||||||||||||
|
|
For the Year Ended December 31, 2004 | |||||||||||||||||||||
|
|||||||||||||||||||||
Pro forma | |||||||||||||||||||||
Pro forma | before | Pro forma | |||||||||||||||||||
debt | Offering | Offering | |||||||||||||||||||
Historical | adjustments | adjustments | adjustments | Pro forma | |||||||||||||||||
|
|||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||
Sales
|
$ | 2,058,047 | $ | | $ | 2,058,047 | $ | | $ | 2,058,047 | |||||||||||
Cost of sales
|
1,574,535 | | 1,574,535 | | 1,574,535 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
Gross margin
|
483,512 | | 483,512 | | 483,512 | ||||||||||||||||
Selling, general and administrative expenses
|
376,096 | | 376,096 | | 376,096 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
Income from operations
|
107,416 | | 107,416 | | 107,416 | ||||||||||||||||
Interest expense
|
24,458 | 13,558 | (b) | 38,016 | (5,797 | )(d) | 31,819 | ||||||||||||||
(400 | )(e) | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||
Income from continuing operations before income
taxes
|
82,958 | (13,558 | ) | 69,400 | 6,197 | 75,597 | |||||||||||||||
Income tax expense
|
31,480 | (5,139 | )(c) | 26,341 | 2,349 | (c) | 28,690 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
Income from continuing operations
|
$ | 51,478 | $ | (8,419 | ) | $ | 43,059 | $ | 3,848 | $ | 46,907 | ||||||||||
|
|
|
|
|
|||||||||||||||||
Income from continuing operations per
share basic
|
$ | 2.05 | $ | $1.44 | |||||||||||||||||
|
|
||||||||||||||||||||
Income from continuing operations per
share diluted
|
$ | 1.93 | 1.35 | ||||||||||||||||||
|
|
||||||||||||||||||||
Weighted average shares outstanding
basic
|
25,135 | 32,635 | |||||||||||||||||||
|
|
||||||||||||||||||||
Weighted average shares outstanding
diluted
|
26,714 | 34,807 | (f) | ||||||||||||||||||
|
|
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) | Represents a $36.4 million payment made to stock option holders (including applicable payroll taxes of $0.6 million related thereto) recognized as compensation expense in the first quarter 2005 and directly relates to the recapitalization. |
(b) | Represents the adjustment to historical interest expense on debt to be issued or incurred in connection with the debt financing (closed February 11, 2005), as presented in the following table. |
Three Months Ended | Year Ended | |||||||
March 31, | December 31, | |||||||
2005 | 2004 | |||||||
|
||||||||
(In thousands) | ||||||||
Historical interest expense
|
$ | 19,204 | $ | 24,458 | ||||
Incremental interest expense resulting from the
floating rate notes
|
2,198 | 19,305 | ||||||
Incremental interest expense resulting from
borrowings under the new senior secured credit facility
|
1,563 | 14,170 | ||||||
Interest expense resulting from borrowings under
the prior credit facilities
|
(2,559 | ) | (19,148 | ) | ||||
Financing costs incurred for the debt financing
closed on February 11, 2005
|
(2,425 | ) | | |||||
Termination penalty resulting from prepayment of
term loan under prior credit facilities
|
(1,700 | ) | | |||||
|
|
|||||||
Total cash interest expense
|
16,281 | 38,785 | ||||||
|
|
|||||||
Incremental amortization of deferred financing
costs associated with the floating rate notes
|
209 | 1,666 | ||||||
Incremental amortization of deferred financing
costs associated with the new senior secured credit facility
|
193 | 1,551 | ||||||
Amortization of deferred financing costs
associated with the prior credit facilities
|
(238 | ) | (1,804 | ) | ||||
Write-off of unamortized deferred financing costs
related to the prior credit facilities
|
(7,299 | ) | (2,182 | ) | ||||
|
|
|||||||
Total pro forma interest expense
|
$ | 9,146 | $ | 38,016 | ||||
|
|
The pro forma balance sheet reflects outstanding borrowings on the new senior secured credit facility of $225.0 million term loan and the floating rate notes of $275.0 million. The assumed interest rates are as follows: 5.27% (LIBOR plus 2.5%) for $125.0 million of the term loan; 6.62% (fixed swap rate of 4.12% plus 2.5%) for $100.0 million of the term loan; and 7.02% (LIBOR plus 4.25%) for the floating rate notes. The senior secured credit facility also includes a letter of credit fee of 2.75% on outstanding borrowings and a 0.50% commitment fee on the revolving line of credit. For each 0.125% change in the assumed variable interest rates of the new senior secured credit facility and floating rate notes, interest expense would change by approximately $0.1 million for the three month period ended March 31, 2005 and $0.5 million for the year ended December 31, 2004. | |
The average outstanding balance of the prior credit facilities during the year ended December 31, 2004 was approximately $272.0 million at an average interest rate of 6.24%. The prior credit facilities also included a letter of credit fee of 2.75% on outstanding borrowings and a 0.50% commitment fee on the revolving line of credit. The year ended December 31, 2004 also included interest from the 2003 credit facility which was refinanced in February 2004. |
(c) | Represents the income tax effect of the pro forma adjustments assuming an approximate incremental tax rate of 38.0%. |
(d) | Represents a reduction in interest expense related to the repayment of indebtedness under our senior secured credit facility at an interest rate of 5.27%. |
(e) | Represents a reduction in the amortization of deferred financing costs associated with the repayment of indebtedness under our senior secured credit facility. A related nonrecurring write-off of deferred financing costs associated with the repayment was not reflected in the pro forma consolidated statement of operations for the three months ended March 31, 2005 and the year ended December 31, 2004. |
(f) | Pro forma basic and diluted weighted average shares outstanding were estimated as follows: |
Three | |||||||||
months | |||||||||
ended | Year ended | ||||||||
March 31, | December 31, | ||||||||
2005 | 2004 | ||||||||
|
|||||||||
Weighted average shares outstanding
basic
|
25,148 | 25,135 | |||||||
Common shares issued in this offering
|
7,500 | 7,500 | |||||||
|
|
||||||||
Pro forma basic weighted average shares
outstanding
|
32,648 | 32,635 | |||||||
Incremental shares for stock options
|
2,249 | 1,579 | |||||||
Incremental shares for stock options based on
assumed IPO price of $16.00
|
19 | 593 | |||||||
|
|
||||||||
Pro forma diluted weighted average shares
outstanding
|
34,916 | 34,807 | |||||||
|
|
Selected historical consolidated financial information
The following table sets forth our selected historical consolidated financial information for each of the periods or as of the date indicated. The selected statement of operations and balance sheet data as of December 31, 2004 and 2003, and for each of the three fiscal years ended December 31, 2004 has been derived from our consolidated financial statements, included elsewhere herein which have been audited by PricewaterhouseCoopers, LLP, our independent Registered Public Accounting Firm. The selected statement of operations and balance sheet data as of December 31, 2002, 2001, and 2000 and for the fiscal years ended December 31, 2001 and 2000 has been derived from our consolidated financial statements, as restated, not included herein. The selected historical financial information as of and for the three months ended March 31, 2005 and for the three months ended March 31, 2004 has been derived from the unaudited condensed consolidated financial statements of the Company included elsewhere herein and reflects all adjustments that, in the opinion of the management of the Company, are necessary for a fair presentation of such information.
All information included in the following tables should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, the consolidated financial statements and related notes and other financial information, included elsewhere in this prospectus.
Three months ended | ||||||||||||||||||||||||||||||
or at March 31, | Year ended December 31, | |||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
2005 | 2004 | 2004 | 2003(1) | 2002(1) | 2001 | 2000 | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||||||||
Restated | Restated | Restated | Restated | |||||||||||||||||||||||||||
Statement of operations data:
|
||||||||||||||||||||||||||||||
Sales
|
$ | 509,342 | $ | 429,354 | $ | 2,058,047 | $ | 1,675,093 | $ | 1,500,006 | $ | 1,513,545 | $ | 1,513,086 | ||||||||||||||||
Cost of sales
|
388,407 | 333,577 | 1,574,535 | 1,300,410 | 1,155,375 | 1,149,957 | 1,141,808 | |||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Gross margin
|
120,935 | 95,777 | 483,512 | 374,683 | 344,631 | 363,588 | 371,278 | |||||||||||||||||||||||
Selling, general and administrative expenses
|
96,902 | 82,513 | 376,096 | 327,027 | 308,060 | 324,430 | 309,346 | |||||||||||||||||||||||
Stock compensation expense(2)
|
36,364 | 437 | | | | | | |||||||||||||||||||||||
Facility closure costs
|
| | | 1,171 | 750 | 8,288 | | |||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Income (loss) from operations
|
(12,331 | ) | 12,827 | 107,416 | 46,485 | 35,821 | 30,870 | 61,932 | ||||||||||||||||||||||
Other expense, net
|
| | | 620 | 2,220 | 4,067 | 3,567 | |||||||||||||||||||||||
Interest expense
|
19,204 | 6,506 | 24,458 | 11,124 | 12,055 | 20,581 | 30,891 | |||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Income (loss) from continuing operations before
income taxes
|
(31,535 | ) | 6,321 | 82,958 | 34,741 | 21,546 | 6,222 | 27,474 | ||||||||||||||||||||||
Income tax expense (benefit)
|
(12,675 | ) | 2,433 | 31,480 | 13,343 | 8,611 | 2,560 | 11,482 | ||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Income (loss) from continuing operations
|
(18,860 | ) | 3,888 | 51,478 | 21,398 | 12,935 | 3,662 | 15,992 | ||||||||||||||||||||||
Income (loss) from discontinued operations
|
| 246 | 103 | (3,822 | ) | (2,980 | ) | (2,120 | ) | 292 | ||||||||||||||||||||
Cumulative effect of change in accounting
principle, net of tax
|
| | | | (19,504 | ) | | | ||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Net income (loss)
|
$ | (18,860 | ) | $ | 4,134 | $ | 51,581 | $ | 17,576 | $ | (9,549 | ) | $ | 1,542 | $ | 16,284 | ||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Income (loss) from continuing operations
per sharebasic(3) |
$ | (0.75 | ) | $ | 0.15 | $ | 2.05 | $ | 0.85 | $ | 0.51 | $ | 0.14 | $ | 0.72 | |||||||||||||||
Income (loss) from continuing operations
per sharediluted(3) |
$ | (0.75 | ) | $ | 0.15 | $ | 1.93 | $ | 0.85 | $ | 0.51 | $ | 0.14 | $ | 0.71 | |||||||||||||||
Weighted average shares outstandingbasic(3) | 25,148 | 25,138 | 25,135 | 25,204 | 25,363 | 25,532 | 22,268 | |||||||||||||||||||||||
Weighted average shares outstandingdiluted(3) | 25,148 | 25,633 | 26,714 | 25,252 | 25,411 | 25,682 | 22,432 | |||||||||||||||||||||||
Balance sheet data (end of period): | ||||||||||||||||||||||||||||||
Cash and cash equivalents
|
$ | 12,121 | $ | 50,628 | $ | 5,585 | $ | 2,248 | $ | 3,309 | $ | 2,346 | ||||||||||||||||||
Total assets
|
709,460 | 697,011 | 622,128 | 530,965 | 564,204 | 634,939 | ||||||||||||||||||||||||
Total debt, including current portion
|
510,205 | 313,480 | 168,533 | 129,706 | 154,010 | 223,829 | ||||||||||||||||||||||||
Shareholders equity (deficit)
|
(9,156 | ) | 210,890 | 298,933 | 282,789 | 293,035 | 293,916 | |||||||||||||||||||||||
Other financial data:
|
||||||||||||||||||||||||||||||
Depreciation and amortization (excluding
discontinued operations)
|
$ | 4,712 | $ | 4,823 | $ | 19,350 | $ | 20,187 | $ | 20,745 | $ | 25,232 | $ | 21,652 | ||||||||||||||||
Capital expenditures (excluding acquisitions)
|
5,487 | 4,119 | 20,718 | 15,592 | 15,061 | 22,491 | 23,123 |
(1) | See Note 3 to our audited consolidated financial statements, included elsewhere herein, regarding the restatement of our previously issued financial statements. |
(2) | Represents cash payments made to stock option holders (including applicable payroll taxes) in lieu of adjusting exercise prices in conjunction with our recapitalization transactions. For the year ended December 31, 2004, stock compensation expense is classified as selling, general and administrative expenses. There was no stock compensation expense for the years ended December 31, 2003, 2002, 2001 and 2000. |
(3) | Reflects the impact of the 1-for-10 reverse stock split as discussed in Note 6 to the March 31, 2005 unaudited condensed consolidated financial statements, included elsewhere herein. |
Managements discussion and analysis of financial condition
The following discussion of our financial condition and results of operations should be read in conjunction with all of the consolidated historical financial statements and the notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements. Please see Risk Factors and Forward-Looking Statements for a discussion of certain of the uncertainties, risks and assumptions associated with these statements.
OVERVIEW
We are a leading supplier and a fast-growing manufacturer of structural and related building products for residential new construction in the U.S. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, as well as engineered wood that we design and cut for each home. We also manufacture custom millwork and trim that we market under the Synboard® brand name, as well as aluminum and vinyl windows, and we assemble interior and exterior doors into pre-hung units. In addition, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing, and gypsum wallboard. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products and services into five principal product categories: Prefabricated Components, Windows & Doors, Lumber & Lumber Sheet Goods, Millwork, and Other Building Products & Services. Prefabricated Components consist of factory-built floor and roof trusses, wall panels, stairs, as well as engineered wood that we design and cut for each home. The Windows & Doors category is comprised of the manufacturing, assembly and distribution of windows, and the assembly and distribution of interior and exterior door units. Lumber & Lumber Sheet Goods include dimensional lumber, plywood and oriented strand board (OSB) products used in on-site house framing. Millwork includes interior and exterior trim, columns, and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard® brand name. The Other Building Products & Services category is comprised of products including cabinets, gypsum, roofing, and insulation, and services including turn-key framing and shell construction, design assistance, and the professional installation of products, which spans all of our product categories.
Factors influencing future results of operations
Our future results of operations will be impacted by the following factors, some of which are beyond our control.
Homebuilding Industry. Our business is driven primarily by the residential new construction market. According to the National Association of Homebuilders, U.S. housing starts were 1.85 million in 2003 and 1.95 million in 2004 and are projected to be 1.94 million in 2005. While these levels are above the historical average of 1.62 million over the past ten years, several industry sources expect that strong housing demand will continue to be driven over the next decade by new household formations, increasing homeownership rates, the size and age of the population, an aging housing stock (approximately 36% of existing homes were built before 1960), improved financing options for buyers, and immigration trends. In recent years, the homebuilding industry has undergone significant consolidation, with the larger homebuilders substantially increasing their market share. In accordance with this trend, our customer base has increasingly shifted to Production Homebuilders, the fastest growing segment of residential homebuilders.
The growing use of Prefabricated Components in the homebuilding process represents a major trend within the residential new construction building products supply market. Builders value the many benefits of using these products, including reduced cycle time and carrying costs, increased product quality, and cost savings from the reduction of expensive on-site labor and material waste. In response to this trend, we have continued to increase our manufacturing capacity and our ability to provide customers with Prefabricated Components such as roof and floor trusses, wall panels, stairs and engineered wood, as well as windows, pre-hung doors and our branded Synboard® millwork products.
Economic Conditions. Our financial performance will be impacted by economic changes nationally and locally in the markets we serve. The building products supply industry is dependent on new home construction and subject to cyclical market pressures. Our operations are subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition, government regulation, trade policies, and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors and homeowners.
Cost of Materials. Prices of wood products, which are subject to cyclical market pressures, adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products which are then sold to customers as well as used as direct production inputs for our manufactured products. Short term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods may limit our ability to pass on such price changes. Our inability to pass on material price increases to our customers could adversely impact operating income.
Recapitalization. In connection with our new senior secured credit facility, our floating rate notes, and the use of proceeds therefrom, we incurred fees and expenses aggregating $21.1 million and paid a $1.7 million early termination penalty related to the prepayment of the Tranche B term loan under the prior credit facility. The early termination penalty was included in interest expense for the three months ended March 31, 2005. In the first quarter of 2005, we made a $36.4 million cash payment to option holders (including applicable payroll taxes of $0.6 million). Also, based on the final syndicate of banks, we expensed approximately $7.3 million of the $9.3 million unamortized deferred financing costs related to the prior credit facility and approximately $2.4 million of costs incurred in connection with the refinancing. These costs were recorded as interest expense. The remaining $2.0 million of unamortized deferred financing costs related to the prior credit facility and $18.7 million of costs incurred in connection with the refinancing will be included as a component of other assets, net and amortized over the terms of the new senior secured credit facility and floating rating notes.
Selling, General and Administrative Expense. On January 18, 2005, we announced that we are planning to prepare for an underwritten initial public offering of our common stock, which we expect to complete in the second quarter of 2005. Following consummation of our proposed initial public offering, we would incur certain incremental costs and expenses as a result of being a public company, including costs associated with our reporting requirements.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In early 2005 we performed a review of our accounting policies and practices with respect to leases and vendor rebates. As a result of this internal review, we identified errors in our accounting practices associated with accounting for leasehold improvements impacting depreciation and vendor rebates and inventory accounting impacting cost of sales.
In prior periods, we amortized leasehold improvements over terms greater than the shorter of the estimated useful life or lease term. We have determined that Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases (SFAS 13), as amended, requires us to amortize leasehold
improvements over the shorter of the estimated useful life of the assets or the lease term, as defined by SFAS 13, as amended.
The inventory and cost of sales adjustments resulted from the recognition of rebates, which are earned from vendors primarily based on the level of purchases, as a reduction to cost of sales in the period earned and not deferring any amount of vendor rebates to inventory still on hand as of the end of the period, the non-recognition of a vendor rebate earned during 2003 and difficulties associated with converting to a new computer system at one location.
We have restated our consolidated financial statements for the years ended December 31, 2003 and 2002. See Note 3 to the consolidated financial statements for a summary of the effects of these changes on our Consolidated Balance Sheet as of December 31, 2003, as well as on our Consolidated Statements of Operations, Cash Flows and Changes in Shareholders Equity for the years ended December 31, 2003 and 2002. This Managements Discussion and Analysis gives effect to these restatements. Additionally, the information presented within the selected historical consolidated financial information for 2001 and 2000 has been restated with respect to vendor rebates and leasehold improvements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that both are important to the accurate portrayal of a companys financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.
We have identified the following accounting policies that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.
Sales. We recognize sales when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed and determinable, and collectibility is reasonably assured. We generally recognize sales upon delivery to the customers delivery site. We use the completed contract method to recognize sales for certain construction and installation contracts. All sales recognized are net of allowances for cash discounts and estimated returns, which are estimated using historical experience.
Vendor Rebates. Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount payable to us when we achieve any of a number of measures, generally related to the volume of purchases from our vendors. We account for these rebates as a reduction of the prices of the vendors products, which reduces inventory until we sell the product, at which time these rebates reduce cost of sales. Throughout the year, we estimate the amount of rebates based upon our historical level of purchases. We continually revise these estimates to reflect actual purchase levels.
If market conditions were to change, vendors may change the terms of some or all of these programs. Although these changes would not affect the amounts which we have recorded related to product already purchased, it may impact our gross margins on products we sell or sales earned in future periods.
Allowance for Doubtful Accounts and Related Reserves. We maintain an allowance for doubtful accounts for estimated losses due to the failure of our customers to make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we generally require payment from most customers within 30 days. As our business is
seasonal in certain regions, our customers businesses are also seasonal. Sales are lowest in the winter months, and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. Throughout the year, we record estimated reserves based upon our historical write-offs of uncollectible accounts, taking into consideration certain factors, such as aging statistics and trends, customer payment history, independent credit reports, and discussions with customers.
Periodically, we perform a specific analysis of all accounts past due and write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. We charge these write-offs against our allowance for doubtful accounts.
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. Our judgment regarding the existence of impairment indicators is based on market and operational performance. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the assets residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate. 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.
Goodwill. Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2004, our net goodwill balance was approximately $163.0 million, representing approximately 23.4% of our total assets.
In fiscal 2002, we adopted the provisions of SFAS 142, Goodwill and Other Intangible Assets. Under these rules, we test goodwill for impairment in the fourth quarter of each fiscal year or at any other time when impairment indicators exist. Examples of such indicators that would cause us to test goodwill for impairment between annual tests include a significant change in the business climate, unexpected competition, significant deterioration in market share or a loss of key personnel. We determine fair value using a discounted cash flow approach to value our reporting units.
If circumstances change or events occur to indicate that our fair market value on a reporting unit basis has fallen below its net book value, we will compare the estimated implied value of the goodwill to its book value. If the book value of goodwill exceeds the estimated implied value of goodwill, we will recognize the difference as an impairment loss in operating income.
Inventories. Inventories consist principally of materials purchased for resale, including lumber, sheet goods, windows, doors and millwork, and raw materials for certain manufactured products and are stated at the lower of cost or market. Cost is determined using the weighted average method, the use of which approximates the first-in, first-out method. We accrue for shrink based on the actual historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These estimates are compared with actual results as physical inventory counts are taken and reconciled to the general ledger.
During the year, we monitor our inventory levels by location and record provisions for excess inventories based on slower moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage, excluding special order items purchased in the last three months. We then apply our judgment as to forecasted demand and other factors, including liquidation value, to
determine the required adjustments to net realizable value. Our inventories are generally not susceptible to technological obsolescence.
Deferred Income Taxes. We assess whether it is more likely than not that some or all of our deferred tax assets will not be realized. We consider the reversal of existing deferred tax liabilities, future taxable income, and tax planning strategies in our assessment. We have certain state income tax carryforwards where we believe it is unlikely that we will realize the benefits associated with these tax carryforwards and have established a valuation allowance against our deferred tax assets. Changes in our estimates of future taxable income and tax planning strategies will affect our estimate of the realization of the tax benefits of these tax carryforwards.
Insurance Deductible Reserve. We have large deductibles for general liability, auto liability and workers compensation insurance. The expected liability for unpaid claims falling within our deductible, including incurred but not reported losses, is determined using the assistance of a third-party actuary. This amount is reflected on our balance sheet as an accrued liability. Our accounting policy includes an internal evaluation and adjustment of our reserve for all insurance-related liabilities on a quarterly basis. At least on an annual basis, we engage an external actuarial professional to independently assess and estimate the total liability outstanding, which is compared to the actual reserve balance at that time and adjusted accordingly.
RECENT DEVELOPMENTS
On May 24, 2005, our board of directors and our stockholders approved a 1-for-10 reverse stock split of our common stock.
After the reverse stock split, effective May 24, 2005, each holder of record held one share of common stock for every 10 shares held immediately prior to the effective date. As a result of the reverse stock split, the board of directors also exercised its discretion under the anti-dilution provisions of our 1998 Stock Incentive Plan to adjust the number of shares underlying stock options and the related exercise prices to reflect the change in the share price and outstanding shares on the date of the reverse stock split. The effect of fractional shares is not material.
Following the effective date of the reverse stock split, the par value of the common stock remained at $0.01 per share. As a result, we have reduced the common stock in our consolidated balance sheets and statements of changes in shareholders equity (deficit) included herein on a retroactive basis for all periods presented, with a corresponding increase to additional paid-in capital. All share and per-share amounts and related disclosures have also been retroactively adjusted for all periods presented to reflect the 1-for-10 reverse stock split.
RESULTS OF OPERATIONS
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003, and 2002 and our financial condition as of March 31, 2005 and December 31, 2004 and 2003.
The following table sets forth, for the years ended December 31, 2004, 2003 and 2002 and the three months ended March 31, 2005 and 2004 the percentage relationship to sales of certain costs, expenses and income items:
Three months | |||||||||||||||||||||
ended March 31, | Years ended December 31, | ||||||||||||||||||||
|
|
||||||||||||||||||||
2005 | 2004 | 2004 | 2003 | 2002 | |||||||||||||||||
|
|||||||||||||||||||||
Restated | Restated | ||||||||||||||||||||
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
Cost and operating expenses
|
|||||||||||||||||||||
Cost of sales
|
76.3 | % | 77.7 | % | 76.5 | % | 77.6 | % | 77.0 | % | |||||||||||
|
|
|
|
|
|||||||||||||||||
Gross margin
|
23.7 | % | 22.3 | % | 23.5 | % | 22.4 | % | 23.0 | % | |||||||||||
Selling, general and administrative expenses
|
19.0 | % | 19.2 | % | 18.3 | % | 19.5 | % | 20.6 | % | |||||||||||
Stock compensation expense
|
7.1 | % | 0.1 | % | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||
Facility closure costs
|
0.0 | % | 0.0 | % | 0.0 | % | 0.1 | % | 0.0 | % | |||||||||||
|
|
|
|
|
|||||||||||||||||
Income (loss) from operations
|
(2.4 | )% | 3.0 | % | 5.2 | % | 2.8 | % | 2.4 | % | |||||||||||
Interest expense
|
3.8 | % | 1.5 | % | 1.2 | % | 0.7 | % | 0.8 | % | |||||||||||
Other expense, net
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.1 | % | |||||||||||
Income tax expense (benefit)
|
(2.5 | )% | 0.6 | % | 1.5 | % | 0.8 | % | 0.6 | % | |||||||||||
(Income) Loss from discontinued operations, net
of tax
|
0.0 | % | (0.1 | )% | 0.0 | % | 0.3 | % | 0.2 | % | |||||||||||
Cumulative effect of change in accounting
principle, net of tax
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 1.3 | % | |||||||||||
|
|
|
|
|
|||||||||||||||||
Net income (loss)
|
(3.7 | )% | 1.0 | % | 2.5 | % | 1.0 | % | (0.6 | )% | |||||||||||
|
|
|
|
|
Three Months Ended March 31, 2005 Compared with the Three Months Ended March 31, 2004 |
Overview. Our results for the three months ended March 31, 2005 were primarily driven by double digit sales growth for all product categories especially in Prefabricated Components and strong margins for Prefabricated Components and Lumber & Lumber Sheet Goods. Our operating results were negatively impacted by $36.4 million of stock compensation expense resulting from a special cash payment made to stock option holders (inclusive of applicable payroll taxes) in conjunction with the recapitalization. Interest expense for the three months ended March 31, 2005 also included nonrecurring expenses related to the recapitalization totaling $11.4 million.
Sales. Sales for the three months ended March 31, 2005 were $509.3 million, an $80.0 million, or 18.6%, increase over sales of $429.4 million for the three months ended March 31, 2004. Sales benefited from strong homebuilding activity in all our geographic markets. Sales of Prefabricated Components increased 37.8% reflecting the success of our strategy to diversify into more value-added product sales. In addition, our sales management initiatives, including incentive and training programs, have allowed us to grow sales in all product categories at a faster rate than reported growth in residential housing starts during the same period.
The following table shows sales classified by
major product category (in millions):
Three Months Ended March 31,
2005
2004
Sales
% of Sales
Sales
% of Sales
% Growth
$
103.1
20.2
%
$
74.9
17.4
%
37.8
%
97.4
19.1
%
84.8
19.8
%
14.9
%
188.4
37.0
%
167.8
39.1
%
12.3
%
44.2
8.7
%
38.0
8.8
%
16.3
%
76.2
15.0
%
63.9
14.9
%
19.3
%
$
509.3
100.0
%
$
429.4
100.0
%
18.6
%
Sales of Prefabricated Components increased $28.3 million, or 37.8%, from $74.9 million for the three months ended March 31, 2004 to $103.1 million for the three months ended March 31, 2005. This was largely attributable to the increase in truss and panel sales of $22.1 million resulting from increased usage of Prefabricated Components by Production Homebuilders.
Sales of Windows & Doors increased $12.6 million, or 14.9%, from $84.8 million for the three months ended March 31, 2004 to $97.4 million for the three months ended March 31, 2005. This was attributable to an $8.0 million increase in sales of pre-assembled door units and a $4.6 million increase in sales of assembled and distributed window products.
Sales of Lumber & Lumber Sheet Goods increased $20.6 million, or 12.3%, from $167.8 million for the three months ended March 31, 2004 to $188.4 million for the three months ended March 31, 2005. This increase was largely attributable to the effect of price increases of approximately $11.5 million and unit volume increases of $9.1 million. Market prices moderated during the three months ended March 31, 2005 and were more in line with the average market price for the year ended December 31, 2004.
Sales of Millwork products increased $6.2 million, or 16.3%, from $38.0 million for the three months ended March 31, 2004 to $44.2 million for the three months ended March 31, 2005. Sales of interior trim and moldings increased $4.2 million, the result of increased housing activity and our expanded distribution capacity and broadened offering of custom millwork.
Sales of Other Building Products & Services increased $12.3 million, or 19.3%, from $63.9 million for the three months ended March 31, 2004 to $76.2 million for the three months ended March 31, 2005. This increase was largely attributable to a $2.7 million increase in sales of gypsum products, a $2.4 million increase in sales of hardware products and a $1.9 million increase in sales of roofing products.
Gross Margin. Gross margin increased $25.2 million, or 26.3%, from $95.8 million for the three months ended March 31, 2004 to $120.9 million for the three months ended March 31, 2005. The gross margin percentage increased from 22.3% for the three months ended March 31, 2004 to 23.7% for the three months ended March 31, 2005. Contributing to this increase was a $9.4 million, or 47.0%, increase in gross margins on Prefabricated Components. The increase was attributable to the higher sales volume and an increase in gross margin percentage from 26.7% for the three months ended March 31, 2004 to 28.5% for the three months ended March 31, 2005. The improvement in gross margin percentage was primarily attributable to a reduction in raw materials costs. In addition, the overall gross margin increase was attributed to an $8.4 million, or 30.5%, increase in Lumber & Lumber Sheet Goods gross margins, and a corresponding increase in Lumber & Lumber Sheet Goods gross margin percentage from 16.4% for the three months ended March 31, 2004 to 19.1% for the three months ended March 31, 2005. The gross margin increase was a result of higher sales levels while purchasing programs implemented in 2004 continue to improve gross margin percentage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $14.4 million, or 17.4%, from $82.5 million for the three months ended March 31, 2004 to $96.9 million for the three months ended March 31, 2005. The increase was primarily related to an $8.7 million increase in salaries and benefits expense, largely as a result of a $3.4 million increase in commission expense and a 5.1% increase in headcount to support sales growth. In addition, handling and delivery expenses increased $2.4 million, primarily due to higher fuel costs, and occupancy costs increased $0.7 million.
Stock Compensation Expense. In conjunction with the February 11, 2005 recapitalization, we made a $36.4 million cash payment (including applicable payroll taxes of $0.6 million) to stock option holders in-lieu of adjusting the exercise price. During the three months ended March 31, 2004, we paid approximately $0.4 million to certain option holders whose exercise price could not be adjusted for the dividend.
Interest Expense. Interest expense increased by $12.7 million from $6.5 million for the three months ended March 31, 2004 to $19.2 million for the three months ended March 31, 2005. The increase was primarily attributable to a $7.3 million write-off of previously deferred loan costs, $2.4 million of costs incurred in connection with the recapitalization completed in February 2005, and a $1.7 million early termination penalty related to the prepayment of the Tranche B term loan under the 2004 Agreement. In the three months ended March 31, 2004, the Company expensed $2.2 million in deferred loan costs related to the early retirement of a prior debt facility.
In addition, higher average debt levels and higher average interest rates during the three months ended March 31, 2005 increased interest expense by approximately $2.2 million and $1.0 million, respectively. Our average debt balance increased from $226.6 million for the three months ended March 31, 2004 to $416.0 million for the same period in 2005. Our average interest rate increased from 5.73% to 6.69% year-over-year. Interest expense also included $0.7 million and $0.3 million of debt issue cost amortization for the three months ended March 31, 2005 and 2004, respectively.
Income Tax Expense (Benefit). The effective combined federal and state tax rate was 40.2% and 38.5% for the three months ended March 31, 2005 and 2004, respectively. The increase in the effective tax rate was primarily because of an increase in 2005 of expenses not deductible for state tax purposes.
Income from Discontinued Operations, Net of Tax. During the three months ended March 31, 2004, income from discontinued operations, net of tax, was $0.2 million resulting from a favorable settlement of a remaining lease obligation.
2004 compared with 2003
Overview. Our competitive strengths are driving sales growth and improved profitability. During 2004, our leading market positions and unique business model allowed us to grow market share by 3.1%. We define market share growth as price adjusted sales growth less permit growth within our markets. Adjusted for higher panel and lumber prices in 2004, our sales grew 12.6% over 2003 while we estimate that new building permits increased only 9.5% for the same period. This market share growth has leveraged our fixed operating expenses, reducing our selling, general and administrative expenses, expressed as a percentage of sales, from 19.5% in 2003 to 18.3% in 2004. Expanded offering of prefabricated components over the last several years has improved our sales mix and increased overall gross margins. Prefabricated components sales have increased from $257.3 million in 2002 to $385.9 in 2004, a $128.6 million increase, while its gross margin percentage has expanded from 24.9% in 2002 to 27.0% in 2004. Superior customer service levels allow us to generate attractive gross margins even on commodity type products. Our gross margin percentage for Lumber and Lumber Sheet Goods products increased to 19.2% in 2004 from 16.6% in 2003 due to the customer service being provided coupled with new purchasing programs implemented in 2004.
Sales. Sales for the year ended 2004 were $2,058.0 million, a $382.9 million, or 22.9%, increase over sales of $1,675.1 million for the year ended 2003. Sales benefited from unanticipated strong homebuilding activity in all our geographic markets and higher market prices for Lumber and Lumber Sheet Goods products. Our sales management initiatives, including incentive and training programs, have contributed to our ability to grow sales in all product categories at a faster rate than reported growth in residential housing starts during the same period. In addition, the growth rate of Prefabricated Components reflects the success of our strategy of diversifying into more value-added product sales.
The following table shows sales classified by
major product category (in millions):
Year Ended
2004
2003
Sales
% of Sales
Sales
% of Sales
% Growth
$
385.9
18.8
%
$
303.4
18.1
%
27.2
%
391.2
19.0
%
354.6
21.2
%
10.3
%
815.3
39.6
%
593.7
35.4
%
37.3
%
175.9
8.5
%
158.7
9.5
%
10.8
%
289.7
14.1
%
264.7
15.8
%
9.4
%
$
2,058.0
100.0
%
$
1,675.1
100.0
%
22.9
%
Sales of Prefabricated Components increased $82.5 million, or 27.2%, from $303.4 million for the year ended 2003 to $385.9 million for the year ended 2004. This was largely attributable to the increase in truss and panel sales of $61.9 million resulting from usage of Prefabricated Components by Production Homebuilders. We expect this trend to continue due to increasing demand and our continued investment toward growing this product category.
Sales of Windows & Doors increased $36.6 million, or 10.3%, from $354.6 million for the year ended 2003 to $391.2 million for the year ended 2004. This was attributable to a $13.1 million increase in sales of assembled and distributed window products and a $23.5 million increase in sales of pre-assembled door units.
Sales of Lumber & Lumber Sheet Goods products increased $221.6 million, or 37.3%, from $593.7 million for the year ended 2003 to $815.3 million for the year ended 2004. This increase was largely attributable to favorable price variances of approximately $210.9 million and unit volume increases of $10.7 million. Sales were favorably impacted by the pass-through to our customers of significantly higher prices for Lumber & Lumber Sheet Goods, a result of increases in demand coupled with limited capacity additions by manufacturers over the last several years. Market prices for these products are determined by several factors U.S. housing starts (demand), new capacity (supply), foreign imports and tariffs, and world consumption. On average, market prices during the year ended December 31, 2004 were approximately 28.2% higher than average prices of the previous five years. Future market prices are difficult to predict, and there is no assurance that current price levels are sustainable in the future.
Sales of Millwork products increased $17.2 million, or 10.8%, from $158.7 million for the year ended 2003 to $175.9 million for the year ended 2004. This was largely attributable to a $14.3 million increase in sales of interior trim and moldings, primarily as a result of our new sales management programs.
Sales of Other Building Products & Services increased $25.0 million, or 9.4%, from $264.7 million for the year ended 2003 to $289.7 million for the year ended 2004. This increase was largely attributable to a $6.7 million increase in installation services, a $6.7 million increase in sales of insulation products and a $7.6 million increase in sales of hardware products.
Gross Margin. Gross margin increased $108.8 million, or 29.0%, from $374.7 million for the year ended 2003 to $483.5 million for the year ended 2004. The gross margin percentage increased from 22.4% for the year ended 2003 to 23.5% for the year ended 2004. Contributing to this increase was a $26.2 million, or 33.6%, increase in gross margins on Prefabricated Components. The increase was attributable to the higher sales volume and an increase in gross margin percentage from 25.7% for the year ended 2003 to 27.0% for the year ended 2004. The improvement in gross margin percentage is primarily attributable to a 1.0% of sales improvement in labor efficiencies, a 1.8% of sales improvement in fixed cost absorption due to the higher sales volume as partially offset by a 1.6% of sales increase in raw materials costs. In addition, the overall gross margin increase was attributed to a $57.6 million, or 58.4%, increase in Lumber & Lumber Sheet Goods gross margins, and a corresponding increase in Lumber & Lumber Sheet Goods gross margin percentage from 16.6% for the year ended 2003 to 19.2% for the year ended 2004. The gross margin increase was a result of higher sales levels while purchasing programs implemented in 2004 were the predominant reason for the improvement in gross margin percentage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $49.1 million, or 15.0%, from $327.0 million for the year ended 2003 to $376.1 million for the year ended 2004. The increase was attributable to a $31.7 million increase in salaries and benefits expense, largely as a result of a $13.0 million increase in commission expense and a $10.3 million increase in bonus expense, related to increased sales and profitability, a $6.4 million increase in handling and delivery costs, exclusive of salaries and benefits, primarily in fuel costs, and a $4.3 million increase in occupancy costs. As a percentage of sales, selling, general and administrative expenses decreased from 19.5% for the year ended 2003 to 18.3% for the year ended 2004. This decrease was due to labor efficiencies and leveraging of fixed operating costs.
Interest Expense. Interest expense increased by $13.4 million, or 120.7%, from $11.1 million for the year ended 2003 to $24.5 million for the year ended 2004. Higher average debt levels and average interest rates during the year ended 2004 increased interest expense by approximately $8.0 million and $3.4 million, respectively, following the recapitalization completed in February 2004. Our average debt balance increased from $135.2 million in 2003 to $297.5 million in 2004. Our weighted average interest rate increased from 5.10% in 2003 to 6.24% in 2004. We expect interest expense to increase during 2005 due to the higher debt levels resulting from the 2005 capitalization.
Interest expense in 2003 and 2004 included $2.0 million and $1.8 million of debt issue cost amortization, respectively, and 2004 included the write-off of $2.2 million of previously deferred loan costs.
Income Tax Expense. The effective combined federal and state tax rate was 37.9% and 38.4% for the years ended 2004 and 2003, respectively.
Income (Loss) from Discontinued Operations, Net of Tax. Loss from discontinued operations, net of tax, decreased $3.9 million from a loss of $3.8 million in 2003 to income of $0.1 million in 2004. During the year ended 2003, the Company recognized an expense of $1.9 million to adjust asset balances to their estimated net realizable value, an expense of $0.2 million related to facility closure costs, and a goodwill impairment charge of $1.2 million. We completed our Colorado exit plan prior to December 31, 2003. During the year ended 2004, we favorably settled an outstanding lease obligation and collected several previously written-off customer balances aggregating $0.4 million as partially offset by an additional impairment charge of $0.2 million related to the carrying value of the real estate.
2003 compared with 2002
Sales. Sales for the year ended 2003 were $1,675.1 million, a $175.1 million, or 11.7%, increase over sales of $1,500.0 million for the year ended 2002. Overall, sales benefited from improved economic conditions and low interest rates.
The following table shows sales by major product
category (millions):
Year Ended
2003
2002
Sales
% of Sales
Sales
% of Sales
% Growth
$
303.4
18.1
%
$
257.3
17.2
%
17.9
%
354.6
21.2
325.2
21.7
9.0
593.7
35.4
515.4
34.3
15.2
158.7
9.5
151.1
10.1
5.0
264.7
15.8
251.0
16.7
5.5
$
1,675.1
100.0
%
$
1,500.0
100.0
%
11.7
%
Sales of Prefabricated Components increased $46.1 million, or 17.9%, from $257.3 million for the year ended 2002 to $303.4 million for the year ended 2003. In particular, truss and panel sales grew $33.7 million as we continued our strategy of opening new plants and modernizing and expanding our existing plants.
Sales of Windows & Doors increased $29.4 million, or 9.0%, from $325.2 million for the year ended 2002 to $354.6 million for the year ended 2003. Sales of manufactured aluminum and vinyl windows increased $16.0 million as we continued to expand this product offering.
Sales of Lumber & Lumber Sheet Goods increased $78.3 million, or 15.2%, from $515.4 million for the year ended 2002 to $593.7 million for the year ended 2003. Higher prices contributed approximately $57.0 million of the increase while increased unit volumes amounted to approximately $21.3 million. Sales prices were favorably impacted, particularly in the second half of 2003, by higher market prices for panel and lumber products due to increases in demand coupled with minimal increases in capacity by the major manufacturers.
Sales of Millwork products increased $7.6 million, or 5.0%, from $151.1 million for the year ended 2002 compared to $158.7 million for the year ended 2003.
Sales of Other Building Products & Services increased $13.7 million, or 5.5%, from $251.0 million for the year ended 2002 to $264.7 million for the year ended 2003. This increase was largely attributable to the continued growth of installation services ($8.4 million increase in sales of services).
Gross Margin. Gross margin increased $30.1 million, or 8.7%, from $344.6 million for the year ended 2002 to $374.7 million for the year ended 2003. Gross margin on Prefabricated Components increased $14.0 million, and, expressed as a percentage of sales, increased 0.8% as a result of value-added engineering and raw material substitution reducing the raw material costs of the finished product. The overall gross margin percentage for 2003 decreased to 22.4% compared to 23.0% in 2002. Gross margin on Lumber & Lumber Sheet Goods increased $2.4 million but, expressed as a percentage of sales, fell 2.1% from 18.7% in 2002 to 16.6% in 2003. This decrease was primarily due to the rapid increase in procurement costs in 2003, and our delayed ability to pass along these increases due to existing customer commitments.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $18.9 million, or 6.1%, from $308.1 million in 2002 to $327.0 million in 2003. Salaries and benefits expense increased $14.1 million in 2003 due to a $3.7 million increase in commission expense and a $6.6 million increase in bonus expense associated with the strong sales performance as partially offset by a $1.3 million reduction in group health expense. In addition, handling and delivery costs, exclusive of salaries and benefits, increased $5.5 million in 2003 due to the increase in number of deliveries. Selling, general and administrative expenses expressed as a percentage of sales decreased from 20.5% in 2002 to 19.5% in 2003. The largest improvement was in the salaries and benefits percentage, which decreased
0.6% due to improved labor efficiencies and the leveraging of fixed management and supervisory payroll costs.
Interest Expense. Interest expense totaled $11.1 million for 2003 compared to $12.1 million for 2002. The decrease was due to lower average debt levels in 2003. Interest expense in 2003 and 2002 included $2.0 million and $2.1 million of debt issue cost amortization, respectively.
Income Tax Expense. The effective tax rate was 38.4% for 2003 compared to 40.0% for 2002. Our overall effective tax was in excess of the federal statutory rate due to state income taxes. The effective state tax rate fell due to change in mix of income generated in states in which we are subject to taxation.
Loss from Discontinued Operations, Net of Tax. Loss from discontinued operations, net of tax increased $0.8 million, or 26.7%, to $3.8 million in 2003 from $3.0 million in 2002. The increase was due to the Company announcing its intent to exit its operations in Colorado in September 2003 based upon several factors including unfavorable market conditions and a poor competitive position which prevented the Company from generating profitable results. The cessation of operations in this market was treated as a discontinued operation as it had distinguishable cash flow and operations that have been eliminated from the ongoing Company and we have no further cash flows or operations in this market. The Company completed the exit plan prior to December 31, 2003. As a result of the exit plan, in 2003 the Company recorded an expense of $1.9 million in order to adjust asset balances to their estimated net realizable value, an expense of $0.2 million related to facility exit costs, and a goodwill impairment charge of $1.2 million. During 2002, the Company also closed a facility related to the Colorado operations and recorded an expense of approximately $1.2 million for the closure of this facility primarily related to future minimum lease payments due on the vacated facility.
Cumulative Effect of Change in Accounting
Principle, Net of Tax.
As of
January 1, 2002, we adopted SFAS 142 which eliminates
the amortization of goodwill and intangible assets with
indefinite lives and requires instead that those assets be
tested for impairment annually. The application of the
transition provisions of this new accounting standard required
us to reduce our goodwill balance by $19.5 million, net of
tax during 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are to fund
working capital needs, meet required debt payments, including
debt service payments on the floating rate notes and our new
senior secured credit facility, to fund capital expenditures and
acquisitions, and to pay dividends, if any, on our common stock.
Capital resources have primarily consisted of cash flows from
operations and borrowings under our credit facility.
Consolidated cash flows
Operating
activities.
Cash flows used in
operating activities was $8.7 million for the three months
ended March 31, 2005 compared to net cash provided of
$39.4 million for the three months ended March 31,
2004. The decrease in cash flows provided by operating
activities was primarily driven by a special cash payment made
to stock option holders during the current year quarter. These
payments were recorded as compensation expense resulting in a
net loss for the three months ended March 31, 2005. Other
net uses of cash were related to changes in working capital. The
increase in accounts payable was the result of increased
purchasing activity to support higher sales volume combined with
the timing of disbursements at period end.
Cash flows provided by operating activities
increased to $94.4 million for the year 2004 from net cash
used of $40.2 million for the year ended 2003. The increase
of $134.6 million in cash flows provided by operating
activities was primarily driven by a $34.0 million increase
in net income, a net improvement of $72.7 million in
accounts receivable and retained interest in transferred
accounts receivable used in operating activities and a
$29.6 million increase in accounts payable and accrued
liabilities. The increase in accounts payable was the result of
increased purchasing activity to support higher fourth quarter
sales
volume combined with the timing of disbursements
near year-end. The remaining sources were from changes in other
working capital. The improvement in accounts receivable and
retained interest in transferred accounts receivable was
primarily due to our accounts receivable securitization
agreement expiring in August 2003. The increase in accrued
liabilities was due to increased compensation, including
bonuses, and sales and income tax accruals which were a direct
result of our increased performance for the year ended 2004 as
compared to the prior year.
Net cash used in operating activities was
$40.2 million for 2003 as compared to cash flows provided
by operating activities of $48.5 million in 2002. The net
change in cash provided by operating activities of
$88.7 million was primarily driven by net increases in
accounts receivable and retained interest in transferred
accounts receivable of $64.7 million, increases in cash
used for inventory of $30.9 million, and net decreases in
accounts payable and accrued liabilities of $6.2 million.
These increases in cash used were offset in part by an increase
in net income before depreciation and amortization, cumulative
effect of change in accounting principle, and non-cash gain
(loss) from discontinued operations of $9.0 million. The
remaining sources were from changes in other working capital.
The increase in accounts receivable and retained interest in
transferred accounts receivable was primarily due to our
accounts receivable securitization agreement expiring in August
2003. The net decrease in accounts payable and accrued
liabilities was primarily due to the timing of payments off-set
in part by increased compensation and sales tax accruals which
were a direct result of the Companys increased performance
from prior year. The increase in inventory levels was a direct
result of the Company building inventory levels to support
higher sales in addition to the Company taking advantage of
declining lumber prices near the end of the year in 2003.
Investing
activities.
During the three
months ended March 31, 2005 and 2004, cash flows used for
investing activities were $4.2 million and
$3.7 million, respectively. Capital expenditures increased
approximately $1.4 million to $5.5 million for the
three months ended March 31, 2005 from $4.1 million
for the three months ended March 31, 2004 primarily due to
the purchase of machinery and equipment at our existing
facilities. Proceeds from the sale of property, plant, and
equipment increased $0.9 million from $0.4 million for
the three months ended March 31, 2004 to $1.3 million
for the three months ended March 31, 2005 primarily due to
the sale of real estate related to discontinued operations.
During the years ended 2004 and 2003, cash flows
used for investing activities totaled $18.7 million and
$13.0 million, respectively. Capital expenditures increased
approximately $5.1 million to $20.7 million for the
year ended 2004 from $15.6 million for the year ended 2003
primarily due to the purchase of machinery and equipment at our
existing facilities. Proceeds from the sale of property, plant,
and equipment decreased $5.1 million from $7.1 million
for the year ended 2003 to $2.0 million for the year ended
2004 primarily due to us updating our delivery and warehouse
fleet in 2003. Cash used for acquisitions decreased
$4.6 million for the year ended 2004 due to our three
completed acquisitions during 2003 and no acquisitions completed
during 2004.
During 2003, cash used in investing activities
increased approximately $2.7 million from
$10.3 million in 2002 to $13.0 million in 2003. This
increase was primarily attributable to our using
$4.6 million to acquire three companies in 2003 as compared
to only $1.7 million in 2002 relating to acquisitions.
Financing
activities.
Net cash used in
financing activities was $25.6 million for the three months
ended March 31, 2005 compared to $27.9 million for the
three months ended March 31, 2004. During the three months
ended March 31, 2005, we used $313.3 million to retire
our prior credit facility, $201.2 million to pay a dividend
and $21.1 million to pay expenses related to the
refinancing. Also related to the 2005 refinancing, we received
proceeds totaling $275.0 million and $225.0 million
related to the floating rate notes and the new senior secured
credit facility term loan, respectively. During the first
quarter of 2005, we also had net borrowings under our senior
secured revolving credit facility totaling $10.0 million.
During the three months ended March 31,
2004, we received approximately $315.0 million of proceeds
from our prior credit facility, of which approximately
$139.6 million was used to pay a dividend,
$10.8 million was used to pay the transaction costs
associated with the prior credit facility and
$168.3 million was used to retire the existing debt
facility. Book overdrafts decreased $24.1 million during
the three months ended March 31, 2004 based on the timing
of disbursements at period end.
Net cash used in financing activities was
$30.7 million for the year ended 2004 as compared to cash
provided by financing activities of $56.5 million for the
year ended 2003. The increase in cash used in financing
activities was primarily due to our entering into a credit
agreement in February of 2004 from which we received
approximately $315.0 million of proceeds, of which
approximately $139.6 million was used to pay a dividend,
$11.1 million was used to pay the transaction costs
associated with the new credit agreement and $168.3 million
was used to retire the then existing debt facility. We also made
$1.7 million of scheduled principal payments during the
year ended 2004 on our credit facility. We had net borrowings of
$61.4 million on our revolving line of credit and made
approximately $22.6 million of principal payments for the
year ended 2003. Book overdrafts decreased $24.8 million
during the year ended 2004 as compared to an increase of
$20.5 million during the year ended 2003, reflecting the
timing of the release of payables.
Net cash provided by financing activities was
$56.5 million in 2003 as compared to $39.3 million
used in financing activities in 2002. The increase in cash
provided by financing activities was primarily due to our
incurring net borrowings of long-term debt of $38.8 million
in 2003 as compared to us repaying $24.3 million of
long-term debt in 2002. The increased borrowings in 2003 were
attributable to our accounts receivable securitization agreement
expiring in 2003, which was a significant source of cash. Book
overdrafts increased $20.5 million during 2003 as compared
to a decrease of $13.3 million in 2002, reflecting the
timing of the release of payables.
Capital
Resources.
On February 11,
2005, we entered into a $350.0 million senior secured
credit agreement (the New Credit Agreement) with a
syndicate of banks. The New Credit Agreement is comprised of a
$225.0 million six-and-a-half year term loan; a
$110.0 million five-year revolver; and a pre-funded letter
of credit facility to be available at any time during the
six-and-a-half year term in the aggregate face amount
outstanding not to exceed $15.0 million.
Interest rates on loans under the New Credit
Agreement are based on the base rate of interest determined by
the administrative agent or LIBOR (plus a margin, based on
leverage ratios, which is currently 1.50% for base rate
revolving loans and 2.50% for term loans), to be determined at
our option at the time of borrowing. A variable commitment fee
(currently 0.50%) based on the total leverage ratio is charged
on the unused amount of the revolving loan commitment.
In April 2005, we entered into an interest rate
swap designed to obtain a fixed rate with respect to
$100.0 million of our outstanding senior secured floating
rate debt and thereby reduce our exposure to interest rate
volatility. The swap will fix $100.0 million of our
outstanding debt at an effective interest rate of 6.62% for
three years starting July 1, 2005 (4.12% fixed rate plus
2.50%). Thus, our effective interest rate on the debt includes
the fixed swap rate plus applicable margin payable under its
debt agreement.
The New Credit Agreement is collateralized by
(i) a pledge of the common stock of all of our subsidiaries
and (ii) a security interest in substantially all tangible
and intangible property and proceeds thereof now owned or
hereafter acquired by us and substantially all our subsidiaries.
The New Credit Agreement also contains certain restrictive
covenants that, among other things, relate to the payment of
dividends, incurrence of indebtedness, repurchase of common
stock or other distributions, and asset sales and also require
compliance with certain financial covenants with respect to a
maximum total leverage ratio and a minimum interest coverage
ratio. We can be required to make mandatory prepayments of
amounts outstanding under the New Credit Agreement based on
certain asset sales and casualty events, issuances of debt and
the results of an annual excess cash flow calculation.
On February 11, 2005, we issued
$275.0 million in aggregate principal amount of second
priority senior secured floating rate notes due 2012. Interest
accrues on the floating rate notes at a rate of LIBOR plus
4.25%. The LIBOR rate is reset at the beginning of each quarter.
The floating rate notes are collateralized by (i) a pledge
of the common stock of certain of our subsidiaries and
(ii) a security interest in substantially all tangible and
intangible property and proceeds thereof now owned or hereafter
acquired by us and substantially all our subsidiaries. The
indenture governing the floating rate notes contains covenants
that limit our ability and the ability of our restricted
subsidiaries to, among other things: incur additional
indebtedness; pay dividends or make other distributions on our
capital stock or repurchase, repay or redeem our capital stock;
make certain investments; incur liens; enter into certain types
of transactions with affiliates; create restrictions on the
payment of dividends or other amounts to us by our restricted
subsidiaries; and sell all or substantially all of our assets or
merge with or into other companies.
Proceeds from the New Credit Agreement and the
issuance of the floating rate notes were used, in addition to
cash and cash equivalents on hand at the refinancing date, to
retire our prior credit facility, pay a cash dividend to
shareholders of $201.2 million, make a cash payment of
approximately $36.4 million (including applicable payroll
taxes of $0.6 million) to stock option holders in lieu of
adjusting the exercise price, pay fees and expenses of
$21.1 million related to the refinancing, and make a
$1.7 million early termination payment related to the
prepayment of the Tranche B term loan under the prior
credit facility.
Long-term debt consists of the following:
Based on our ability to generate cash flows from
operations and our borrowing capacity under the revolver under
the New Credit Agreement, we believe we will have sufficient
capital to meet our anticipated short-term and long-term needs,
including our capital expenditures, acquisition strategies and
our debt obligations for the foreseeable future. Upon completion
of this offering and use of the net proceeds as set forth
herein, we expect to have total long-term debt of
$400.2 million.
Capital
Expenditures.
Capital expenditures
vary depending on prevailing business factors, including current
and anticipated market conditions. With the exception of 2003
capital expenditures in recent years have remained at relatively
low levels in comparison to the operating cash flows generated
during corresponding periods. We believe that this trend will
continue given our existing facilities and acquisition plans,
and our product portfolio and anticipated market conditions
going forward. For the three months ended March 31, 2005
and 2004 capital expenditures totaled $5.5 million and
$4.1 million, respectively. For the years ended
December 31, 2004, 2003 and 2002, capital expenditures
totaled $20.7 million, $15.6 million and
$15.1 million, respectively. Market conditions in 2002 into
early 2003 led to reduced capital expenditures during those
periods. However, we increased capital expenditures in late 2003
and early 2004 given the improvement in business conditions.
Consistent with previous spending patterns,
future capital expenditures will focus primarily
on expanding our value-added product offerings such as
Prefabricated Components. We expect our capital expenditures to
approximate $28.0 million in 2005.
We anticipate that cash flows from operations and
liquidity from the New Credit Agreement will be sufficient to
execute the Companys business plans and acquisition
strategies.
DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND
COMMERCIAL COMMITMENTS
The following summarizes the contractual
obligations of the Company as of December 31, 2004 (in
thousands):
Purchase orders entered into in the ordinary
course of business are excluded from the above table. Amounts
for which we are liable under purchase orders are reflected on
our consolidated balance sheet as accounts payable and accrued
liabilities.
Other cash obligations not reflected in the
balance sheet
The amounts reflected in the table above for
operating leases represent future minimum lease payments under
noncancelable operating leases with an initial or remaining term
in excess of one year at December 31, 2004.
In accordance with GAAP, our operating leases are
not recorded in our balance sheet. In addition, we have residual
value guarantees on certain equipment leases. Under these leases
the Company has the option of (a) purchasing the equipment
at the end of the lease term at its then fair market value,
(b) arranging for the sale of the equipment to a third
party, or (c) returning the equipment to the lessor to sell
the equipment. If the sales proceeds in either case are less
than the residual value, then we are required to reimburse the
lessor for the deficiency up to a specified level as stated in
each lease agreement. The guarantees under these leases for the
residual values of equipment at the end of the respective
operating lease periods approximated $10.8 million as of
December 31, 2004.
Based upon the expectation that none of these
leased assets will have a residual value at the end of the lease
term that is materially less than the value specified in the
related operating lease agreement, we do not believe it is
probable that we will be required to fund any amounts under the
terms of these guarantee arrangements. Accordingly, no accruals
have been recognized for these guarantees.
DISCLOSURES OF CERTAIN MARKET RISKS
The Company experiences changes in interest
expense when market interest rates change. Changes in the
Companys debt could also increase these risks. Based on
debt outstanding at December 31, 2004, a 25 basis
point increase in interest rates would result in approximately
$0.8 million of additional interest costs annually.
The Company does not utilize any derivative
financial instruments to hedge price movements of our materials.
However, we intend to use interest rate swap contracts to fix
long-term interest rates on approximately 40% of our outstanding
balances related to our term loan under the New Credit Agreement
and floating rate notes.
We purchase certain materials, including lumber
products, which are then sold to customers as well as used as
direct production inputs for our manufactured products which we
deliver. Short term changes in the cost of these materials, some
of which are subject to significant fluctuations, are sometimes,
but not always, passed on to our customers. Our delayed ability
to pass on material price increases to our customers can
adversely impact operating income.
QUARTERLY RESULTS AND SEASONALITY
The Companys first and fourth quarters
historically have been, and are expected to continue to be,
adversely affected by weather patterns in some of the
Companys markets, causing reduced construction activity.
In addition, quarterly results historically have reflected, and
are expected to continue to reflect, fluctuations from period to
period arising from, among other things, (i) the volatility
of prices of lumber and wood products, (ii) the cyclical
nature of the homebuilding industry, (iii) general economic
conditions in the various local markets in which we compete,
(iv) the pricing policies of our competitors, (v) the
production schedules of our customers, and (vi) the effects
of the weather.
The composition and level of working capital
typically changes during periods of increasing sales as the
Company carries more inventory and receivables. Working capital
levels typically increase in the second and third quarters of
the year due to higher sales during the peak residential
construction season. These increases historically have resulted
in negative operating cash flows during this peak season, which
generally have been financed through our revolving credit
facility. Collection of receivables and reduction in inventory
levels following the peak of the building and construction
season have more than offset this negative cash flow in recent
years. We believe our new revolving credit facility and our
ability to generate positive cash-flows from operating
activities will continue to be sufficient to cover seasonal
working capital needs.
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued Staff Position
109-1 (FSP 109-1), Application of FASB Statement
No. 109 (FASB No. 109), Accounting
for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004. FSP 109-1 clarifies guidance that applies to the new
deduction for qualified domestic production activities. When
fully phased-in, the deduction will be up to 9% of the lesser of
qualified production activities income or taxable
income. FSP 109-1 clarifies that the deduction should be
accounted for as a special deduction under FASB No. 109 and
will reduce tax expense in the period or periods that the
amounts are deductible on the tax return. Any tax benefits
resulting from the new deduction will be effective for the
Companys fiscal year ending December 31, 2005. The
Company is currently reviewing the effect of FSP 109-1 on its
consolidated financial statements.
In March 2005, the Securities and Exchange
Commission released SEC Staff Accounting Bulletin
(SAB) No. 107,
Share-Based Payment
.
SAB No. 107 provides the SEC staff position regarding
the application of
SFAS No. 123 (Revised 2004) Share
Based Payment (SFAS 123R). SAB No.
107 contains interpretive guidance related to the interaction
between SFAS No. 123(R) and certain SEC rules and
regulations, as well as provides the staffs views
regarding the valuation of share-based payment arrangements for
public companies. SAB No. 107 also highlights the
importance of disclosures made related to the accounting for
share-based payment transactions. The Company is currently
reviewing the effect of SAB No. 107 on its
consolidated financial statements.
In December 2004, the FASB issued SFAS
No. 123R, which is a revision of SFAS 123 and
supersedes APB 25 and SFAS 148. This statement
requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. This
statement establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all
entities to apply a fair value based measurement method in
accounting for share-based payment transactions with employees
except for equity instruments held by employee share ownership
plans.
SFAS 123R applies to all awards granted
after the required effective date (the beginning of the first
interim or annual reporting period that begins after
June 15, 2005) and to awards modified, repurchased, or
cancelled after that date. As of the required effective date,
all public entities that used the fair value based method for
either recognition or disclosure under Statement 123 will
apply this Statement using a modified version of prospective
application. Under that transition method, compensation cost is
recognized on or after the required effective date for the
portion of outstanding awards for which the requisite service
has not yet been rendered, based on the grant-date fair value of
those awards calculated under Statement 123 for either
recognition or pro forma disclosures. For periods before the
required effective date, those entities may elect to apply a
modified version of the retrospective application under which
financial statements for prior periods are adjusted on a basis
consistent with the pro forma disclosures required for those
periods by Statement 123. The Company previously used the
minimum value method under SFAS 123 to calculate the fair
value of its options and will apply the prospective transition
method as of the required effective date. The Company will
continue to account for the currently outstanding options under
APB 25 and will apply the provisions of SFAS 123R
prospectively to new awards and to awards modified, repurchased,
or cancelled after adoption of this statement.
In November 2004, the FASB issued
SFAS No. 151,
Inventory Costs an amendment of
ARB No. 43, Chapter 4
(SFAS No. 151). SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151
requires that those items be recognized as current period
charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to the costs of
inventory be based on the normal capacity of the production
facilities. This new standard is effective for inventory costs
incurred during fiscal years beginning after June 15,
2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 23,
2004. The Company does not anticipate the adoption of this
statement to have a significant impact on its financial position
or results of operations.
In December 2004, the FASB issued Statement
No. 153,
Exchanges of Nonmonetary Assets
, an
amendment of APB Opinion No. 29,
Accounting for
Nonmonetary Transactions
(SFAS No. 153). The amendments made by
SFAS No. 153 are based on the principle that exchanges
of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance.
Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or
an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset
relinquished. By focusing the exception on exchanges that lack
commercial substance, the Financial Accounting Standards Board
believes SFAS No. 153 produces financial reporting
that more faithfully represents the economics of the
transactions. This statement is effective for
nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not
believe the adoption of this new statement will have a material
impact on its financial condition or results of operations.
In September 2004, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 04-8, The Effect of Contingently Convertible Debt
on Diluted Earnings Per Share, which requires shares
associated with contingently convertible debt instruments with
market price triggers to be included in the computation of
diluted earnings per share (EPS) regardless of
whether the market price trigger has been met. EITF 04-8
also requires that prior period diluted EPS amounts presented
for comparative purposes be restated. EITF 04-8 is
effective for reporting periods ending after
December 15, 2004. The Company does not believe the
adoption of this new statement will have a material impact on
its financial condition or results of operations.
Industry overview and trends
We compete in the professional segment (Pro
Segment) of the U.S. residential new construction
building products supply market, which, according to the Home
Improvement Research Institute, has estimated 2004 annual sales
of $145.05 billion. Our competitive landscape is highly
fragmented, consisting primarily of small, privately owned
companies, most of which have limited access to capital and
manufacturing capabilities, and lack the ability to provide a
full range of construction services. We serve a broad customer
base ranging from small custom homebuilders to the largest
Production Homebuilders, including publicly traded companies
that have multi-billion dollar market capitalizations such as
Centex, D.R. Horton, Hovnanian Enterprises, Pulte, and Ryland
Group. Our target market is distinctly different from that of
home center retailers, such as Home Depot and Lowes, which
primarily serve do-it-yourself and professional remodeling
customers.
We believe the following industry conditions and
trends will benefit our business:
Large, Fragmented
Market.
The Pro Segment of the
$145.05 billion U.S. residential new construction
building products supply market, as estimated by the Home
Improvement Research Institute, is highly fragmented, with the
top ten suppliers accounting for about 12% of the total market,
and only six generating over $1 billion in sales according
to ProSales Magazine. This segment consists predominantly of
small, privately owned companies, most of which have limited
access to capital and lack sophisticated information technology
systems and large-scale procurement capabilities. The
industrys fragmentation is due to the overall size of the
market, the diversity of the target customer base, and
variations in local building preferences and practices. While we
and our largest competitors have significantly grown market
share over the past several years, including through
acquisitions, the market remains extremely fragmented relative
to most other industries. We believe that the highly fragmented
nature of the Pro Segment presents substantial acquisition
opportunities as well as the opportunity to increase market
share in existing markets.
Strong Housing
Fundamentals.
Our business is
driven primarily by the new residential construction market.
According to the National Association of Homebuilders,
U.S. housing starts were 1.85 million in 2003 and
1.95 million in 2004 and are projected to be
1.94 million in 2005. While these levels are above the
historical average of 1.62 million over the past ten years,
several industry sources expect that strong housing demand will
continue to be driven over the next decade by new household
formations, increased housing affordability, rising
homeownership rates, the size and age of the population, an
aging housing stock, improved financing options for buyers, and
immigration trends. The Homeownership Alliance, for example,
predicts that these demand drivers will lead to
1.85 million to 2.17 million new U.S. housing
starts per year through 2014. The Homeownership Alliance further
predicts that U.S. home ownership rates, which are strongly
correlated with new housing construction, will reach 70% by
2013, an increase from 64% in 1985 and 68% in 2003.
Home Ownership
The strong levels of housing starts are being
driven in large part by an increase in household formations.
According to Fitch Ratings, the average ratio of new incremental
household formations to total housing starts from 1960-1999 was
86.6%. This ratio dipped to 80.5% in the 1990s, representing the
creation of some slack between demand and supply, but has
rebounded to 88.5% for the time period from 2000-2003, trending
above the historical average and signaling a tightening of the
supply/demand balance. Favorable demographic factors are
expected to continue to drive increased household formations.
Baby boomers have created demand that could not be accommodated
by the existing housing base. While this demand was primarily
for starter homes and apartments in the past, we expect it will
increasingly be directed toward single-family homes aimed at
move-up buyers, as well as second homes. Further, the echo
boom, comprised of the children of baby boomers, has just
begun to impact the housing market.
The U.S. housing market is also expected to
benefit from immigration trends. According to the Joint Center
for Housing Studies at Harvard University, foreign immigration
should account for almost one third of the total
U.S. population growth through 2010. The immigrant
population is expected to be concentrated between the ages of 20
and 50, and therefore represents a more immediate stimulus to
new household formation activity than population growth due to
new births. Further, Census results show that the homeownership
rate for immigrants is highly dependent on the length of time
since their arrival in the U.S. This figure rises from 25%
for those who have resided in the U.S. for less than
10 years to 74% for those who have been in the
U.S. more than 30 years. With the immigration peak
that occurred in the 1990s, this trend portends a dramatic
increase in immigrant homeowners in the coming decades.
Immigration into the U.S.
Consolidation and Emergence of Large-Scale
Production Homebuilders.
The
homebuilding sector has undergone a significant change over the
past decade as evidenced by a variety of industry trends,
including the introduction of more professional management
teams, a reduction in speculative land positions, lower levels
of unsold inventory, more conservatively financed balance
sheets, geographic diversification and increased consolidation.
Substantial consolidation among residential homebuilders and
market share gains by the top Production Homebuilders since the
early 1990s have shifted our target customer base increasingly
to large volume homebuilders. The market share of the ten
largest Production Homebuilders quadrupled from approximately 5%
in 1990 to 20% in 2004, according to Builder Magazine, and is
expected to increase to 40% by 2010 according to the National
Association of Realtors.
Market Share of the Top 10
Homebuilders
While Production Homebuilders continue to
consolidate their industry, homebuilding remains a locally
oriented business even within the Production Homebuilders
organizations, as building codes and architectural preferences
vary widely by locale. For example, building codes in coastal
areas are generally much different from codes in inland areas or
those in earthquake zones, requiring different products and
construction techniques. One of our key success factors is to
maintain the local flexibility required to meet customer demand
while maximizing the benefits of operating a large-scale,
integrated company.
Homebuilders Increasing Demand for
Integrated Solutions.
As the
homebuilding industry continues to consolidate, our customers
are increasingly demanding an integrated solution from their
building products suppliers. We play an integral role for our
customers that encompasses the entire homebuilding process from
planning to final construction. Prior to construction, we advise
our customers on essential issues such as design and product mix
and selection, as well as cost reduction opportunities. We then
deliver a comprehensive package of structural and related
building products to the job-site, which includes products that
we manufacture individually for the given house, such as roof
and floor trusses, wall panels and stairs. On the job-site, we
provide a full range of installation, turn-key framing and shell
construction services that reduce cycle time and costs for the
homebuilder. Our sales representatives are also deployed to the
job-site throughout the homebuilding process to ensure constant
communication and rapidly resolve issues that may arise,
including on the interpretation of blueprints, additional
product and service needs, and questions regarding building code
requirements. We believe this fully integrated approach further
strengthens customer loyalty and enables us to retain an
advantage over our competitors.
Building Components
Manufacturing.
The growing use of
Prefabricated Components in the homebuilding process represents
a major trend within the new residential construction building
products supply market. This trend has already had a large
impact on the homebuilding industry, as, according to the USDA
Forest Service, roof trusses, the largest component of our
Prefabricated Components category, have replaced conventional
site-built roof framing in approximately 70% of all
single-family construction. Further, the Engineered Wood
Association reports that the use of manufactured panels in new
homes increased by over 60% from 1997 to 2003.
In accordance with this trend, we have increased
our manufacturing capacity and our ability to provide customers
with Prefabricated Components such as roof and floor trusses,
stairs, wall panels, and engineered wood. Builders value the
many benefits of using these products, including reduced cycle
time and carrying costs, increased product quality, and cost
savings from the reduction of expensive on-site labor and
material waste. Once established as a preferred supplier of
Prefabricated Components, we are typically able to cross-sell
additional products and services as our customers increasingly
seek integrated solutions. Prefabricated wood components are
also becoming increasingly common in floor and wall construction.
According to the Freedonia Group, the outlook for
Prefabricated Component products is strong, with shipments of
roof trusses forecasted to rise at a 3.7% CAGR for the period
from 2001 to 2011. Smaller sub-segments such as floor trusses
and walls and partitions are expected to grow at a faster pace
over the same period, with CAGRs of 6.2% and 7.3%, respectively.
Sales growth of these products is being driven by increased
homebuilder awareness and acceptance of these products resulting
from cost and performance advantages. These products represent a
strategic focus for us going forward, as they carry higher
margins than our purely distributed product offerings.
Gross Sales of Manufactured Products
March 31,
December 31,
2005
2004
(in thousands)
$
10,000
$
228,275
85,000
225,000
275,000
205
205
510,205
313,480
2,250
1,688
$
507,955
$
311,792
Payments Due by Period
Less
than
1 3
4
5
After 5
Contractual Obligations
Total
1 Year
Years
Years
Years
Years
$
500,205
$
1,688
$
6,750
$
2,250
$
2,455
$
487,062
172,664
31,072
65,018
16,449
11,476
48,649
226,842
30,079
100,493
33,245
32,614
30,411
$
899,711
$
62,839
$
172,261
$
51,944
$
46,545
$
566,122
(1)
These future maturities of Long-Term Debt
reflect the refinancing of our credit agreement and the issuance
of $275.0 million of floating rate notes on
February 11, 2005.
(2)
Interest based on LIBOR rate of 3.10% at
March 31, 2005. Actual interest may vary based on LIBOR
fluctuations.
SOURCES:
The Yearbook of Immigration Statistics, Joint
Center for Housing Studies at Harvard University
Immigrant Home Ownership Rate by Time Since
Arrival in the U.S.
SOURCE:
U.S. Census Bureau
SOURCES:
Production Homebuilders Public Filings;
National Association of Realtors
Business
GENERAL
The Company is a Delaware corporation formed on March 4, 1998, as BSL Holdings, Inc., through a partnership between JLL Partners and certain members of our management team. On October 13, 1999, the Company changed its name to Builders FirstSource, Inc. Since 1998, the Company has successfully acquired and integrated 23 companies and is currently managed as three operating groups with centralized financial and operational oversight.
We are a leading supplier and a fast-growing manufacturer of structural and related building products for residential new construction in the U.S. We believe we are one of the top two suppliers of our product categories to Production Homebuilders, which we define as those U.S. homebuilders that build more than 100 homes per year. Our large scale, full product and service offerings, and unique business model position us to continue growing our sales to Production Homebuilders, the fastest-growing segment of residential homebuilders. We have operations principally in the southern and eastern U.S. with 62 distribution centers and 50 manufacturing facilities. For the year ended December 31, 2004, we generated sales of $2,058.0 million and net income of $51.6 million.
We provide an integrated solution to our customers that combines the manufacturing, supply, and installation of a full range of structural and related building products. Over the past several years, we have significantly increased our sales of products that we manufacture. These products include our factory-built roof and floor trusses, wall panels and stairs, as well as engineered wood products that we design and cut for each home (collectively Prefabricated Components). We also manufacture custom millwork and trim that we market under the Synboard® brand name, as well as aluminum and vinyl windows, and we assemble interior and exterior doors into pre-hung units. Our revenue from these manufactured products totaled $680.4 million for the year ended December 31, 2004, representing 33.1% of total sales. In addition, we supply our customers with a broad offering of professional grade building products not manufactured by us such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing, and gypsum wallboard. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products and services into five principal product categories: Prefabricated Components, Windows & Doors, Lumber & Lumber Sheet Goods, Millwork, and Other Building Products & Services. Over the past five years we have more than doubled the sales of our Prefabricated Components, Windows & Doors, and Millwork product categories, each of which includes both manufactured and distributed products. Products in these categories typically carry a higher margin and provide us with opportunities to cross-sell other products and services, thereby increasing customer penetration.
We serve a broad customer base ranging from Production Homebuilders to small custom homebuilders and believe that we are the number one or two building products supplier for single-family residential new construction in approximately 75% of the geographic markets in which we operate. According to 2003 U.S. Census data, we have operations in 20 of the top 50 U.S. Metropolitan Statistical Areas, as ranked by single family housing permits, and approximately 44% of U.S. housing starts occurred in states in which we operate. Our comprehensive product offering featuring over 250,000 SKUs company-wide and our full range of construction services, combined with our scale and experienced sales force, have driven market share gains, particularly with Production Homebuilders.
OUR COMPETITIVE STRENGTHS
We believe our sales, earnings and cash flow will be driven by our competitive strengths:
Leading Positions in Growing Markets. We believe that we are the number one or two building products supplier for single-family residential new construction in approximately 75% of the geographic markets in which we operate. We are also the largest supplier of our product categories to the Production Homebuilders in our geographic markets as a whole. These leading market positions allow us to develop and sustain strong relationships with local customers and attain economies of scale that enhance profitability and reduce the risk of losing customers to our competitors. This in turn positions us favorably to continue to gain market share. Our facilities are strategically located in many of the fastest-growing markets in the southern and eastern U.S., where we expect continued growth. We believe that we are well positioned to grow with the Production Homebuilders as they increase their market share in these growing markets.
Unique Business Model. Our unique business model allows us to cost-effectively supply our customers and target Production Homebuilders, the fastest-growing segment of our customer base. We operate an integrated business model across our network of 62 distribution centers and 50 manufacturing facilities that differentiates us from many of our competitors who operate in a decentralized manner with a collection of facilities. This has enabled us to achieve an appropriate balance of maximizing the benefits of a centrally directed, large-scale company while maintaining the flexibility to build strong customer relationships and provide superior customer service at the local market level. The key components of our business model are the following:
| We operate a highly customized, proprietary information technology system that drives internal efficiencies while allowing us to rapidly respond to our customers and reduce their administrative costs. |
| We tailor the size of our facilities to each market to meet the needs of our customers, offering large-scale, full-service branches in larger markets and smaller, more tailored facilities in secondary markets. |
| We offer our customers a one-stop-shop approach that combines a full line of manufactured structural building products, lumber and lumber sheet goods, and turn-key construction services; this integrated approach substantially reduces the administrative burden and cost to our customers of dealing with multiple suppliers. |
Full Offering of Manufactured Products and Construction Services. Over the past several years, we have significantly increased our sales of manufactured products, which provide us with higher margins and increased opportunities to cross-sell other products to our customers. Our ability to supply our own manufactured products, including Prefabricated Components, windows, pre-hung doors and our branded Synboard® millwork products, strengthens our customer relationships by helping homebuilders reduce costs and cycle time while ensuring high quality. We also provide our customers with a full range of services, including professional installation, turn-key framing and shell construction, and design. This combination of manufactured products and construction services offers competitive advantages versus the traditional single-product, sell-and-deliver business model employed by many of our competitors.
Superior Customer Service. We offer our customers superior service through our experienced sales force and reliable delivery capabilities. Our salespeople act as trusted advisors and on-site consultants to the homebuilder and are involved in each important step of the construction process to ensure constant communication and rapidly resolve any issues that may arise. We typically deploy a salesperson to the job site to take measurements, interpret blueprints, assist in product selection and help oversee product installation. Drawing on a deep base of experience and knowledge, our representatives advise on regional aesthetic preferences and opportunities for cost reductions. In addition, our large delivery fleet and
comprehensive inventory management system enable us to provide just-in-time product delivery, ensuring a smoother and faster production cycle for the homebuilder.
Attractive Cost and Working Capital Position. We have used our position as one of the few large-scale competitors in our industry to create an attractive cost position. We have generated substantial savings over time by implementing centralized corporate purchasing agreements. Approximately 80% of our non-lumber product purchases are made pursuant to company-wide agreements. Our distribution centers average $32.6 million of annual sales, which is higher than any of our competitors that have annual sales in excess of $1 billion, according to their public filings, company web sites, and ProSales Magazine. This scale allows us to leverage our fixed costs, including occupancy, location management, supervisory labor and corporate overhead, to lower our costs per sales dollar. We measure location productivity at a detailed level and actively manage efficiency and cost. We have implemented a comprehensive efficiency measurement system in our truss and wall panel plants and this system has enabled us to significantly improve productivity. We aggressively manage every component of working capital, including accounts receivable, inventory, and accounts payable, and we have improved our working capital, expressed as a percentage of sales, from 1999 as compared to the year ended December 31, 2004. All of these activities are designed to ensure that we serve our customers at the lowest cost possible.
Experienced Management Team. We have a dedicated management team with extensive experience and expertise in the manufacturing, distribution, and marketing of building products. Our senior management team, including our three regional group presidents, has a total of over 175 years of industry experience. This team has successfully led us through various industry cycles, economic conditions and capital structures, and has demonstrated the ability to grow manufacturing businesses, introduce new product lines, expand into new geographic markets, and target and integrate acquisitions, while improving operational and working capital efficiencies. Our seasoned operational team is led by three regional group presidents who average over 25 years of industry experience. Local facility management and sales representatives are knowledgeable about homebuilding and generally have longstanding relationships with the builders in their respective markets.
OUR STRATEGY
Our strategy is to leverage our competitive strengths to grow sales, earnings, and cash flow and remain the preferred supplier to the homebuilding industry.
Increase Customer Penetration Through Incremental Sales of Manufactured Products and Services. We plan to organically grow our unit volumes and revenues through further penetration of our customer base by providing existing customers with incremental value-added products and services. As part of this strategy, we intend to increase sales of manufactured products, which are higher margin and less price sensitive than lumber products, and are growing in demand by homebuilders. Prefabricated Components, such as trusses, wall panels, stairs and engineered wood, are highly valued by our customers, especially Production Homebuilders, because they reduce builders cycle times and carrying costs and generate cost savings through the reduction of on-site labor and lumber waste. Once established as a manufacturer of these products by our customers, we are generally able to cross-sell additional products. We also intend to grow our sales of construction services, such as professional installation, turn-key framing and shell construction, and design, as a complement to our existing product offerings. Our ability to provide full product and service solutions further strengthens customer loyalty and enables us to retain an advantage over our competitors.
Target Production Homebuilders. We intend to leverage our unique business model, geographic breadth, and scale to continue to grow our sales to the Production Homebuilders as they continue to gain market share. The ten largest Production Homebuilders, as measured by homes sold, quadrupled their market share from approximately 5% in 1990 to 20% in 2004, according to Builder Magazine, and are expected to increase their market share to 40% by 2010 according to the National Association of Realtors. From 2001 to 2004, the ten largest Production Homebuilders increased their market share by approximately 22% from an estimated 18% to a projected 22%. Over approximately the same period, we
increased our sales to this customer group at an even greater rate of approximately 73% from $260.8 million in 2001 to $451.8 million in 2004.
Expand through New Manufacturing and Distribution Centers in Existing and Contiguous Markets. We believe that several key markets in which we currently operate require increased manufacturing capacity or incremental distribution facilities to reach their full sales potential. In many locations, we believe that we can increase market penetration through the introduction of additional distribution and manufacturing facilities. In addition, we have identified several markets that we believe we can enter with a strong market share from the onset by leveraging our existing nearby facilities, customer relationships and local knowledge. We will also selectively seek expansion opportunities that will enable us to grow in the multi-family and commercial end markets where we currently have a limited presence. We expect these expansions can be realized with capital expenditures consistent with historical levels.
Focus on Cost, Working Capital and Operating Improvements. We are extremely focused on expenses and working capital to remain a low cost supplier. We maintain a continuous improvement, best practices operating philosophy and regularly implement new initiatives to reduce costs, increase efficiency and reduce working capital, thereby enhancing profitability and cash flow. For example, we are beginning to link our computer system to those of our customers to streamline the administrative aspects of the quoting, invoicing and billing processes. We are also analyzing our workforce productivity to determine the optimal labor mix that minimizes cost, and examining our logistics function to reduce the cost of inbound freight. Our focus on cost controls and our strategy of shifting the sales mix to value-added products and services have significantly improved profitability. Selling, general and administrative expenses have declined as a percentage of sales from 21.4% in 2001 to 18.3% in 2004. We have also improved our working capital, expressed as a percentage of sales, from 1999 as compared to the year ended December 31, 2004.
Pursue Strategic Acquisitions. The highly fragmented nature of the Pro Segment presents substantial acquisition opportunities. Our acquisition strategy centers on geographic expansion and continued growth of our Prefabricated Components business. First, there are a number of attractive homebuilding markets, including in the western and southwestern U.S. and parts of the Midwest, where we do not currently operate. We believe that our proven operating model can be successfully adapted to these markets and the homebuilders in these markets, many of whom we currently serve elsewhere, and who value our broad product and service offering, professional expertise, and superior customer service. When entering a new market, our strategy is to acquire market-leading distributors and subsequently expand their product offerings and/or add manufacturing facilities while integrating their operations into our centralized platform. This strategy allows us to quickly achieve the scale required to maximize profitability and leverage existing customer relationships in the local market. Second, we will selectively seek to acquire companies that manufacture Prefabricated Components such as roof and floor trusses, wall panels, stairs, and engineered wood, as well as other building products such as millwork. Prefabricated Components are growing in popularity with homebuilders and provide us with cross-selling opportunities and higher margins. While our senior management team has neither identified any specific geographic areas in which to pursue strategic acquisitions nor entered into serious negotiations to establish a market in any such geographical area at the present time, it has the experience and ability to identify acquisition candidates and integrate acquisitions, having acquired and integrated 23 companies since 1998.
OUR PRODUCTS AND SERVICES
We distribute a wide variety of products and services directly to homebuilder customers through our network of 62 distribution centers in 11 states. In addition, through our 50 manufacturing facilities, many of which are located on the same premises as our distribution centers, we are a fast-growing manufacturer of building products, including floor and roof trusses, wall panels, stairs, millwork and windows.
We group our full range of building products and services into five product categories: Prefabricated Components, Windows & Doors, Lumber & Lumber Sheet Goods, Millwork, and Other Building Products & Services. The following chart provides the sales breakdown for our five product categories for the year ended December 31, 2004:
Sales by Product CategoryYear Ended December 31, 2004
Prefabricated Components. We believe we are one of the largest manufacturers of Prefabricated Components for residential new construction in the U.S. According to the Freedonia Group, we are one of the leading manufacturers of wood roof trusses and floor trusses in the U.S. Prefabricated Components has been our fastest growing product category over the past five years. This growth has been a response to changing building practices that utilize more manufactured products, as well as a concerted effort to increase profitability through the sale of value-added products. Prefabricated Components are factory-built substitutes for job site-framing and include floor and roof trusses, wall panels, stairs, and engineered wood that we design and cut for each home. Our manufacturing facilities utilize the latest technology and the highest quality materials to produce a quality product, increase efficiency, reduce lead times, and minimize production errors. As a result, we believe we incur significantly lower engineering and set-up costs than do our competitors, contributing to improved margins and customer satisfaction. Sales of Prefabricated Components were $385.9 million during the year ended December 31, 2004, representing 18.8% of total sales.
Windows & Doors. The Windows & Doors category comprises the manufacturing, assembly and distribution of windows, and the assembly and distribution of interior and exterior door units. These products typically require a high degree of product knowledge and training to sell. As we continue to emphasize higher margin product lines, value-added goods like those in the Windows & Doors category are expected to increasingly contribute to our sales and overall profitability. Windows & Doors sales were $391.2 million during the year ended December 31, 2004, representing 19.0% of total sales.
Lumber & Lumber Sheet Goods. Lumber & Lumber Sheet Goods include dimensional lumber, plywood and oriented strand board (OSB) products used in on-site house framing. This product line has not grown at the same rate as our overall sales over the last five years, as demonstrated by the fact that it represented 39.6% of total sales for the year ended December 31, 2004, compared to 47.6% of total sales in 1999. This shift in product mix has been intentional as we have sought to migrate builder demand toward higher margin Prefabricated Components for their framing needs. Despite this shift in product mix, we believe we have grown our market share for Lumber & Lumber Sheet Goods over this time period. We expect the Lumber & Lumber Sheet Goods business to remain a stable revenue source in the future, but to grow over the long-term at a slower rate than our other business lines. Sales of Lumber & Lumber Sheet Goods for the year ended December 31, 2004, were $815.3 million.
Millwork. Millwork represents a small, but profitable product category. This category includes interior and exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard® brand name. Millwork sales during the year ended December 31, 2004, were $175.9 million, representing 8.5% of total sales.
Other Building Products & Services. Other Building Products & Services consists of products including cabinets, gypsum, roofing, and insulation, and services including turn-key framing and shell construction, design assistance and professional installation of products which spans all our product categories. We provide professional installation and turn-key services as a solution for our homebuilder customers to increase productivity and avoid project delays. We believe these services require scale, capital and sophistication that smaller competitors do not possess. Sales of Other Building Products & Services were $289.7 million during the year ended December 31, 2004, representing 14.1% of total sales.
SALES AND MARKETING
Our marketing and sales strategy primarily seeks to attract and retain customers through exceptional customer service, leading product quality, a broad and complete product and service offering, and competitive pricing. This strategy is centered on building and maintaining strong customer relationships rather than traditional marketing and advertising. Homebuilders recognize the value we add: shorter lead times, lower material costs, faster project completion and higher quality. We expect to continue to successfully compete for business and gain market share through superior service.
Our experienced, locally focused sales force is at the core of our sales effort. This sales effort involves deploying salespeople who are skilled in housing construction to meet with a homebuilders construction superintendent, local purchasing agent, or local executive with the goal of becoming the primary product supplier. If selected by the homebuilder, the salesperson and his or her team of experts review blueprints for the contracted homes and advise the homebuilder in areas such as opportunities for cost reduction and regional aesthetic preferences. Next, the team determines the specific package of our products that are needed to complete the project and schedules a sequence of site deliveries. Our large delivery fleet and comprehensive inventory management system enable us to provide just-in-time product delivery, ensuring a smoother and faster production cycle for the homebuilder. Throughout the construction process, the salesperson makes frequent site visits to ensure timely delivery and proper installation and to make suggestions for efficiency improvements. Our level of service is highly valued by customers and generates significant customer loyalty. We currently employ over 500 outside sales representatives, who are typically paid a commission based on gross margin dollars collected and work with over 300 internal sales coordinators and product specialists.
OUR CUSTOMERS
Our customer mix is a balance of large national homebuilders, regional homebuilders, and local builders. Our customer base is highly diversified, with the top ten customers accounting for approximately 22% of sales in the year ended December 31, 2004, and no single customer accounting for more than 4.2% of sales. At the same time, our top ten customers are comprised primarily of the largest Production Homebuilders, including publicly traded companies such as Centex, D.R. Horton, Hovnanian Enterprises, Pulte, and Ryland Group.
We believe we are one of the top two suppliers of our product categories to the Production Homebuilders, the fastest growing segment of the residential builders, and are the largest supplier of our product categories to Production Homebuilders in our geographic markets as a whole. In line with the growth of this segment, we have increased our sales to the ten largest Production Homebuilders, as measured by homes sold, by approximately 73% from $260.8 million in 2001 to $451.8 million in the year ended December 31, 2004.
In addition to the largest Production Homebuilders, we also service and supply regional and local custom homebuilders. Custom homebuilders require high levels of service since our sales team must work very closely with the designers on a day-to-day basis in order to ensure the appropriate products are produced and delivered to the building site. To account for these increased service costs, pricing in the industry is generally commensurate with the level of service provided and the volumes purchased.
MATERIALS AND SUPPLIER RELATIONSHIPS
We purchase raw materials for our manufacturing plants and finished products for resale by our distribution operations. The key raw materials for our Prefabricated Components are dimensional lumber, OSB and engineered wood. We purchase door slabs and hardware for our pre-hanging door plants, Celuka-blown PVC for our custom millwork plants, and aluminum and vinyl extrusions and glass for our window plant. Our distributed products include windows, doors, millwork, lumber and lumber sheet goods. Our largest suppliers are national lumber and wood products producers and distributors such as Bluelinx, Boise Cascade, International Paper, and Weyerhaeuser and building products manufacturers such as Masonite and MW Windows. We believe there is sufficient supply in the marketplace to competitively source most of our requirements without reliance on any particular supplier and that our diversity of suppliers affords us purchasing flexibility. Due to our centralized oversight of purchasing and our large lumber and OSB purchasing volumes, we are able to maximize the advantages of both our and our suppliers national footprints and negotiate purchases in multiple markets to achieve more favorable contracts with respect to price, terms of sale, and supply than our regional competitors. Additionally, for certain customers, we institute purchasing programs on raw materials such as OSB to align portions of our procurement costs with our pricing commitments. We purchase lumber and OSB on the spot market as necessary to fulfill customer contracts.
We currently source products from over 5,000 suppliers in order both to reduce our dependence on any single company and to maximize purchasing leverage. Although no purchases from any single supplier represent more than 11% of our cost of goods sold, we believe we are one of the largest customers for many suppliers, and therefore have significant purchasing leverage. We have found that using multiple suppliers ensures a stable source of products and the best purchasing terms as the suppliers compete to gain and maintain our business.
We maintain strong relationships with our suppliers, and we believe opportunities exist to improve purchasing terms in the future, including inventory storage or just-in-time delivery to reduce our inventory carrying costs. Additional procurement cost savings and purchasing synergies are expected to further enhance our margins and cash flow generation capability.
MANUFACTURING
We manufacture four different types of products: Prefabricated Components, millwork, windows, and pre-hung doors. Our Prefabricated Components allow builders to build higher quality homes more efficiently. Roof trusses, floor trusses, wall panels and stair units are built in an indoor, factory-controlled environment. Engineered wood floors and beams are cut to the required size and packaged for the given application at many of our locations. Without Prefabricated Components, builders construct these items on site, where weather and variable labor quality can negatively impact construction cost, quality and installation time. In addition, engineered wood beams have greater structural strength than conventional framing materials, allowing builders to frame houses with more open space and to create a larger variety of house designs. Engineered wood floors are stronger and straighter than conventionally framed floors.
We manufacture custom millwork products such as synthetic exterior trim, custom windows and box columns under the Synboard® brand name. Our millwork is produced from extruded PVC and offers several advantages over traditional wood features, such as greater durability and less maintenance requirements. We also operate an aluminum and vinyl window plant in Houston, Texas which allows us
to provide builders, primarily in the Texas market, with an adequate supply of cost-competitive products. Our pre-hung interior and exterior doors consist of a door slab with the hinges and door jambs attached, reducing job site installation time and providing higher quality finished door units than those constructed on site.
Prefabricated Components Trusses and Wall Panels. Truss and wall panel production has two steps, design and fabrication. Each house requires its own set of designed shop drawings, which vary by builder type: non-custom versus custom builders. Non-custom builders use prototype house plans, which may be modified for each individual customer. The number of changes made to a given prototype house, and the number of prototype houses in existence, varies by builder and their construction and sales philosophy. We maintain an electronic master file of trusses and wall panels for each builders prototype houses. There are three primary benefits to master filing. First, it reduces design cost as a designer can make minor changes to a prototype house rather than designing the components individually. Second, it improves design quality as the majority of the houses design is based on a proven prototype. Third, master filing allows us to change one file and update all related prototype house designs automatically as we improve the design over time or if the builder modifies the base prototype house. We do not use a master file for custom builders who do not replicate houses, as it is not cost-effective. For these builders, the components are designed individually for each house.
After the shop drawings are designed for a given house, regardless of whether or not the master file system is used, the shop drawings are downloaded into a proprietary software system to review the design for potential errors and to schedule the job for production. The fabrication process begins with the cutting of individual pieces of lumber to the lengths required to assemble the finished component. Shop drawings are downloaded from the design department to our computerized saws. The cut lumber is then joined together to form the roof trusses, floor trusses or wall panels. The finished components are stored by house awaiting shipment to the job site.
We are able to generate fabrication time standards for each component during the design step. We use these standards to measure efficiency by comparing actual production time with the calculated standard. Each plants performance is benchmarked by comparing efficiency across plants.
Prefabricated Components Engineered Wood. As with trusses and wall panels, engineered wood components have a design and fabrication step. Engineered wood floors are designed using a master filing system similar to the truss and wall panel system. Engineered wood beams are designed to ensure the beam will be structurally sound in the given application. After the design phase, a printed layout is generated. This layout is used to cut the engineered wood to the required length and assemble all of the components into a house package. The components are then installed on the job site. Engineered wood design and fabrication is done at the majority of our distribution locations.
Prefabricated Components Stairs. We manufacture box stairs at several of our locations and curved stairs at our East Brunswick, New Jersey location. After a house is framed, our salesman takes measurements at the job site prior to manufacturing to account for any variation between the blueprints and the actual framed house. Box stairs can be fabricated based on these measurements. Curved stairs are typically a more customized product used in the entry foyer of a home and require additional designing, which is done using a CAD based computer program. Box stairs are manufactured by routing 1 1/4 inch by 12 inch stringer lumber to form the frame that holds the stair treads. The treads are then nailed and glued into the frame. The frame for curved stairs is built on a specially designed jig to give the stairs the desired curvature.
Custom Millwork. Our manufactured custom millwork consists primarily of synthetic exterior trim, custom windows, features and box columns we sell under the Synboard® brand name. Synboard® requires no ongoing maintenance as compared to wood exterior trim products that require periodic caulking and painting. Synboard® products are sold throughout our company and are manufactured at three locations.
Sheets of 4 foot by 18 or 20 foot Celuka-blown, extruded PVC (Synboard®) are sanded, cut and shaped to produce the desired product. Exterior trim boards are produced by cutting the Synboard® into the same industry-standard dimensions used for wood-based exterior trim boards. Exterior features are formed by assembling pieces of Synboard® and other PVC-based moldings that have been cut, heated and bent over forms to achieve the desired shape. Custom windows are made by building the frame from Synboard® and glazing the glass into place. Box columns are fabricated from sections of PVC that are cut on a 45 degree angle and mitered together.
Windows. We manufacture a full line of traditional aluminum and vinyl windows at a 200,000 square foot manufacturing facility located in Houston, Texas. The process begins with the purchase of aluminum and vinyl lineal extrusions. These extrusions are cut to size and joined together to form the window frame and sash. Sheet glass is purchased and cut to size. Two pieces of identically shaped glass are then sealed together with a sealing compound to create a glass unit with improved insulating capability. The sealed glass unit is then inserted and glazed into the window frame and sash. The unit is completed when a balance is installed to operate the window and a lock is added to secure the window in a closed position.
Pre-hung Doors.
We
pre-hang interior and exterior doors at many of our locations.
Door slabs and pre-cut door jambs are inserted into a door
machine. The door machine bores holes into the doors for the
door hardware and applies the jambs and hinges to the door slab.
The casing that frames interior doors is then applied at a
separate station. Exterior doors do not have a casing, and
instead may have sidelights applied to the sides of the door, a
transom attached over the top of the door unit and a door sill
applied to the threshold.
COMPETITION
We compete in the professional segment (Pro
Segment) of the U.S. residential new construction
building products supply market, which is estimated by the Home
Improvement Research Institute to have 2004 annual sales of
$145.05 billion. The Pro Segment of this market consists
predominantly of small, privately owned companies, including
framing and shell construction contractors, local and regional
materials distributors, single or multi-site lumberyards, and
truss manufacturing and millwork operations, most of which have
limited access to capital and lack sophisticated information
technology systems and large-scale procurement capabilities.
According to ProSales Magazine, the top ten Pro Segment
suppliers account for about 12% of the total market, which
remains fragmented due to its overall size, the diversity of the
target customer market, and variations in local building
preferences and practices. There are only six building products
suppliers in the Pro Segment that generate over $1 billion
in sales according to ProSales Magazine. Our largest competitors
in our markets are 84 Lumber (a privately held company),
Stock Building Supply (formerly known as Carolina Holdings, a
unit of U.K.-based Wolseley, plc), and Strober (a privately held
company).
We focus on a distinctly different target market
than the home center retailers such as Home Depot and
Lowes, who primarily serve do-it-yourself and professional
remodeling customers. By contrast, our customers consist of
professional homebuilders and those that provide construction
services to them, with whom we develop strong relationships. The
principal methods of competition in the Pro Segment are the
development of long-term relationships with professional
builders and retaining such customers by delivering a full range
of high-quality products on time and offering trade credit,
competitive pricing, flexibility in transaction processing, and
integrated service and product packages, such as turnkey framing
and shell construction, as well as prefabricated components and
installation. Though some of our competitors may have access to
greater resources than do we, our geographic scope and the
breadth of our product and service offerings position us well to
meet the needs of our customers and retain an advantage over
such competitors. In addition, our leading market positions in
the highly competitive Pro Segment create economies of scale
that allow us to cost-effectively supply our customers, which
both enhances profitability and reduces the risk of losing
customers to competitors.
We believe we are the number one or two building
products supplier for single-family residential new construction
in approximately 75% of the geographic markets in which we
operate. We are also the largest supplier of our product
categories to the Production Homebuilders in our geographic
markets as a whole. Due in part to our long-standing customer
relationships, local market knowledge and competitive pricing,
we believe we have substantial competitive advantages over the
small, privately owned companies with which we primarily
compete. According to 2003 U.S. Census data, we have
operations in 20 of the top 50 U.S. Metropolitan
Statistical Areas as ranked by single family housing permits and
approximately 44% of U.S. housing starts occurred in states
in which we operate.
EMPLOYEES
At December 31, 2004, we had approximately
6,200 employees, none of whom was represented by a union.
We believe that we have good relations with our employees.
INFORMATION TECHNOLOGY SYSTEMS
Our primary ERP system, which we use for
operations representing 70% of our revenue, is a proprietary
system that has been highly customized by our computer
programmers. The system has been designed to operate our
businesses in a highly efficient manner. The materials required
for thousands of standard builder plans are stored by the system
for rapid quoting or order entry. Hundreds of price lists are
maintained on thousands of SKUs, facilitating rapid price
changes in changing product cost environments. A customers
order can be tracked at each stage of the process and billing
can be customized to reduce a customers administrative
costs and speed payment. We also operate a legacy ERP system for
operations representing 30% of our revenue. This system allows
us to effectively manage the business and deliver outstanding
customer service, but lacks several of the enhancements we have
made to our primary system. Accordingly, we are in the process
of migrating our remaining operations from the legacy system to
our primary system.
We have implemented a single financial reporting
system that has been highly customized for our business. Our
Hyperion financial reporting package is used to aggregate data
from our two ERP systems. The Hyperion system effectively
consolidates the financial information of each location to allow
us to plan, track, and report performance and compensation
measures. Our state-of-the-art information technology
infrastructure affords our corporate headquarters complete
financial oversight and control over each of our locations,
allowing us to minimize errors and maximize efficiency and
reliability.
We have developed a proprietary program for use
in our component plants. This software reviews product designs
for errors, schedules the plants and provides the data used to
measure plant efficiency. In addition, we have purchased several
software products that have been integrated with our primary ERP
system. These programs assist in analyzing blueprints to
generate material lists, configure kitchen cabinet orders to
submit to manufacturers, purchase lumber products from the
lowest cost source and configure orders and schedule production
in our window plants.
FACILITIES AND PROPERTIES
We have a broad network of distribution and
manufacturing facilities in 11 states throughout the
southern and eastern U.S. We have 62 distribution
facilities and 50 manufacturing facilities, many of which are
located on the same premises as our distribution facilities. Our
manufacturing facilities produce trusses, wall panels,
engineered wood, stairs, windows, pre-hung doors, and custom
millwork. We are organized into three regional operating groups,
Atlantic, Central, and Southeast, in order to achieve operating
efficiencies while maintaining maximum capacity for growth. The
Atlantic and Central markets generally consist of larger, higher
volume builders than the Southeast markets. As a result, each
manufacturing facility in the
Atlantic and Central regions typically supplies a
single distribution center, while Southeast manufacturing
facilities supply multiple distribution centers within an
economical three-hour shipping radius.
Distribution centers are generally leased and
typically include 15 to 25 acres of outside storage, a
60,000 square foot warehouse, 10,000 square feet of
office space, and 30,000 square feet of covered storage.
The outside area provides space for lumber storage and a staging
area for delivery while the warehouse stores millwork, windows,
and doors. The distribution centers are generally located in
industrial areas with low cost real estate and easy access to
freeways to maximize distribution efficiency and convenience. A
majority of the distribution centers are situated on rail lines
for efficient receipt of goods.
Our manufacturing facilities are generally
located on the same premises as our distribution facilities.
Truss and panel manufacturing facilities vary in size from
30,000 square feet to 60,000 square feet with 8 to
10 acres of outside storage for lumber and for finished
goods. Our window manufacturing facility in Houston, Texas has
approximately 200,000 square feet.
We lease most of our distribution and
manufacturing facilities. These leases generally have an initial
operating lease term of 5 to 15 years and most provide
options to renew for specified periods of time. A majority of
our leases provide for fixed annual rentals. Certain of our
leases include provisions for escalating rent, generally based
on changes in the consumer price index. Most of the leases
require us to pay taxes, insurance and common area maintenance
expenses associated with the properties.
The following chart highlights the location of
the Companys distribution and manufacturing operations:
We operate a fleet of approximately 1,500 trucks
to deliver products from our distribution and manufacturing
centers to job sites. Through our emphasis on local market
flexibility and strategically placed locations, we minimize
shipping and freight costs while maintaining a high degree of
local market expertise. Through knowledge of local homebuilder
needs, customer coordination, and rapid restocking ability, we
reduce working capital requirements and guard against
out-of-stock products. We believe that this reliability is
highly valued by our customers and reinforces customer
relationships.
LEGAL PROCEEDINGS
We are involved in various claims and lawsuits
incidental to the conduct of our business in the ordinary
course. We carry insurance coverage in such amounts in excess of
our self-insured retention as we believe to be reasonable under
the circumstances and that may or may not cover any or all of
our liabilities in respect of claims and lawsuits. We do not
believe that the ultimate resolution of these matters will have
a material adverse impact on our financial position or operating
results.
Although our business and facilities are subject
to federal, state, and local environmental regulation,
environmental regulation does not have a material impact on our
operations. We believe that our facilities are in material
compliance with such laws and regulations. As owners and lessees
of real property, we can be held liable for the investigation or
remediation of contamination on such properties, in some
circumstances without regard to whether we knew of or were
responsible for such contamination. Our current expenditures
with respect to environmental investigation and remediation at
our facilities are minimal, although no assurance can be
provided that more significant remediation may not be required
in the future as a result of spills or releases of petroleum
products or hazardous substances or the discovery of unknown
environmental conditions.
Facility Location
Address
General Character
Leased or Owned
Florida
Bunnell
1700 N. State St.
Truss Plant
L
2121 N. State St.
Distribution Center
L
Jacksonville
6550 Roosevelt Blvd.
Truss Plant; Distribution Center
O/L
8275 Forshee Dr.
Millwork Shop
L
Lake City
2525 E. Duval St.
Truss Plant
L
Orlando
11501 Ryland Ct.
Millwork Shop; Distribution Center
O
Sanford
2901 Aileron Cr.
Truss Plant
L
Tampa
1820 Massaro Blvd.
Truss Plant; Millwork Shop; Panel Plant;
Distribution Center
L
West Palm Beach
8333 Southern Blvd.
Distribution Center
L
Georgia
Atlanta (Norcross)
6870 Mimms Dr.
Truss Plant; Millwork Shop; Distribution Center
L
Blairsville
52 Cleveland St.
Distribution Center
L
College Park (South Atlanta)
5230 Feldwood Rd.
Millwork Shop; Distribution Center
L
Columbus
5515 Veterans Pkwy.
Distribution Center
L
Gainesville
1285 W. Ridge Rd.
Distribution Center
L
LaGrange
195 Davis Rd.
Distribution Center
O
Kentucky
Erlanger
39 Montgomery Rd.
Millwork Shop; Distribution Center
L
Facility Location
Address
General Character
Leased or Owned
Maryland
Frederick
3302 Ballenger Creek Pike
Millwork Shop
O
295 Bailes Lane Rd.
Panel Plant
L
North East
18 Industrial Ave.
Truss Plant; Distribution Center
L
102 Pennisula Dr.
Panel Plant
L
Point of Rocks
4011 Rock Hall Rd.
Millwork Shop; Distribution Center
L
New Jersey
East Brunswick
40-B Cotters Ln.; 35 Kimberly Rd.
Millwork Shop
L
South Brunswick
1 Progress Rd.
Distribution Center
L
North Carolina
Aberdeen
900 N. Pinehurst St.
Distribution Center
L
Apex
12816 US Hwy. 64 West
Truss Plant; Panel Plant; Millwork Shop;
Distribution Center
L
Asheboro
3060 US Hwy. 220 Bus.
South
Distribution Center
O
Asheville
332 Haywood Rd.
Distribution Center
O
Cashiers
181 Hwy. 64 West
Distribution Center
L
Harrisburg (Charlotte)
7770 Caldwell Rd.
Truss Plant; Panel Plant; Distribution Center
L
Fayetteville
1135 Robeson St.
Truss Plant; Distribution Center
L
Hendersonville
433 4th Ave. East
Distribution Center
L
High Point
1601 S. Main St.
Distribution Center
L
Hillsborough
401 Valley Forge Rd.
Distribution Center
L
Pisgah Forest (Brevard)
1450 Ecusta Rd.
Distribution Center
L
Southport
1609 Howe St. SE
Distribution Center
O
Wake Forest
4900 NC Hwy. 98 West
Millwork Shop; Distribution Center
L
Washington
515 East Water St.
Distribution Center
L
Waynesville
970 Brown Ave.
Distribution Center
L
Wilmington
5415 Market St.
Distribution Center
O
Ohio
Cincinnati
7600 Colerain Ave.
Millwork Shop; Distribution Center
L
Mason
1242 Reading Rd.
Truss Plant; Panel Plant; Distribution Center
O
South Carolina
Anderson
1510 Pearman Dairy Rd.
Distribution Center
L
Beaufort
1 Parris Island Gateway
Distribution Center
L
Cowpens
151 Dewberry Rd.
Truss Plant
O
101 Dewberry Rd.
Panel Plant
O
Charleston
4450 Arco Ln.
Millwork Shop; Distribution Center
L
Facility Location
Address
General Character
Leased or Owned
Columbia
919 S. Edisto Ave.
Millwork Shop; Distribution Center
L
Conway
651 Century Cr.
Millwork Shop; Distribution Center
L
Edisto Island
796 Hwy. 174
Distribution Center
L
Florence
1724 West Lucas St.
Distribution Center
O
Goose Creek
111 Lumber Ln.
Distribution Center
L
Greenville
801 S. Washington Ave.
Millwork Shop; Distribution Center
O
Hilton Head
69 Matthews Dr.
Distribution Center
O
Johns Island
3155 Maybank Hwy.
Distribution Center
L
Little River
603 Hwy. 17 South
Distribution Center
L
Myrtle Beach
4920 Hwy. 17 Bypass
Millwork Shop
L
North Augusta
871 Edgefield Rd.
Distribution Center
L
Orangeburg (Charleston)
295 Prosperity Dr.
Panel Plant
O
Pawleys Island
226 Tiller Dr.
Distribution Center
O
Ridgeland (Cherry Point)
Rt. 1, Box 170
Distribution Center
O
Seneca
101 Lumber Ln.
Distribution Center
O
Simpsonville
313 N. Main St.
Distribution Center
L
Spartanburg
8035 Howard St.
Distribution Center
O
Summerville
1507 West 5th N. St.
Distribution Center
L
Sumter
114 & 116 Myrtle
Beach Hwy.
Truss Plant
O
Tennessee
Johnson City
407 E. State of
Franklin Rd.
Distribution Center
O
Lebanon (Nashville)
3135 Hwy. 109 North
Millwork Shop; Distribution Center
L
6010 Division St.
Truss Plant; Panel Plant
L
Morristown
1907 W. Morris Blvd.
Distribution Center
L
Mt. Carmel (Kingsport)
230 West Main
Distribution Center
L
Piney Flats
260 Piney Flats Rd.
Truss Plant; Millwork Shop
O
Texas
Arlington
3403 E. Abram
Millwork Shop; Distribution Center
L
Grand Prairie
1790 Westpark, Suite 103
Millwork Shop
L
Houston
5515 Brittmore
Window Manufacturing Plant
L
Lewisville
902 N. Mill St.
Distribution Center
O
Taylor (Austin)
3800 W. 2nd St.
Distribution Center
L
San Antonio
6305 Camp Bullis Rd.;
1515 Goliad Rd.
Millwork Shop
L
6448 Camp Bullis Rd.
Distribution Center
L
Facility Location
Address
General Character
Leased or Owned
Virginia
Bristol
941-45 W. State St.
Distribution Center
O
Culpeper
13234 Airpark Dr.
Truss Plant; Panel Plant; Millwork Shop;
Distribution Center
L
Management
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to our directors,
director nominee, and executive officers, as of the date hereof,
is set forth below:
Name
Age
Position
65
President, Chief Executive Officer, and Director
40
Senior Vice President and Chief Operating Officer
44
Senior Vice President and Chief Financial Officer
50
Senior Vice President and General Counsel
55
Vice President, Manufacturing
57
Director, Chairman of the Board
55
Director
44
Director
36
Director
57
Director Nominee
(1) | Mr. Griffin has agreed to become a member of our board of directors upon the completion of this offering and has consented to being named in this prospectus |
Our board of directors consists of five members elected annually by our stockholders. All executive officers are chosen by the board of directors and serve at its pleasure. There are no family relationships among any of the directors or executive officers, and there is no arrangement or understanding between any of the directors or executive officers and any other person pursuant to which he was selected as a director or officer. Unless otherwise indicated, each director and officer is a citizen of the United States and the business address of each individual is: 2001 Bryan Street, Suite 1600, Dallas, Texas 75201.
Set forth below is a brief description of the business experience of each of our directors, executive officers, and our three regional group presidents.
Floyd F. Sherman, President, Chief Executive Officer, and Director. Mr. Sherman has been a director since 2001, when he came to BFS. Prior to joining BFS, he spent 28 years at Triangle Pacific/ Armstrong Flooring, the last nine of which he served as Chairman and Chief Executive Officer. Mr. Sherman has over 40 years of experience in the building products industry. A native of Kerhonkson, New York, and a veteran of the U.S. Army, Mr. Sherman is a graduate of the New York State College of Forestry at Syracuse University. He also holds an M.B.A. degree from Georgia State University.
Kevin P. OMeara, Chief Operating Officer. Mr. OMeara is a co-founder of BFS. At the inception of BFS, he served as the Chief Financial Officer. Mr. OMeara was promoted to his current position in May 2000. Prior to co-founding BFS, Mr. OMeara served as Vice President, Strategic Planning and Business Development at Fibreboard Corporation. He worked three years in the Dallas office of Bain & Company, a strategic management consulting firm. He also worked six years at two private investment firms. Mr. OMeara is a C.P.A. and has a B.A. (economics) and a B.B.A. (accounting) from Southern Methodist University and an M.B.A. from Harvard Business School.
Charles L. Horn, Chief Financial Officer. Mr. Horn joined BFS in May 1999 as Vice President-Finance and Controller. He was promoted to CFO in May 2000. Prior to joining the Company, Mr. Horn served
in a variety of positions at Pier One Imports, most recently as Vice President and Treasurer. Prior to Pier One, he served as Vice President Finance/ Chief Financial Officer of Conquest Industries. Mr. Horn also has seven years of public accounting experience with Price Waterhouse. Mr. Horn is a C.P.A. and received his B.B.A. degree from Abilene Christian University and M.B.A. from The University of Texas at Austin.
Donald F. McAleenan, Senior Vice President and General Counsel. Mr. McAleenan is a co-founder of BFS and serves as General Counsel. Prior to co-founding BFS, Mr. McAleenan served as Vice President and Deputy General Counsel of Fibreboard Corporation from 1992 to 1997. Mr. McAleenan was also Assistant General Counsel of AT&E Corporation and spent nine years as a securities lawyer at two New York City law firms. Mr. McAleenan has a B.S. from Georgetown University and J.D. from New York University Law School.
Frederick B. Schenkel, Vice President, Manufacturing. Mr. Schenkel joined BFS in 1998 when the Company acquired BSL from Pulte Home Corporation. At BSL, and later with the Company, Mr. Schenkel was a location manager. He became Vice President of the Atlantic Group in 1999 and was promoted to Vice President, Manufacturing in 2002. Mr. Schenkel has more than 31 years of experience managing manufacturing facilities in the industry and, before joining BSL, held such positions as manufacturing manager for The Ryland Group, Inc., vice president of manufacturing for Diversified Homes Corporation of Maryland, and plant manager for Regional Building Systems, Inc. Mr. Schenkel holds a B.A. in accounting from Saint Bonaventure University.
Morris E. Tolly, Southeast Group President. Mr. Tolly has been with the Company since 1998 when the Company acquired Pelican Companies, Inc. (Pelican). Mr. Tolly was a General Manager and Market Manager for Pelican and later for the Company prior to being promoted in 2000 to President of the Southeast Group. Overall, Mr. Tolly has over 40 years of experience in the building products industry.
Douglas E. Schweinhart, Atlantic Group President. Mr. Schweinhart joined BFS in 1998 when the Company acquired Builders Supply & Lumber Co. (BSL) from Pulte Home Corporation. Previously, Mr. Schweinhart was a founder and Vice President of BSL. He also spent 12 years with Lowes Contractor Yards in various capacities. Overall, Mr. Schweinhart has over 28 years of experience in the building products industry. Mr. Schweinhart received his B.S. degree in Finance from Towson State University.
Alan K. Davenport, Central Group President. Mr. Davenport joined BFS in 2000 as Vice President of National Sales and Marketing. In December 2002, Mr. Davenport was promoted to President of the newly formed Central Group. Prior to joining BFS, Mr. Davenport spent over ten years in the building products industry in various executive positions with Wickes, Inc. and 84 Lumber. Mr. Davenport is a graduate of the University of Cincinnati. He holds a B.S. degree in architecture/construction management technology.
Paul S. Levy, Director, Chairman of the Board. Mr. Levy has been a director since 1998. Mr. Levy is a Senior Managing Director of JLL Partners, Inc., which he founded in 1988. Mr. Levy serves as a director of several companies, including Fairfield Manufacturing Company, Inc., Lancer Industries, Inc., Motor Coach Industries International, Inc., Mosaic Sales Solutions, Corp., PGT Industries, Inc., and C.H.I. Overhead Doors, Inc.
Alexander R. Castaldi, Director. Mr. Castaldi has been a director since 2004. Mr. Castaldi, a C.P.A., is a Senior Managing Director of JLL Partners, Inc., which he joined in 2003, and was previously a CFO of three very successful management buyouts. He was most recently Executive Vice President, Chief Financial and Administration Officer of Remington Products Company. Previously, Mr. Castaldi was Vice President and Chief Financial Officer at Uniroyal Chemical Company. From 1990 until 1995, he was Senior Vice President and Chief Financial Officer at Kendall International, Inc. During the 1980s, Mr. Castaldi was also Vice President, Controller of Duracell, Inc. and Uniroyal, Inc. Mr. Castaldi serves as
a director of several companies, including Motor Coach Industries International, Inc., Mosaic Sales Solutions, Corp., PGT Industries, Inc., and C.H.I. Overhead Doors, Inc.
Ramsey A. Frank, Director. Mr. Frank has been a director since 2001. Mr. Frank is a Senior Managing Director of JLL Partners, Inc., which he joined in 1999. From January 1993 to July 1999, Mr. Frank was a Managing Director at Donaldson, Lufkin & Jenrette, Inc., where he headed the restructuring group and was a senior member of the leveraged finance group. Mr. Frank serves as a director of several companies, including Motor Coach Industries International, Inc., C.H.I. Overhead Doors, Inc., PGT Industries, Inc., and Medical Card System, Inc.
Brett N. Milgrim, Director. Mr. Milgrim has been a director since 1999. Mr. Milgrim is a director of both PGT Industries, Inc. and C.H.I. Overhead Doors, Inc. and is a Managing Director of JLL Partners, Inc., which he joined in 1997.
Robert C. Griffin, Director. Mr. Griffin has been nominated to become a director upon completion of this offering. In March 2002, Mr. Griffin retired from Barclays Capital, where from June 2000 to March 2002 he was Head of Investment Banking, Americas and a member of the Management Committee. Prior to joining Barclays Capital, Mr. Griffin was a member of the Executive Committee for the Montgomery Division of Bank of America Securities and held a number of positions with Bank of America, including Group Executive Vice President and Head of Global Debt Capital Raising and Senior Management Council Member. Mr. Griffin is a member of the Advisory Council of PriceMetrix, Inc. and has been nominated to serve on the board of directors of Commercial Vehicle Group, Inc.
Board Composition
We intend to appoint an independent director prior to the completion of this offering. Upon completion of this offering, our board will consist of the new independent director and Messrs. Sherman, Levy, Castaldi, Frank, and Milgrim. Immediately prior to the consummation of this offering, we will adopt our amended and restated articles of incorporation and our amended and restated by-laws, which will provide that our board of directors be divided into three classes, each of whose members will serve for a staggered three-year term. We intend to appoint one additional independent member to the board of directors within 90 days of the consummation of this offering, and, within one year of the consummation of this offering, we expect to appoint that number of additional independent members to the board of directors as are necessary to comply with the requirements of the Sarbanes-Oxley Act of 2002 and The Nasdaq National Market.
Board Committees
Upon completion of this offering, our board of directors intends to appoint an audit committee, the composition of which will comply with the requirements of The Nasdaq National Market and the Sarbanes-Oxley Act of 2002. Our board of directors also intends to appoint such other committees as may be required by the rules of The Nasdaq National Market.
The audit committee will select, on behalf of our board of directors, an independent public accounting firm to be engaged to audit our financial statements, discuss with the independent auditors their independence, review and discuss the audited financial statements with the independent auditors and management, and recommend to our board of directors whether the audited financials should be included in our Annual Reports on Form 10-K to be filed with the SEC.
Compensation of Directors
For the year ended December 31, 2004, the individuals serving on the board of directors did not receive any compensation for their service as directors. We intend to set the compensation for independent directors prior to completion of this offering. We do not intend to pay compensation to individuals serving on our board of directors who are employees or affiliates of the Company for their service as directors.
Executive compensation
SUMMARY OF COMPENSATION
The following summary compensation table sets
forth information concerning compensation earned in the fiscal
year ended December 31, 2004, by our chief executive
officer and our other four most highly compensated executive
officers serving at the end of the last fiscal year. We refer to
these executives as our named executive officers
elsewhere in this prospectus.
Summary Compensation Table
Annual Compensation
Long-Term Compensation
Securities Underlying
All Other
Year
Salary
Bonus
Options(#)
Compensation(1)
2004
$
600,000
$
1,107,036
President and Chief Executive
Officer
2004
$
360,000
$
848,444
56,592
$
3,769
Senior Vice President and Chief Operating
Officer
2004
$
330,000
$
927,740
111,783
$
4,925
Senior Vice President and Chief Financial
Officer
2004
$
320,000
$
754,172
57,577
$
6,500
Senior Vice President and General
Counsel
2004
$
232,000
$
492,097
5,000
$
6,500
Vice President, Manufacturing
(1) | Reflects Company matching contributions under our 401(k) plan. |
The following table sets forth information
concerning the grant of stock options to each of our named
executive officers during the last fiscal year.
Option Grants in Last Fiscal Year
Individual Grants
Number of
Percent of total
securities
options granted
Exercise or
Grant date
underlying options
to employees
base price
present
Name
granted(1)
in fiscal year
($/Sh)
Expiration date
value($)(2)
56,592
3.7
%
$
3.15
February 27, 2014
$
28,296
111,783
7.4
%
$
3.15
February 27, 2014
$
55,892
57,577
3.8
%
$
3.15
February 27, 2014
$
28,789
5,000
0.3
%
$
3.15
February 27, 2014
$
2,500
(1) | These options vest in full on December 31, 2011. These options have accelerated vesting provisions that provide that (a) one sixth of the options will vest on each of December 31, 2004, 2005, and 2006, if certain annual financial performance targets are met in the applicable year; (b) one half of the options will vest on December 31, 2006, if certain cumulative financial performance targets for the three calendar years ended December 31, 2006, are met; and (c) upon a change in control of the Company some or all of the previously unvested options will vest if certain financial targets have been met. |
(2) | The options are valued by the minimum value option pricing variation of the Black-Scholes pricing model. The following weighted average assumptions were used for the grants: expected term six years; expected volatility 0.00%; expected dividend yield 0.00%; and risk free rate 3.01%. No adjustment was made for non-transferability or risk of forfeitures. |
The following table sets forth information
concerning the exercise of stock options during the last fiscal
year by each of our named executive officers and the number and
value of unexercised options held by such individuals as of the
end of the last fiscal year.
Aggregated Option Exercises in Last Fiscal
Year
Value of Unexercised In-
Number of securities
the-Money Options at
underlying unexercised
Fiscal Year-End ($)
Shares acquired
Value
options at fiscal year-end(#)
Exercisable/
Name
on exercise(#)
realized($)
exercisable/unexercisable(1)
Unexercisable
851,814/ 283,939
$
10,945,810/ $3,648,616
350,158/ 132,341
$
4,499,530/ $1,700,582
181,292/ 143,707
$
2,329,602/ $1,846,635
293,534/ 118,965
$
3,771,912/ $1,528,700
12,433/ 17,567
$
159,764/ $225,736
(1) | In connection with the payment of an extraordinary dividend to our stockholders in February 2004, the exercise price of most of our then-outstanding stock options, including all stock options held by our named executive officers, was adjusted to take into account the decrease in the fair market value of the underlying shares after the payment of the extraordinary dividend. With respect to our named executive officers, this adjustment resulted in the reduction of the exercise price of their options from $10.00 to $3.15 per share and applied to the following number of shares subject to options: Mr. Sherman, 1,135,753; Mr. OMeara, 425,907; Mr. Horn, 213,216; Mr. McAleenan, 354,922; and Mr. Schenkel, 25,000. |
Employment agreements
We have entered into employment agreements with four of our named executive officers. These employment agreements provide for Mr. Sherman to serve as President and as our Chief Executive Officer, Mr. OMeara to serve as our Senior Vice President of Operations and Chief Operating Officer, Mr. Horn to serve as our Senior Vice President of Finance and Chief Financial Officer, and Mr. McAleenan to serve as our Senior Vice President and General Counsel.
Mr. Shermans agreement
Mr. Shermans employment agreement was entered into on September 1, 2001, and, as amended on June 1, 2005, has a two-year term, with automatic one-year renewals commencing on the first anniversary of the effective date of the employment agreement, unless either party provides at least 90 days notice of non-renewal. In addition to providing for his annual base salary and employee benefits, Mr. Shermans employment agreement provides, among other things, that he will be eligible for an annual cash bonus of up to 133% of his base salary, as determined by our board of directors or the compensation committee, and for the initial grant of an option to purchase 1,135,753 shares of our common stock. Our board of directors may increase the amount of Mr. Shermans bonus if they deem such an increase appropriate. This option vests ratably on each of the first four anniversaries of the effective date of the employment agreement and in full upon a change of control (as defined in the employment agreement) of the Company.
Mr. Shermans employment agreement provides that if he is terminated by us without cause (as defined in the employment agreement) he will be entitled to payment of his annual base salary and health and welfare benefits for the remainder of the term of the employment agreement. His employment agreement further provides that, during his employment with us and for one year thereafter, he may not disclose confidential information and may not directly or indirectly compete with the Company. In addition, he may not solicit any employees of the Company or any of its subsidiaries during his employment with us and for two years thereafter.
Agreements with other named executive officers
The employment agreements with Messrs. OMeara, Horn, and McAleenan were entered into on January 15, 2004. Each of these agreements has a one-year term, with automatic one-year renewals commencing on the first anniversary of the effective date of the employment agreement, unless either party provides at least 90 days notice of non-renewal. In addition to providing for an annual base salary and employee benefits, each of these agreements provides, among other things, that the executive is eligible for an annual cash bonus under our annual cash incentive plan, which currently provides for a target bonus percentage of 100% of the executives base salary. Pursuant to the employment agreements, this target bonus percentage will not be less than 100% of the executives base salary.
Under each of these employment agreements, in the event that (a) the executives employment is terminated by us without cause (as defined in the employment agreement), (b) the executive terminates his employment because of a material adverse diminution in job title or responsibilities or a relocation of his principal place of employment more than 100 miles from its current location without his consent, (c) we notify the executive of our intent not to renew the employment agreement and the executive delivers a notice of resignation (as defined in the employment agreement) within 90 days of receipt of the notice of non-renewal, or (d) the executives employment is terminated by mutual consent and the parties enter into an agreement whereby the executive agrees to be bound by the post-termination restrictive covenants in the agreement (described below), the executive will be entitled to continuation of his base salary and health benefits for one year after the date of termination, plus payment of an amount equal to his average bonus compensation (as defined in the employment agreement). During the executives employment with us and for one year thereafter, the executive may not disclose confidential information and may not directly or indirectly compete with the Company. In addition, the executive may
not solicit any employees of the Company or any of its subsidiaries during his employment with us and for two years thereafter.
1998 Stock Incentive Plan, as amended and restated March 1, 2004
The following is a summary of the material terms of the 1998 Stock Incentive Plan. The following description is subject to, and qualified in its entirety by reference to, the plan document, a copy of which has been filed as an exhibit to the registration statement of which this prospectus is a part.
The purpose of the 1998 Stock Incentive Plan is to provide our key employees, officers, consultants, and advisors with an opportunity to acquire shares of our common stock. Under this plan, our board of directors is authorized to grant stock options and other equity based awards, such as stock appreciation rights or restricted stock awards. In addition, the plan provides for the sale of shares to plan participants at prices to be determined by our board of directors. Stock options granted under the plan may be either incentive stock options within the meaning of Section 422(b) of the Code, or non-qualified stock options. A total of 6,400,000 shares of our common stock have been reserved for issuance under this plan. A total of 4,600,000 shares have been made available for the issuance of options and other equity based awards and a total of 1,800,000 shares have been made available for the sale of common stock. The plan is intended to comply with the requirements of Rule 701 under the Securities Act.
The plan is administered by our board of directors, which has the discretion to determine the persons to whom awards will be granted, the type of awards, the number of awards, vesting requirements, and other features and conditions of awards under the plan, including whether the awards will contain provisions relating to a change in control of the Company.
In the event of any extraordinary dividend, stock dividend, recapitalization, reclassification, merger, acquisition, consolidation, stock split, warrant or rights issuance, combination or exchange of shares, or other similar transaction, our board of directors has the sole discretion to equitably adjust the exercise price, the number and kind of shares of common stock available for issuance under the plan, the number and kind of shares covered by outstanding options, and other awards under the plan to preserve the value of each share of common stock and the value of each award.
In the event of a sale of the Company, the board of directors, in its sole discretion, may cancel all outstanding stock options issued under the plan and provide for a cash payment to each holder thereof equal to (i) the excess of the consideration received by the Companys stockholders pursuant to the sale of the Company over the exercise price per share of the option multiplied by (ii) the number of shares of common stock subject to the option.
No further grants will be made under the 1998 Stock Incentive Plan upon completion of this offering.
2005 Equity Incentive Plan
The following is a summary of the material terms of the 2005 Equity Incentive Plan. The following description is subject to, and qualified in its entirety by reference to, the plan document, a copy of which has been filed as an exhibit to the registration statement of which this prospectus is a part.
We intend to adopt a new equity incentive plan prior to completion of this offering for the purpose of affording an incentive to eligible persons to increase their efforts on behalf of the Company and its subsidiaries and to promote the Companys success. The 2005 Equity Incentive Plan will provide for the grant of equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and other awards based on or relating to our common stock to eligible non-employee directors, selected officers and other employees, advisors and consultants. The plan will be administered by our board of directors. Our board of directors may appoint a committee of its members to administer the plan and awards granted under the plan, provided that the committees authorities under
the plan will be limited by the Boards authority to make all final determinations with respect to the plan and any awards granted under the plan. If a committee is appointed to administer the plan, each member of the committee will qualify as a non-employee director within the meaning of Rule 16b-3 under the Exchange Act and an outside director within the meaning of Section 162(m) of the Code. Our board of directors will have the authority, in its discretion, to determine the participants in the plan; to grant awards under the plan and determine all of the terms and conditions of awards, including, but not limited to, whether the grant, vesting or settlement of awards may be conditioned upon achievement of one or more performance goals; to construe and interpret the plan and any award; to prescribe, amend and rescind rules and regulations relating to the plan; and to make all other determinations deemed necessary or advisable for the administration of the plan. Our board of directors may delegate such administrative duties as it may deem advisable. All decisions and determinations of our board of directors will be final and binding on all persons.
Shares Available under the Plan. An aggregate of 2.2 million shares of our common stock has been authorized for issuance under the plan. Up to an aggregate of 2.2 million shares may be made subject to stock options and stock appreciation rights, and up to an aggregate of 1.1 million shares may be made subject to awards that are not stock options and stock appreciation rights, which awards include, among other things, grants of restricted stock. The shares available for issuance under the plan may be authorized but unissued shares or shares that we have reacquired. If any shares subject to an award are forfeited, cancelled, exchanged or surrendered, or if an award terminates or expires without a distribution of shares, or if shares are surrendered or withheld as payment of the exercise price or withholding taxes with respect to an award, those shares will again be available for issuance under the plan. If our board of directors determines that any dividend or other distribution, recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination or other similar corporate transaction or event affects our common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of participants rights under the plan, our board of directors will make such changes or adjustments as it deems necessary or appropriate including with respect to any or all of (i) the number and kind of shares or other property that may thereafter be issued in connection with awards, (ii) the number and kind of shares or other property subject to outstanding awards, (iii) the exercise or purchase price of any award and (iv) the performance goals applicable to outstanding awards. In addition, our board of directors may determine that an equitable adjustment may take the form of a payment to an award holder in the form of cash or other property.
Performance Goals. Our board of directors may determine that the grant, vesting or settlement of an award granted under the plan may be subject to the attainment of one or more performance goals. The performance criteria that may be applied to an award granted under the plan are the same as those described below, under Management Incentive Plan.
Stock Options and Stock Appreciation Rights. Each stock option and stock appreciation right, or SAR, will be evidenced by an award agreement which will set forth the terms and conditions of the award. Stock options granted under the plan may be incentive stock options, within the meaning of Section 422 of the Code, or nonqualified stock options. A SAR confers on the participant the right to receive an amount with respect to each share subject to the SAR equal to the excess of the fair market value of one share of our common stock on the date of exercise over the grant price of the SAR. SARs may be granted alone or in tandem with a stock option. Our board of directors will determine all of the terms and conditions of stock options and SARs including, among other things, the number of shares subject to the award and the exercise price per share of the award, which in no event may be less than the fair market value of a share of our common stock on the date of grant (in the case of a SAR granted in tandem with a stock option, the grant price of the tandem SAR will be equal to the exercise price of the stock option), and whether the vesting of the award will be subject to the achievement of one or more performance goals. Stock options and SARs granted under the plan may not have a term exceeding 10 years from the date of grant, and the award agreement will contain terms concerning the termination of the option or SAR following termination of the participants service with us. Payment of the exercise
price of a stock option granted under the plan may be made in cash or by an exchange of our common stock previously owned by the participant, through a cashless exercise procedure approved by the plan administrator or by a combination of the foregoing methods.
Restricted Stock and Restricted Stock Units. The terms and conditions of awards of restricted stock and restricted stock units granted under the plan will be determined by our board of directors and set forth in an award agreement. A restricted stock unit confers on the participant the right to receive a share of our common stock or its equivalent value in cash, in the discretion of our board of directors. These awards will be subject to restrictions on transferability which may lapse under those circumstances that our board of directors determines, which may include the attainment of one or more performance goals. Our board of directors may determine that the holder of restricted stock or restricted stock units may receive dividends (or dividend equivalents, in the case of restricted stock units) that may be deferred during the restricted period applicable to these awards. The award agreement will contain terms concerning the termination of the award of restricted stock or restricted stock units following termination of the participants service with us.
Other Stock-Based Awards. The plan will also provide for other stock-based awards, the form and terms of which will be determined by our board of directors consistent with the purposes of the plan. The vesting or payment of one of these awards may be made subject to the attainment of one or more performance goals.
Change in Control. The plan will provide that, unless otherwise determined by our board of directors and set forth in an award agreement, in the event of a change in control (as defined in the plan), all awards granted under the plan will become fully vested and/or exercisable, and any performance conditions will be deemed to be fully achieved.
Taxes. We are authorized to withhold from any payment in respect of any award granted under the plan, or from any other payment to a participant, amounts of withholding and other taxes due in connection with any transaction involving an award. Our board of directors may provide in the agreement evidencing an award that the participant may satisfy this obligation by electing to have the company withhold a portion of the shares of our common stock to be received upon exercise or settlement of the award.
Amendment; Termination. The plan will expire on the tenth anniversary of the date of its adoption. Our board of directors may amend, suspend or terminate the plan in whole or in part at any time, provided that no amendment, expiration or termination of the plan will adversely affect any then-outstanding award without the consent of the holder of the award. Unless otherwise determined by our board of directors, an amendment to the plan that requires stockholder approval in order for the plan to continue to comply with applicable law, regulations or stock exchange requirements will not be effective unless approved by our stockholders. Our board of directors may amend an outstanding award at any time, provided that the amendment of an award will not adversely affect the award without the consent of the holder of the award.
Management Incentive Plan
The following is a summary of the material terms of the Management Incentive Plan. The following description is subject to, and qualified in its entirety by reference to, the plan document, a copy of which has been filed as an exhibit to the registration statement of which this prospectus is a part.
Prior to the completion of this offering, we intend to adopt a management incentive plan that will provide for the payment of annual bonuses to those of our executive officers who are selected for participation in the plan. The plan will be administered by our board of directors. Our board of directors may appoint a committee of its members to administer the plan and bonus awards granted under the plan, provided that the committees authorities under the plan will be limited by the Boards authority to make all final
determinations with respect to the plan and any awards granted under the plan. If a committee is appointed to administer the plan, each member of the committee will qualify as an outside director within the meaning of Section 162(m) of the Code. Our board of directors will have the authority, in its discretion, to determine the participants in the plan; to grant awards under the plan and determine all of the terms and conditions of awards, including, but not limited to, the performance goals; to adjust performance goals where applicable; to construe and interpret the plan and any award; to prescribe, amend and rescind rules and regulations relating to the plan; and to make all other determinations deemed necessary or advisable for the administration of the plan. All decisions and determinations of our board of directors will be final and binding on all persons.
Our board of directors will determine the performance goals applicable to each award under the plan, which may be based on one or more criteria. The plan provides for the development of performance goals based on, for example, pre- or after-tax income, cash flow, return on assets, equity or investment, stock price or total stockholder return, earnings before or after interest, taxes, depreciation, amortization or extraordinary or special items, net tangible assets or return on net tangible assets, or other criteria determined by our board of directors to be appropriate.
Performance goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criterion and may be applied to one or more of the company or one of our affiliates, or a division or business unit of the company, all as determined by our board of directors. Performance goals may include threshold, target and maximum levels of performance. The achievement of performance goals will be subject to certification by our board of directors. In the discretion of our board of directors, equitable adjustments may be made to performance goals in recognition of unusual or non-recurring events affecting the company or one of our affiliates, in response to changes in applicable laws or regulations, or to account for items of extraordinary gain, loss or expense, to account for dispositions or changes in accounting principles.
Awards under the plan may be expressed as a dollar amount or as a percentage of the participants annual base salary. In no event will payment to any participant who is expected to be a covered employee (as defined in the plan) exceed $5.0 million in any performance period (which may be no longer than 12 months). Payment of awards under the plan may be made in cash or in the form of equity-based awards issued under a stockholder-approved equity incentive plan. Unless otherwise determined by our board of directors, in order to receive payment of an award, the participant must be employed by the company or one of its affiliates on the day payment is to be made, absent any deferral. The company has the right under the plan to withhold the amount of any taxes that the company may be required to withhold before delivery of any payment under the plan.
Our board of directors may alter, amend, suspend or terminate the plan at any time, provided that no amendment that requires stockholder approval in order for the plan to comply with any applicable law, regulations or rule will be effective unless it is approved by our stockholders. No amendment or termination of the plan will affect adversely any rights of a participant under the plan without the participants consent.
Principal and selling stockholders
The following table sets forth certain information regarding the beneficial ownership, as of May 15, 2005, and as adjusted to reflect the sale of the shares of common stock offered by us and the selling stockholders in this offering, of: (i) our common stock by each person known to us to hold greater than 5% of the total number of outstanding shares; (ii) our common stock by each current director or executive officer and of all the current directors and executive officers as a group; and (iii) each stockholder selling shares in this offering. The number of shares beneficially owned by each person or group as of May 15, 2005 includes shares of common stock that such person or group had the right to acquire on or within 60 days after May 15, 2005, including upon the exercise of options. All such information is estimated and subject to change.
Ownership of our common stock is shown in terms
of beneficial ownership. Amounts and percentages of
common stock beneficially owned are reported on the basis of
regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is
deemed to be a beneficial owner of a security if
that person has or shares voting power, which
includes the power to vote or to direct the voting of such
security, or investment power, which includes the
power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of
any securities of which he has a right to acquire beneficial
ownership within 60 days. More than one person may be
considered to beneficially own the same shares. In the table
below, unless otherwise noted, a person has sole voting and
dispositive power for those shares shown as beneficially owned
by such person.
Common Stock
Shares Beneficially Owned
Shares Beneficially Owned
Before the Offering
After the Offering
Percentage of
Percentage
Ownership of
Shares
Ownership
Name and Address of
Shares of
Shares of
Offered
Shares of
of Shares of
Beneficial Owner(1)
Common Stock(2)
Common Stock(3)(4)
Hereby
Common Stock
Common Stock
23,783,643
94.6
%
3,687,974
20,095,669
61.6
%
851,814
3.3
%
851,814
2.5
%
394,455
1.5
%
394,455
1.2
%
197,792
*
197,792
*
337,831
1.3
%
337,831
1.0
%
27,033
*
27,033
*
23,783,643
94.6
%
20,095,669
61.6
%
23,783,643
94.6
%
20,095,669
61.6
%
23,783,643
94.6
%
20,095,669
61.6
%
23,783,643
94.6
%
20,095,669
61.6
%
100,000
*
31,013
68,987
*
179,866
*
31,013
148,853
*
25,592,568
95.3
%
21,904,594
63.8
%
* | Less than 1%. |
(1) | Unless otherwise indicated, the business address of each person named in the table is Builders FirstSource, Inc., 2001 Bryan Street, Suite 1600, Dallas, Texas 75201. |
(2) | The number of shares beneficially owned by each person or group as of May 15, 2005 includes shares of common stock that such person or group had the right to acquire on or within 60 days after May 15, 2005, including upon the exercise of options. |
(3) | For each person and group included in the table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group as described above by the sum of 25,148,213 shares of common stock outstanding on May 15, 2005 and the number of shares of common stock that such person or group had the right to acquire on or within 60 days of May 15, 2005, including upon the exercise of options. |
(4) | Subject to dilution resulting from potential awards of common stock and exercise of options to acquire common stock under the 1998 Stock Incentive Plan, as amended. |
(5) | Messrs. Levy, Frank, Milgrim, and Castaldi are all associated with JLL Partners Fund II, L.P. and JLL Partners Fund III, L.P., which, as members of JLL Building Products, LLC, may be deemed to beneficially own the shares of common stock owned by JLL Building Products, LLC. In addition, Mr. Levy is the sole general partner of JLL Associates II, L.P., which controls JLL Partners Fund II, L.P., and Messrs. Levy and Frank and Jeffrey C. Lightcap are the managing members of JLL Associates III, L.L.C., which controls JLL Partners Fund III, L.P. As a result, Messrs. Frank, Levy, and Lightcap may be deemed to beneficially own all of the shares of common stock owned by JLL Building Products, LLC, and to have shared voting or investment power over the shares of common stock owned by JLL Building Products, LLC. Messrs. Milgrim and Castaldi disclaim any beneficial ownership of our common stock. |
(6) | Includes 851,814 shares of common stock issuable upon exercise of options exercisable within 60 days of May 15, 2005 under the Companys 1998 Stock Incentive Plan, as amended. |
(7) | Includes 350,158 shares of common stock issuable upon exercise of options exercisable within 60 days of May 15, 2005 under the Companys 1998 Stock Incentive Plan, as amended. |
(8) | Includes 185,292 shares of common stock issuable upon exercise of options exercisable within 60 days of May 15, 2005 under the Companys 1998 Stock Incentive Plan, as amended. |
(9) | Includes 293,534 shares of common stock issuable upon exercise of options exercisable within 60 days of May 15, 2005 under the Companys 1998 Stock Incentive Plan, as amended. |
(10) | Includes 16,033 shares of common stock issuable upon exercise of options exercisable within 60 days of May 15, 2005 under the Companys 1998 Stock Incentive Plan, as amended. |
(11) | The business address for Messrs. Levy, Frank, Milgrim, and Castaldi is 450 Lexington Ave., Suite 3350, New York, New York 10017. |
(12) | The business address for Poole Holdings, Inc. is 8323 Ramona Blvd., Jacksonville, Florida 32221. Mr. Lockwood P. Holmes is the controlling stockholder of Poole Holdings, Inc. as well as its only officer and sole director and accordingly may be deemed to beneficially own the shares of common stock owned by Poole Holdings, Inc. and to have voting or investment power over such shares. Mr. Holmes is also the beneficial owner of 100,000 shares of common stock issuable upon exercise of options exercisable within 60 days of May 15, 2005. Mr. Holmes is currently an employee of the Company. |
(13) | The business address for Mr. William A. Schwartz is 821 Holmdel Road, Holmdel, New Jersey 07733. |
Certain related party transactions
In February 2005, with a portion of the net proceeds of our offering of floating rate notes and our new senior secured credit facility, we paid a dividend to our stockholders and a compensation-based payment to all holders of our outstanding stock options (including vested and unvested options). Such payment to option holders was made in connection with the payment of such dividend, rather than making an adjustment to the exercise price or number of shares subject to such options. The aggregate dividend to stockholders was $201.2 million, and the aggregate payment to option holders was $35.8 million (excluding applicable payroll taxes of $0.6 million), which was recognized as stock compensation expense.
In February 2004, we completed a recapitalization to refinance our indebtedness and pay a dividend to our stockholders in an aggregate amount equal to $139.6 million. In connection with such dividend, our board of directors exercised its discretion under the anti-dilution provisions of our employee stock plan to adjust the exercise price of stock options to reflect the change in the share value on the dividend date. This adjustment was made to the stock options held by our executive officers as well as other employees. Approximately $0.4 million was also paid to certain option holders whose exercise price could not be adjusted for the dividend.
JLL Partners, affiliates of which control JLL Building Products, LLC, one of the selling stockholders, is reimbursed by us for expenses it pays or incurs on our behalf or in connection with its investment in us. The amount reimbursed was approximately $300,000 in each of 2004 and 2003, and approximately $265,000 in 2002. In the ordinary course of business, we purchase windows from PGT Industries, Inc., a company controlled by affiliates of JLL Partners.
In connection with this offering, we will amend our stockholders agreement with JLL Building Products, LLC and some of our executive officers. See Description of Capital Stock Registration Rights.
The Company loaned $50,000 to Mr. Horn to purchase shares of our common stock, under our 1998 Stock Incentive Plan, as amended, which loan, together with interest thereon, was repaid in full on February 25, 2004.
Description of capital stock
The following is a summary of the material terms of our capital stock. The following description of our capital stock is subject to, and qualified in its entirety by reference to, our amended and restated certificate of incorporation, which will be filed with the State of Delaware and become effective immediately prior to the closing of this offering, amended and restated by-laws and other agreements, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, and by the provisions of applicable Delaware law.
GENERAL MATTERS
Our amended and restated certificate of incorporation, which will be filed with the State of Delaware and become effective immediately prior to the closing of this offering, provides that we are authorized to issue 200,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share.
As of May 15, 2005, we had outstanding 25,148,213 shares of common stock, held by 194 stockholders of record. As of May 15, 2005, we had outstanding options to purchase 4,451,659 shares of our common stock.
COMMON STOCK
Shares of our common stock have the following rights, preferences and privileges:
| Voting rights. Each outstanding share of common stock entitles its holder to one vote on all matters submitted to a vote of our stockholders, including the election of directors. There are no cumulative voting rights. Generally, all matters to be voted on by stockholders must be approved by a majority of the votes entitled to be cast by all shares of common stock present or represented by proxy. |
| Dividends. Holders of common stock are entitled to receive dividends as, when and if dividends are declared by our board of directors out of assets legally available for the payment of dividends. |
| Liquidation. In the event of a liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, after payment of our liabilities and obligations to creditors, our remaining assets will be distributed ratably among the holders of shares of common stock on a per share basis. |
| Rights and preferences. Our common stock has no preemptive, redemption, conversion or subscription rights. The rights, powers, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. |
LISTING
We have applied to list our common stock on The Nasdaq National Market under the trading symbol BLDR.
PREFERRED STOCK
Our amended and restated certificate of incorporation provides that the board of directors has the authority, without action by the stockholders, to designate and issue up to 10,000,000 shares of preferred stock in one or more classes or series and to fix for each class or series the powers, rights, preferences and privileges of each series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any class or series, which may be greater than the rights of the holders of the common stock. There will be no shares of preferred stock outstanding immediately after the closing of this offering. Any issuance of shares of preferred stock could adversely affect the voting power of holders of common stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation could have the effect of
delaying, deferring or preventing a change in control. We have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
In connection with this offering, we will amend prior to completion of this offering our stockholders agreement with JLL Building Products, LLC and some of our executive officers. The agreement provides that, upon the request of JLL Building Products, we will register under the Securities Act the shares of our common stock held by JLL Building Products and such executive officers for sale in accordance with its intended method of disposition, and will take other actions as are necessary to permit the sale of the shares in various jurisdictions. In addition, if we register any of our equity securities either for our own account or for the account of other security holders, JLL Building Products and such executive officers are entitled to notice of the registration and may include their shares in the registration, subject to certain customary underwriters cut-back provisions. All fees, costs and expenses of underwritten registrations will be borne by us, other than underwriting discounts and selling commissions, which will be borne by each stockholder selling its shares. Our obligation to register the shares and take other actions is subject to certain restrictions on, among other things, the frequency of requested registrations, the number of shares to be registered and the duration of these rights. In addition to registration rights, the amended stockholders agreement also provides for certain customary tag-along and drag-along rights until the six-month anniversary of this offering. We also have agreements with the other selling stockholders providing them with piggyback registration rights, subject to certain conditions and limitations.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
Our amended and restated certificate of incorporation, which will be filed with the State of Delaware and become effective immediately prior to the closing of this offering, and by-laws contain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of our company unless the takeover or change in control is approved by our board of directors. These provisions include the following:
Staggered Board of Directors. Our amended and restated certificate of incorporation provides for a staggered board of directors, divided into three classes, with our stockholders electing one class each year. Between stockholders meetings, the board of directors will be able to appoint new directors to fill vacancies or newly created directorships so that no more than the number of directors in any given class could be replaced each year and it would take three successive annual meetings to replace all directors.
Elimination of stockholder action through written consent. Our amended and restated certificate of incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting.
Elimination of the ability to call special meetings. Our amended and restated certificate of incorporation provides that, except as otherwise required by law, special meetings of our stockholders can only be called pursuant to a resolution adopted by a majority of our board of directors, a committee of the board of directors that has been duly designated by the board of directors and whose powers and authority include the power to call such meetings, or by our chief executive officer or the chairman of our board of directors. Stockholders are not permitted to call a special meeting or to require our board to call a special meeting.
Advance notice procedures for stockholder proposals. Our by-laws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board. Stockholders at our annual meeting may only consider
proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to our secretary timely written notice, in proper form, of the stockholders intention to bring that business before the meeting.
Removal of Directors; Board of Directors Vacancies. Our certificate of incorporation and by-laws provide that members of our board of directors may not be removed without cause. Our by-laws further provide that only our board of directors may fill vacant directorships, except in limited circumstances. These provisions would prevent a stockholder from gaining control of our board of directors by removing incumbent directors and filling the resulting vacancies with such stockholders own nominees.
The foregoing provisions of our amended and restated certificate of incorporation and by-laws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by our board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of the common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management. See Risk Factors Risks Related to the Offering Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated certificate of incorporation and by-laws provide indemnification for our directors and officers to the fullest extent permitted by the DGCL. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors that may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. In addition, as permitted by Delaware law, our amended and restated certificate of incorporation includes provisions that eliminate the personal liability of our directors for monetary damages resulting from breaches of certain fiduciary duties as a director. The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of fiduciary duties as a director, except that a director will be personally liable for:
| any breach of his or her duty of loyalty to us or our stockholders; |
| acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| any transaction from which the director derived an improper personal benefit; or |
| improper distributions to stockholders. |
These provisions may not be held to be enforceable for violations of the federal securities laws of the United States.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is LaSalle Bank, N.A., and its telephone number is (312) 904-2458.
Description of certain indebtedness
The following is a summary of the material provisions of the agreements governing our material debt to be in effect upon the closing of this offering. The following is only a summary and it does not include all of the provisions of our material debt, copies of which have been filed as exhibits to our registration statement filed in connection with this offering and are available as set forth under Where You Can Find More Information.
SENIOR SECURED CREDIT FACILITY
On February 11, 2005, we entered into a new senior secured credit facility with various lenders, UBS Securities LLC and Deutsche Bank Securities Inc., as Joint Arrangers, UBS AG, Stamford Branch, as Administrative Agent, Collateral Trustee and Issuing Bank, Deutsche Bank Securities Inc., as Syndication Agent and General Electric Capital Corporation and LaSalle Bank, National Association, as Co-Documentation Agents.
Structure. The new senior secured credit facility consists of:
| a new senior secured term loan facility of $225.0 million (the Term Loan Facility), |
| a new senior secured revolving credit facility of $110.0 million (the Revolving Credit Facility), and |
| a new pre-funded letter of credit facility of $15.0 million (the Funded LC Facility). Funds in an aggregate principal amount of $15.0 million have been deposited (the Credit-linked Deposit) by the lenders under the Funded LC Facility in an account (the Credit-Linked Deposit Account) held in the name of the Administrative Agent. |
We may borrow, repay, and reborrow from the Revolving Credit Facility from time to time until the earlier of the maturity date thereof and the termination of the revolving loan commitment. The Revolving Credit Facility is used for working capital and general corporate purposes. The Funded LC Facility is used solely in connection with general corporate purposes.
Maturity, Amortization, and Prepayment. The Term Loan Facility has a maturity of six and a half years and will amortize in consecutive equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility, with the balance payable on the maturity date. Unless terminated earlier, the Revolving Credit Facility has a maturity of five years. The Funded LC Facility has a maturity of six and a half years.
The new senior secured credit facility is subject to mandatory prepayment with, in general, (i) 100% of the net proceeds of certain asset sales or other disposition of assets, subject to a 365-day reinvestment period and with exceptions to be agreed; (ii) 100% of the net cash proceeds from certain issuances of debt, with exceptions to be agreed; (iii) 100% of all casualty and condemnation proceeds in excess of amounts applied within 365 days of receipt to replace or restore any properties in respect of which such proceeds are paid; and (iv) 75% of the excess cash flow, subject to leverage-based stepdowns to be agreed. Any such prepayment is applied first to the Term Loan Facility, then to the Credit Linked Deposit and the proceeds thereof applied to cash-collateralize any outstanding Funded Letters of Credit to the extent such Funded Letters of Credit outstanding at the time exceed the Credit-Linked Deposit (as so reduced), and thereafter to the Revolving Credit Facility and the proceeds thereof applied to cash collateralize any outstanding letters of credit issued thereunder which repayment (or cash-collateralization) shall also result in the permanent reduction of the commitments in respect thereof.
Interest and Fees. The term loans under the Term Loan Facility bear interest, at our option, at a rate equal to LIBOR plus 2.50% per annum or a base rate plus 1.50% per annum. The loans under the Revolving Credit Facility initially bear interest, at our option, at a rate equal to LIBOR plus 2.50% per
annum or a base rate plus 1.50% per annum, and, beginning September 30, 2005, may decline to as much as 1.75% for LIBOR loans and 0.75% for base rate loans if certain leverage ratios are met. A commitment fee equal to 0.500% to 0.375% per annum (determined by our leverage) accrues on the undrawn portion of the Revolving Credit Facility and such fee is payable quarterly in arrears. We pay the lenders under the Funded LC Facility an amount equal to LIBOR plus 2.75% per annum minus UBS AG, Stamford Branchs internal deposit rate, and such lenders will receive UBS AG, Stamford Branchs internal deposit rate on the amounts in the Credit-Linked Deposit Account.
Guarantees. All of the obligations under the new senior secured credit facilities are guaranteed by all of our existing and future direct and indirect subsidiaries (collectively, the Guarantors), subject to exceptions for foreign subsidiaries to the extent such guarantees would be prohibited by applicable law or would result in adverse tax consequences.
Pledge and Security. The new senior secured credit facilities are secured by perfected first priority pledges of all of the equity interests of each of the Guarantors and perfected first priority security interests in and mortgages on all of our tangible and intangible assets and those of the Guarantors, except, in the case of the stock of a foreign subsidiary, to the extent such pledge would be prohibited by applicable law or would result in materially adverse tax consequences, and subject to such other exceptions as are agreed.
Covenants. The new senior secured credit facilities contain a number of covenants that, among other things, restrict our ability and the ability of our subsidiaries to (i) dispose of assets; (ii) change our business; (iii) engage in mergers or consolidations; (iv) make certain acquisitions; (v) pay dividends or repurchase or redeem stock; (vi) incur indebtedness and issue preferred stock; (vii) make investments and loans; (viii) create liens; (ix) engage in certain transactions with affiliates; (x) enter into sale and leaseback transactions; (xi) issue stock or stock options; (xii) amend or prepay other indebtedness; (xiii) modify or waive material documents; or (xiv) change our fiscal year. In addition, under the new senior secured credit facilities, we are required to comply with specified financial ratios and tests, including a minimum interest coverage ratio, a maximum leverage ratio, and maximum capital expenditures.
Events of Default. The new senior secured credit facilities contain customary events of default, including (i) nonpayment of principal or interest; (ii) false or misleading representations or warranties; (iii) noncompliance with covenants; (iv) insolvency and bankruptcy-related events; (v) judgments in excess of specified amounts; (vi) certain ERISA matters; (vii) actual or asserted invalidity of guarantees of the new senior secured credit facilities or impairment of security interests in collateral; (viii) invalidity or unenforceability of certain provisions of any loan document; and (ix) certain change of control events.
SECOND PRIORITY SENIOR SECURED FLOATING RATE NOTES
On February 11, 2005, we issued $275.0 million in aggregate principal amount of our floating rate notes, all of which continue to be outstanding.
Maturity and Interest. The floating rate notes mature on February 15, 2012. Interest accrues at a rate of LIBOR plus 4.25%. The LIBOR rate is reset at the beginning of each quarter. Interest on the floating rate notes is payable quarterly in arrears on each February 15, May 15, August 15, and November 15, commencing on May 15, 2005.
Ranking. The floating rate notes are our senior secured obligations and rank equally in right of payment with all of our existing and future senior debt. The floating rate notes are effectively junior in right of payment to any of our indebtedness that is secured by first priority liens on the assets securing the floating rate notes, including our new senior secured credit facility, or secured by assets not securing the floating rate notes, and are junior in right of payment to all indebtedness of our future nonguarantor subsidiaries. The subsidiary guarantees are the senior secured obligations of our subsidiary guarantors and rank equal
in right of payment with all of our subsidiary guarantors existing and future senior debt, but rank effectively junior in right of payment to the subsidiary guarantees of our new senior secured credit facility.
Guarantees. All of our existing subsidiaries jointly and severally guarantee the floating rate notes. Our future significant restricted domestic subsidiaries will also be required to guarantee the floating rate notes.
Pledge and Security. The new floating rate notes are secured by perfected second priority pledges of certain of the equity interests of each of the guarantors of the floating rate notes and perfected second priority security interests in and mortgages on all of our tangible and intangible assets and those of the guarantors, except, in the case of the stock of a foreign subsidiary, to the extent such pledge would be prohibited by applicable law or would result in materially adverse tax consequences, and subject to such other exceptions as are agreed.
Optional Redemption. At any time on or after February 15, 2007, we may redeem some or all of the floating rate notes at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably to par, plus accrued and unpaid interest and liquidated damages, if any, to the redemption dates.
At any time before February 15, 2007, we may redeem the floating rate notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the floating rate notes redeemed, plus a make-whole premium, accrued and unpaid interest, and liquidated damages, if any, to the redemption date.
At any time before February 15, 2007, we may redeem up to 35% of the aggregate principal amount of the floating rate notes with the proceeds of certain equity offerings, including this offering, so long as:
| we pay holders of the floating rate notes a redemption price in an amount equal to par plus the interest rate then in effect, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date; |
| at least 65% of the aggregate principal amount of the floating rate notes issued under the indenture, remains outstanding immediately after such redemption; and |
| we redeem the floating rate notes within 90 days of any such equity offering. |
Covenants. The indenture governing the floating rate notes contains covenants that limit our ability and the ability of our restricted subsidiaries to, among other things: incur additional indebtedness; pay dividends or make other distributions on our capital stock or repurchase, repay or redeem our capital stock; make certain investments; incur liens; enter into certain types of transactions with affiliates; create restrictions on the payment of dividends or other amounts to us by our restricted subsidiaries; and sell all or substantially all of our assets or merge with or into other companies. These covenants are subject to a number of important exceptions and qualifications.
Change of Control Offer. If we experience a change of control, we may be required to offer to purchase the floating rate notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the repurchase date.
Events of Default. The indenture contains customary events of default, including, but not limited to, (i) defaults in the payment of principal or interest, (ii) defaults in the compliance with the covenants contained in the indenture, (iii) cross defaults on debt in excess of $20.0 million, (iv) failure to pay more than $20.0 million of judgments that have not been stayed by appeal or otherwise, or (v) our bankruptcy or other insolvency events.
Shares eligible for future sale
Prior to this offering, there has been no public market for our common stock, and a significant public market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares of our outstanding common stock and shares of our common stock issued upon exercise of outstanding options, in the public market after this offering could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.
SALE OF RESTRICTED SHARES AND LOCK-UP AGREEMENTS
Upon the closing of this offering, we will have 32,648,213 outstanding shares of common stock based upon our shares outstanding as of May 15, 2005, assuming no exercise of stock options.
Of these shares, the shares of common stock sold in this offering will be freely tradeable without restriction under the Securities Act, unless purchased by affiliates of our company, as that term is defined in Rule 144 under the Securities Act.
The remaining 21,398,213 shares of common stock were issued and sold by us in private transactions, and are eligible for public sale if registered under the Securities Act or sold in accordance with Rules 144, 144(k) or 701 of the Securities Act. However, 20,463,237 of such remaining shares of common stock representing an aggregate of 95.6% of our outstanding common stock not sold in this offering are held by officers, directors, and existing security holders. We, our executive officers and directors and the selling stockholders have entered into lock-up agreements with the underwriters under which, subject to certain exceptions, we and each of these persons may not offer, sell, contract to sell, pledge, hedge or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended under certain circumstances where we announce or pre-announce earnings or material news or a material event occurs within approximately 18 days before, or approximately 16 days after, the termination of the 180-day period. The representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements before the 180-day lock-up period ends.
As of the date of this prospectus, and for the first 90 days thereafter, up to 13,112 of the remaining shares may be eligible for sale in the public market. Following this offering, but no sooner than 90 days thereafter, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock issued or reserved for issuance under our 1998 Stock Incentive Plan and agreements with our employees. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market.
RULE 144
In general, Rule 144 allows a stockholder (or stockholders where shares are aggregated) who has beneficially owned shares of our common stock for at least one year and who files a Form 144 with the SEC to sell within any three month period commencing 90 days after the date of this prospectus a number of those shares that does not exceed the greater of:
| 1% of the number of shares of common stock then outstanding, which will equal approximately 326,482 shares immediately after this offering; or |
| the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of the Form 144 with respect to such sale. |
Sales under Rule 144, however, are subject to specific manner of sale provisions, notice requirements, and the availability of current public information about our company. We cannot estimate the number of shares of common stock our existing stockholders will sell under Rule 144, as this will depend on the market price for our common stock, the personal circumstances of the stockholders, and other factors.
RULE 144(k)
Under Rule 144(k), in general, a stockholder who has beneficially owned shares of our common stock for at least two years and who is not deemed to have been an affiliate of our company at any time during the immediately preceding 90 days may sell shares without complying with the manner of sale provisions, notice requirements, public information requirements, or volume limitations of Rule 144. Affiliates of our company, however, must always sell pursuant to Rule 144, even after the otherwise applicable Rule 144(k) holding periods have been satisfied.
RULE 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Our 1998 Stock Incentive Plan provided for the issuance of up to an aggregate of 6,400,000 shares pursuant to Rule 701. A total of 4,600,000 of such shares were reserved for issuance upon the exercise of stock options, and a total of 1,800,000 of such shares were reserved for issuance upon the purchase of such shares by plan participants. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701. In addition, holders of Rule 701 shares who are subject to the lock-up agreements described in Sale of Restricted Shares and Lock-up Agreements have agreed not to sell their shares for a period of 180 days after the date of this prospectus.
As of May 15, 2005, 912,863 shares of our outstanding common stock have been issued in reliance on Rule 701, including as a result of exercises of stock options, and an additional 4,339,182 shares are issuable upon exercise of outstanding stock options issued under our 1998 Stock Incentive Plan.
REGISTRATION RIGHTS
After the closing of this offering, JLL Building Products, LLC, which will hold approximately 20,095,669 shares of our common stock, will have the right, subject to various conditions and limitations, to cause us to register shares of our common stock held by it and our executive officers to include such shares in registration statements relating to our securities. The exercise of such registration rights, resulting in a large number of shares to be registered and sold in the public market, could cause the price of the common stock to fall. In addition, any demand to include such shares in our registration statements could have a material adverse effect on our ability to raise needed capital. See Description of Capital StockRegistration Rights. In addition, we have agreements with the other selling stockholders providing them with piggyback registration rights, subject to certain conditions and limitations.
OPTIONS
In addition to the shares of common stock outstanding immediately after this offering, as of May 15, 2005, there were outstanding options to purchase 4,451,659 shares of our common stock. Following this offering, but no sooner than 90 days thereafter, we intend to file a registration statement on Form S-8
under the Securities Act covering shares of our common stock issued or reserved for issuance under our 1998 Stock Incentive Plan and agreements with our employees. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise by the holders, subject to vesting restrictions with us and any applicable contractual lock-up restrictions that prohibit the sale or other disposition of the shares of common stock underlying the options.
Material United States federal tax considerations for Non-U.S. holders
The following is a summary of the anticipated material United States federal income and estate tax consequences to a Non-U.S. Holder (as defined below) of the acquisition, ownership and disposition of our common stock under current United States federal tax law. This discussion does not address specific tax consequences that may be relevant to particular persons in light of their individual circumstances (including, for example, pass-through entities (e.g., partnerships) or persons who hold our common stock through pass-through entities, banks or financial institutions, broker-dealers, insurance companies, tax-exempt entities, common trust funds, pension plans, controlled foreign corporations, passive foreign investment companies, owners of more than 5% of our common stock, United States expatriates, dealers in securities or currencies, persons that have a functional currency other than the United States dollar and persons in special situations, such as those who hold our common stock as part of a straddle, hedge, conversion transaction, or other integrated investment), all of whom may be subject to tax rules that differ significantly from those summarized below. Unless otherwise stated, this discussion is limited to the tax consequences to those Non-U.S. Holders who are the original beneficial owners of our common stock and who hold such common stock as capital assets (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the Code). In addition, this discussion does not describe any tax consequences arising under the tax laws of any state, local or non-United States jurisdiction. This discussion is based upon the Code, the Treasury Department regulations (the Treasury Regulations) promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly with retroactive effect.
Prospective purchasers of our common stock are urged to consult their tax advisors concerning the United States federal tax consequences to them of acquiring, owning and disposing of our common stock, as well as the application of state, local and non-United States tax laws.
As used herein, a U.S. Person is (i) an individual who is a citizen or resident of the United States, (ii) a corporation, partnership or other entity taxable as a corporation or partnership created or organized under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate that is subject to United States federal income taxation without regard to the source of its income or (iv) a trust (a) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (b) that was in existence on August 20, 1996, was properly treated as a United States person under the Code on the previous day, and elected to continue to be so treated. A Non-U.S. Holder is a holder of our common stock who is not a U.S. Person.
If a partnership, or other entity or arrangement treated as a partnership for United States federal income tax purposes, holds our common stock, the tax treatment of each partner will generally depend upon the status of the partner and the activities of the partnership. Partners in a partnership that is a prospective investor should consult their tax advisors as to the particular United States federal tax consequences applicable to them.
Dividends
Dividends paid to a Non-U.S. Holder will generally be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, where an income tax treaty applies, are attributable to a United States permanent establishment of the Non-U.S. Holder, are not, however, subject to the withholding tax, but are instead subject to United States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. Any such effectively connected dividends received by a foreign corporation may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A Non-U.S. Holder who wishes to claim the benefit of an applicable income tax treaty rate (and avoid backup withholding as discussed below) for dividends, will be required to (a) complete Internal Revenue Service (IRS) Form W-8BEN (or other applicable form) and certify under penalties of perjury that such holder is not a U.S. person or (b) if the common stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable Treasury Regulations. Special certification and other requirements apply to certain Non-U.S. Holders that are entities rather than individuals.
A Non-U.S. Holder eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Gain on Disposition of Common Stock
A Non-U.S. Holder will generally not be subject to United States federal income tax with respect to gain recognized on a sale or other disposition of our common stock unless (i) the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States, and, where an income tax treaty applies, is attributable to a United States permanent establishment of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, or (iii) we either are or have been a United States real property holding corporation (a USRPHC) for United States federal income tax purposes at any time during the shorter of the five-year period preceding such sale or other disposition or the period that such Non-U.S. Holder held our common shares (the Applicable Period).
An individual Non-U.S. Holder described in clause (i) above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. An individual Non-U.S. Holder described in clause (ii) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses (even though the individual is not considered a resident of the United States). If a Non-U.S. Holder that is a foreign corporation is described in clause (i) above, it will be subject to tax on its gain under regular graduated United States federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.
We do not believe that we have been, are currently or are likely to be a USRPHC. If we were to become a USRPHC, so long as our common stock is regularly traded on an established securities market and continues to be traded, you would be subject to federal income tax on any gain from the sale or other disposition of shares of common stock only if you actually or constructively owned, during the Applicable Period, more than 5% of the class of stock that includes such shares.
Federal Estate Tax
Common stock held by an individual Non-U.S. Holder at the time of death will generally be included in such holders gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was
required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. A Non-U.S. Holder will be subject to backup withholding on dividends paid to such holder unless applicable certification requirements are met.
If common stock is sold by a Non-U.S. Holder outside the United States and conducted through a non-United States related financial institution or broker, backup withholding and information reporting generally would not apply. Information reporting and, depending on the circumstances, backup withholding, generally would apply to the proceeds of a sale of common stock within the United States or conducted through a United States related financial institution or broker unless the beneficial owner certifies under penalties of perjury that it is not a U.S. Person (and the payer does not have actual knowledge or reason to know that the beneficial owner is a U.S. Person) or the owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holders United States federal income tax liability provided the required information is furnished to the IRS.
Underwriting
We and the selling stockholders are offering the shares of our common stock described in this prospectus through the underwriters named below. UBS Securities LLC and Deutsche Bank Securities Inc. are the representatives of the underwriters. UBS Securities LLC and Deutsche Bank Securities Inc. are the joint book-running managers of this offering. We and the selling stockholders have entered into an underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock listed next to its name in the following table.
Underwriters | Number of shares | ||||
|
|||||
UBS Securities LLC
|
|||||
Deutsche Bank Securities Inc.
|
|||||
J.P. Morgan Securities Inc.
|
|||||
Robert W. Baird & Co. Incorporated
|
|||||
BB&T Capital Markets, a division of Scott
& Stringfellow, Inc.
|
|||||
|
|||||
Total
|
3,750,000 | ||||
|
The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option described below.
Our common stock and the common stock of the selling stockholders are offered subject to a number of conditions, including:
| receipt and acceptance of our common stock by the underwriters; and |
| the underwriters right to reject orders in whole or in part. |
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT OPTION
The selling stockholders have granted the underwriters an option to buy up to an aggregate of 1,687,500 additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above.
COMMISSIONS AND DISCOUNTS
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Sales of shares made outside of the United States may be made by affiliates of the underwriters. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon
the terms stated therein, and, as a result, will thereafter bear any risk associated with changing the offering price to the public or other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock to be offered.
We have agreed to pay the offering expenses of the selling stockholders. The selling stockholders will pay the underwriting discounts and commissions applicable to the shares that they sell. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase up to an additional 1,687,500 shares from the selling stockholders.
Paid by us | Paid by selling stockholders | Total | ||||||||||||||||||||||
|
|
|
||||||||||||||||||||||
No exercise | Full exercise | No exercise | Full exercise | No exercise | Full exercise | |||||||||||||||||||
|
||||||||||||||||||||||||
Per Share
|
$ | 1.12 | $ | 1.12 | $ | 1.12 | $ | 1.12 | $ | 1.12 | $ | 1.12 | ||||||||||||
Total
|
$ | 8,400,000 | $ | 8,400,000 | $ | 4,200,000 | $ | 6,090,000 | $ | 12,600,000 | $ | 14,490,000 |
We estimate that the total expenses of this offering payable by us, not including underwriting discounts and commissions, will be approximately $1.6 million.
NO SALES OF SIMILAR SECURITIES
We and each of our directors, officers and the selling stockholders have entered into lock-up agreements with the underwriters. Under these lock-up agreements, subject to certain exceptions, we and each of these persons may not, without the prior written consent of UBS Securities LLC and Deutsche Bank Securities Inc., sell, offer to sell, contract or agree to sell, hypothecate, hedge, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, any of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, or warrants or other rights to purchase our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended under certain circumstances where we announce or pre-announce earnings or material news or a material event occurs within approximately 18 days before, or approximately 16 days after, the termination of the 180-day period. Although they have advised us that they have no intention or understanding to do so, at any time and without public notice, UBS Securities LLC and Deutsche Bank Securities Inc. may, in their sole discretion, release some or all of the affected securities from these lock-up agreements. The representatives of the underwriters have advised us that they do not have any pre-established conditions to waiving the terms of, or releasing shares early from, the lock-up agreements.
In the event that we issue an earnings release or a material news event relating to us occurs 15 calendar days plus three business days prior to or within 15 days after the expiration of the 180-day period, the restrictions imposed on us, our executive officers, directors and the selling stockholders will continue to apply for 15 calendar days plus three business days after such earnings release is issued or such material news event occurs.
We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters may be required to make in respect of those liabilities.
NASDAQ NATIONAL MARKET QUOTATION
We have applied to have our shares of common stock approved for quotation on The Nasdaq National Market under the symbol BLDR.
PRICE STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including:
| stabilizing transactions; |
| short sales; |
| purchases to cover positions created by short sales; |
| imposition of penalty bids; and |
| syndicate covering transactions. |
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. These transactions may also include making short sales of our common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be covered short sales, which are short positions in an amount not greater than the underwriters over-allotment option referred to above, or may be naked short sales, which are short positions in excess of that amount.
The underwriters may close out any covered short position by either exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.
Naked short sales are in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.
As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on The Nasdaq National Market, in the over-the-counter market or otherwise.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:
| the information set forth in this prospectus and otherwise available to the representatives; |
| our history and prospects and the history and the prospects for the industry in which we compete; |
| our past and present financial performance and an assessment of our management; |
| our prospects for future earnings and the present state of our development; |
| the general condition of the securities markets at the time of this offering; |
| the recent market prices of, and the demand for, public traded common stock of generally comparable companies; and |
| other factors deemed relevant by the underwriters and us. |
AFFILIATIONS
Certain of the underwriters and their affiliates in the past have provided and may provide from time to time certain commercial banking, financial advisory, investment banking and other services for us for which they have been or will be entitled to receive separate fees. The underwriters and their affiliates may from time to time in the future engage in transactions with us and perform services for us in the ordinary course of their business. With respect to our $110.0 million revolving credit facility, our $225.0 million term loan, and our $15.0 million pre-funded letter of credit facility, (i) UBS Loan Finance LLC, an affiliate of UBS Securities LLC, and Deutsche Bank Trust Company Americas, an affiliate of Deutsche Bank Securities Inc., are lenders thereunder; (ii) UBS AG, Stamford Branch, an affiliate of UBS Securities LLC, is the issuing bank, administrative agent and collateral trustee thereunder; and (iii) UBS Securities LLC and Deutsche Bank Securities Inc. acted as arrangers thereunder and, in each case, have received customary fees and reimbursement of certain expenses in connection therewith. As of the date of this prospectus, the aggregate commitments of UBS Securities LLC and Deutsche Bank Securities Inc. and their respective affiliates, as applicable, totaled approximately $32.0 million, or approximately 29%, of the revolving credit facility commitments. Neither UBS Securities LLC nor Deutsche Bank Securities Inc. have any outstanding term loan or pre-funded letter of credit facility commitments. We intend to use a portion of the net proceeds of this offering to repay outstanding borrowings, if any, under the revolving credit facility and the remainder will be used to repay a portion of the $225.0 million senior secured term loan. The entire $225.0 million principal amount of the term loan is currently outstanding and is expected to be outstanding immediately prior to any repayment with the proceeds of this offering. As of the date of this prospectus, there were no outstanding borrowings under the revolving credit facility. The lenders under these credit facilities may transfer their commitments, subject to certain conditions, so the individual and aggregate commitments at the time of payoff could also vary from the amounts set forth above. On February 8, 2005, UBS Securities LLC and Deutsche Bank Securities Inc. acted as initial purchasers in connection with the issuance of $275.0 million of our second priority senior secured floating rate notes due 2012 and received customary fees in connection therewith.
ELECTRONIC DISTRIBUTION
A prospectus in electronic format is being made available on Internet web sites maintained by one or more of the lead underwriters of this offering and may be made available on web sites maintained by other underwriters. Other than the prospectus in electronic format, the information on any underwriters web site and any information contained in any other web site maintained by an underwriter is not part of the prospectus or the registration statement of which the prospectus forms a part.
Legal matters
The validity of the common stock offered hereby and certain legal matters in connection with this offering will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP. Certain legal matters in connection with the offering will be passed upon for the underwriters by Latham & Watkins LLP, Los Angeles, California.
Experts
The consolidated financial statements as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, included in this prospectus, have been so included in reliance on the report, which contains an explanatory paragraph relating to the restatement of the 2003 and 2002 consolidated financial statements, of PricewaterhouseCoopers LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 with respect to the common stock being sold in this offering. This prospectus, which forms part of the registration statement, does not contain all of the information included in that registration statement. For further information about us and the common stock being sold in this offering, you should refer to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any agreement, or other document to which we make reference are not necessarily complete. In each instance, we refer you to the copy of such agreement, or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by the more complete description of the matter involved.
Upon completion of this offering, we will become subject to the reporting and information requirements of the Securities and Exchange Act of 1934, as amended, and, as a result, we will file periodic and current reports, proxy statements, and other information with the SEC. You may read and copy any document we file with the SEC at the SECs Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these reports and information may be obtained at prescribed rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. In addition, the SEC maintains a web site that contains reports and other information regarding registrants, such as us, that file electronically with the SEC. The address of this web site is http://www.sec.gov. The other information we file with the SEC is not part of the registration statement of which this prospectus forms a part.
Index to consolidated financial statements
Consolidated Financial Statements
|
|||||
Report of Independent Registered Public
Accounting Firm
|
F-2 | ||||
Consolidated Statements of Operations for the
years ended December 31, 2004, 2003, and 2002
|
F-3 | ||||
Consolidated Balance Sheets at December 31,
2004 and 2003
|
F-4 | ||||
Consolidated Statements of Cash Flows for the
years ended December 31, 2004, 2003, and 2002
|
F-5 | ||||
Consolidated Statements of Changes in
Shareholders Equity for the years ended December 31,
2004, 2003, and 2002
|
F-6 | ||||
Notes to Consolidated Financial Statements
|
F-7 | ||||
Interim Condensed Consolidated Financial
Statements (Unaudited)
|
|||||
Unaudited Condensed Consolidated Statements of
Operations for the Three Months Ended March 31, 2005 and
2004
|
F-32 | ||||
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 2005 and
December 31, 2004 |
F-33 | ||||
Unaudited Condensed Consolidated Statements of
Cash Flows for the Three Months Ended March 31, 2005 and
2004
|
F-34 | ||||
Unaudited Condensed Consolidated Statements of
Changes in Shareholders Equity (Deficit) for the Three
Months Ended March 31, 2005 and 2004
|
F-35 | ||||
Notes to Condensed Consolidated Financial
Statements (Unaudited)
|
F-36 |
Report of Independent Registered Public
Accounting Firm
To the Shareholders of Builders FirstSource, Inc.:
In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, changes in shareholders equity and cash flows
present fairly, in all material respects, the financial position
of Builders FirstSource, Inc. and its subsidiaries (the
Company) at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys 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 the standards of the Public
Company Accounting Oversight Board (United States). Those
standards 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 3 to the consolidated
financial statements, the Company has restated its 2003 and 2002
consolidated financial statements.
Additionally, as discussed in Notes 2 and 5
to the consolidated financial statements, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
in 2002.
CONSOLIDATED STATEMENTS OF
OPERATIONS
The accompanying notes are an integral part of
these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of
these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
The accompanying notes are an integral part of
these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
The accompanying notes are an integral part of
these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Builders FirstSource, Inc. and subsidiaries (the
Company) is a leading provider of manufactured
components, building materials and construction services to
professional homebuilders and contractors in the United States.
The Company was formed through an agreement between JLL
Partners, Inc. and certain members of the existing management
team. Affiliates of JLL Partners, Inc. control JLL Building
Products, LLC, which currently owns 94.6% of the Companys
outstanding common stock. The Companys manufactured
products include trusses, wall panels, custom millwork, pre-hung
doors and windows and stairs. Construction services include
turnkey framing, product installation, and project management
for builders. At December 31, 2004, the Company had 63
distribution centers and 42 manufacturing operations generally
in co-located facilities in Florida, Georgia, Kentucky,
Maryland, North Carolina, New Jersey, Ohio, South Carolina,
Tennessee, Texas and Virginia.
Principles of Consolidation
The consolidated financial statements present the
results of operations, financial position, and cash flows of
Builders FirstSource, Inc. and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated
in consolidation.
Accounting Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those estimates.
Estimates are used when accounting for items such
as revenue, vendor rebates, allowance for returns, discounts and
doubtful accounts, employee compensation programs, depreciation
and amortization periods, income taxes, inventory values,
insurance programs, goodwill, other intangible assets and
long-lived assets.
Sales Recognition
The Company recognizes sales of building products
upon delivery to the customer. For contracts with service
elements, sales are generally recognized on the completed
contract method as these contracts are usually completed within
30 days. Contract costs include all direct material and
labor, equipment costs and those indirect costs related to
contract performance. Provisions for estimated losses on
uncompleted contracts are recognized in the period in which such
losses are determined. Prepayments for materials or services are
deferred until such materials have been delivered or services
have been provided.
All sales recognized are net of allowances for
discounts and estimated returns, based on historical experience.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand
and all highly liquid investments with an original maturity date
of three months or less.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Financial Instruments
The Company uses financial instruments in its
normal course of business as a tool to manage its assets and
liabilities. The Company does not hold or issue financial
instruments for trading purposes.
The carrying amounts of the Companys
financial instruments, including accounts receivable and
accounts payable approximate fair value due to their short-term
nature. Based on the variability of interest rates, management
believes the carrying value of long-term debt approximates fair
value at December 31, 2004.
Accounts Receivable
The Company extends credit to qualified
professional homebuilders and contractors, generally on a
non-collateralized basis. The allowance for doubtful accounts is
based on managements assessment of the amount which may
become uncollectible in the future and is estimated using
specific review of problem accounts, overall portfolio quality,
current economic conditions that may affect the borrowers
ability to pay, and historical experience. Accounts receivable
are written off when deemed uncollectible.
The Company previously provided financing for
construction projects through a builder finance program
inherited from a company acquired in 2000. This program was
offered to a select group of customers in a single market. The
notes receivable bear interest at rates ranging from prime plus
1% to 10.5%, generally mature within one year and are secured by
a first mortgage. As of December 31, 2003, the outstanding
balances aggregated $1.1 million and are included in
accounts receivable in the accompanying consolidated balance
sheets. There were no balances outstanding at December 31,
2004. This program was discontinued during 2002. See Note 6
for a discussion of the Companys accounts receivable
securitization agreement which expired in 2003.
Accounts receivable consist of the following at
December 31:
Inventories
Inventories consist principally of materials
purchased for resale, including lumber, sheet goods, windows,
doors and millwork, and certain manufactured products and are
stated at the lower of cost or market. Cost is determined using
the weighted average method, the use of which approximates the
first-in, first-out method. The Company accrues for shrink based
on the actual historical shrink results of the Companys
most recent physical inventories adjusted, if necessary, for
current economic conditions. These estimates are compared with
actual results as physical inventory counts are taken and
reconciled to the general ledger.
The Companys arrangements with vendors
provide for rebates of a specified amount of consideration,
payable when certain measures, generally related to a stipulated
level of purchases, have been achieved. The Company accounts for
estimated rebates as a reduction of the prices of the
vendors inventory until the product is sold, at which
time, such rebates reduce cost of sales in the accompanying
consolidated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
statements of operations. Throughout the year,
the Company estimates the amount of the rebates based upon the
expected level of purchases. The Company continually revises
these estimates based on actual purchase levels.
Shipping and Handling Costs
Handling costs incurred in manufacturing
activities are included in cost of sales. All other shipping and
handling costs are included in selling, general and
administrative expenses on the accompanying consolidated
statements of operations and aggregated $80.2 million,
$73.2 million and $65.5 million in 2004, 2003 and
2002, respectively.
Income Taxes
The Company accounts for income taxes utilizing
the liability method described in Statement of Financial
Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred income taxes
are recorded to reflect consequences on future years of
differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year end based on
enacted tax laws and statutory tax rates applicable to the
periods in which differences are expected to affect taxable
earnings. The Company records a valuation allowance to reduce
deferred tax assets if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Warranty Expense
The Company has warranty obligations with respect
to most manufactured products, however, the liability for the
warranty obligations is not significant as a result of third
party inspection and acceptance processes.
Deferred Loan Costs
Loan costs are capitalized upon the issuance of
long-term debt and amortized over the life of the related debt
using the effective interest rate method for the Companys
term notes and the straight-line method for the Companys
revolving credit facility. Amortization of deferred loan costs
is included in interest expense.
Property, Plant and Equipment
Property, plant and equipment are recorded at
cost and depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated lives of the
various classes of assets are as follows:
Major additions and improvements are capitalized,
while maintenance and repairs that do not extend the useful life
of the property are charged to expense as incurred. Gains or
losses from dispositions of property, plant and equipment are
recorded in the period incurred.
The Company periodically evaluates the commercial
and strategic operation of the land and related buildings and
improvements of its facilities. In connection with these
evaluations, facilities may be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
consolidated, and others sold or leased. The
Company recorded net gains of $0.5 million,
$1.0 million and $1.6 million in 2004, 2003 and 2002,
respectively, principally from the sale of real estate. These
gains are recorded as a reduction of selling, general and
administrative expenses in the accompanying consolidated
statements of operations.
The Company capitalizes certain costs of computer
software developed or obtained for internal use, including
interest, provided that those costs are not research and
development, and certain other criteria are met pursuant to
Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
The net carrying value of internal use software costs was
$1.2 million and $2.3 million as of December 31,
2004 and 2003, respectively. These costs are included in
furniture and fixtures in Note 10 and are amortized on a
straight-line basis over a period of 3 to 5 years.
Long-Lived Assets
The Company evaluates its long-lived assets,
other than goodwill, for impairment when events or changes in
circumstances indicate, in managements judgment, that the
carrying value of such assets may not be recoverable. The
determination of whether an impairment has occurred is based on
managements estimate of undiscounted future cash flows
before interest attributable to the assets as compared to the
net carrying value of the assets. If an impairment has occurred,
the amount of the impairment recognized is determined by
estimating the fair value of the assets based on estimated
discounted future cash flows and recording a provision for loss
if the carrying value is greater than estimated fair value. The
net carrying value of assets identified to be disposed of in the
future is compared to their estimated fair value, generally the
quoted market price obtained from an independent third-party,
less the cost to sell to determine if an impairment is required.
Until the assets are disposed of, an estimate of the fair value
is redetermined when related events or circumstances change.
Insurance
The Company has established insurance programs to
cover certain insurable risks consisting primarily of physical
loss to property, business interruptions resulting from such
loss, workers compensation, employee healthcare,
comprehensive general and auto liability. Third party insurance
coverage is obtained for exposures above predetermined
deductibles as well as those risks required to be insured by law
or contract. Provisions for losses are developed from valuations
that rely upon the Companys past claims experience, which
considers both the frequency and settlement of claims. The
Company discounts its workers compensation liability based
upon estimated future payment streams at its risk-free rate.
Net Income (Loss) Per Common Share
Net income (loss) per common share
(EPS) is calculated in accordance with
SFAS No. 128, Earnings per Share, which
requires the presentation of basic and dilutive earnings per
share. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period.
Dilutive earnings per share is computed using the weighted
average number of common shares outstanding during the period,
plus the dilutive effect of common stock equivalents. Weighted
average shares outstanding have been adjusted for common shares
underlying options of 4.5 million, 0.1 million and
0.1 million for the periods ended December 31, 2004,
2003 and 2002, respectively. Options to
purchase 2.9 million and 2.9 million shares of
common stock outstanding at December 31, 2003 and 2002,
respectively, were not included in the computation of diluted
earnings per share because their effect would not be dilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The table below presents a reconciliation of
weighted average common shares, in thousands, used in the
calculation of basic and diluted EPS:
Goodwill and Other Intangible Assets
Intangibles subject to amortization
Goodwill and intangibles with indefinite
lives
Stock Compensation
The Company applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations in accounting for employee stock-based
compensation costs related to its stock incentive plan (see
Note 14). APB 25 is an intrinsic value approach for
measuring stock-based compensation costs.
SFAS No. 123, Accounting for Stock-Based
Compensation, is a fair value approach for measuring
stock-based compensation costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Had the compensation cost for the Companys
stock-based compensation been determined in accordance with
SFAS No. 123, the Companys net income (loss) and
net income (loss) per share for 2004, 2003 and 2002 would
approximate the pro forma amounts below:
The effects of applying SFAS No. 123 in
this pro forma disclosure may not be indicative of future
results.
Recently Issued Accounting
Pronouncements
In December 2004, the FASB issued
SFAS No. 123 (Revised 2004) Share Based
Payment (SFAS 123R), which is a revision
of SFAS 123 and supersedes APB 25 and SFAS 148.
This statement requires that the cost resulting from all
share-based payment transactions be recognized in the financial
statements. This statement establishes fair value as the
measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair value
based measurement method in accounting for share-based payment
transactions with employees except for equity instruments held
by employee share ownership plans.
SFAS 123R applies to all awards granted
after the required effective date (the beginning of the first
annual reporting period after June 15, 2005) and to awards
modified, repurchased, or cancelled after that date. As of the
required effective date, all public entities that used the fair
value based method for either recognition or disclosure under
Statement 123 will apply this Statement using a modified
version of prospective application. Under that transition
method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which
the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under
Statement 123 for either recognition or pro forma
disclosures. For periods before the required effective date,
those entities may elect to apply a modified version of the
retrospective application under which financial statements for
prior periods are adjusted on a basis consistent with the pro
forma disclosures required for those periods by
Statement 123. The Company previously used the minimum
value method under SFAS 123 to calculate the value of its
options and will apply the prospective transition method as of
the required effective date. The Company will continue to
account for the currently outstanding options under APB 25
and will apply the provisions of SFAS 123R prospectively to
new awards and to awards modified, repurchased, or cancelled
after adoption of this statement.
In November 2004, the FASB issued
SFAS No. 151,
Inventory Costs an amendment of
ARB No. 43, Chapter 4
(SFAS No. 151). SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151
requires that those items be recognized as current period
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
charges. In addition, SFAS No. 151
requires that allocation of fixed production overhead to the
costs of inventory be based on the normal capacity of the
production facilities. This new standard is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after
November 23, 2004. The Company does not anticipate the
adoption of this statement to have a significant impact on its
financial position or results of operations.
In December 2004, the FASB issued Statement
No. 153,
Exchanges of Nonmonetary Assets
, an
amendment of APB Opinion No. 29,
Accounting for
Nonmonetary Transactions
(SFAS No. 153). The amendments made by
SFAS No. 153 are based on the principle that exchanges
of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance.
Previously, APB Opinion No. 29 required that the accounting
for an exchange of a productive asset for a similar productive
asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the
asset relinquished. By focusing the exception on exchanges that
lack commercial substance, the Board believes
SFAS No. 153 produces financial reporting that more
faithfully represents the economics of the transactions. This
statement is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The
Company does not believe the adoption of this new statement will
have a material impact on its financial condition or results of
operations.
In September 2004, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 04-8, The Effect of Contingently Convertible Debt
on Diluted Earnings Per Share, which requires shares
associated with contingently convertible debt instruments with
market price triggers to be included in the computation of
diluted earnings per share (EPS) regardless of
whether the market price trigger has been met. EITF 04-8
also requires that prior period diluted EPS amounts presented
for comparative purposes be restated. EITF 04-8 is
effective for reporting periods ending after December 15,
2004. The Company does not believe the adoption of this new
statement will have a material impact on its financial condition
or results of operations.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation.
In early 2005 the Company performed a review of
its accounting policies and practices with respect to leases and
vendor rebates. As a result of this internal review, the Company
identified errors in accounting practices associated with
accounting for leasehold improvements impacting depreciation and
vendor rebates and inventory accounting impacting cost of sales.
The restatement increased income from continuing operations by
$0.7 million in 2003 and decreased income from continuing
operations by $0.7 million in 2002.
Property, plant and equipment and
depreciation
The property, plant and equipment and
depreciation (which is included as selling general and
administrative expense in the accompanying consolidated
statements of operations) adjustments related to the Company
amortizing leasehold improvements over terms greater than the
shorter of the estimated useful life or lease term. Statement of
Financial Accounting Standard (SFAS) No. 13,
Accounting for Leases (SFAS 13), as amended,
requires the Company to amortize leasehold improvements over the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
shorter of the estimated useful life of the
assets or the lease term, as defined by SFAS 13, as
amended. These adjustments reduced income from continuing
operations before income taxes by $0.6 million and
$0.7 million for the years ended December 31, 2003 and
2002, respectively.
Inventory and cost of sales
Income tax
Balance sheet
The Company has restated its consolidated
financial statements for the years ended December 31, 2003
and 2002. Following is a summary of the effects of these changes
on the Companys Consolidated Balance Sheet as of
December 31, 2003, as well as the Companys
Consolidated Statements of Operations and Changes in
Shareholders Equity for the years ended December 31,
2003 and 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has also reduced its
shareholders equity balance as of December 31, 2001,
by $2.7 million. The notes to these consolidated financial
statements have been restated, as applicable, to reflect the
restatement adjustments shown above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Goodwill
There were no changes in the net carrying amount
of goodwill for the year ended December 31, 2004.
Covenants not to Compete
Estimated intangible amortization expense is
$0.1 million for 2005.
The Company adopted SFAS No. 142
effective January 1, 2002. This standard required the
Company to complete a transitional impairment analysis of its
recorded goodwill and indefinite lived intangible assets and to
record any impairment charge as a change in accounting
principle. This analysis is a two-step process. The first step
requires a comparison of the book value of net assets to the
fair value of the related operations. If the book value exceeds
the fair value, the second step of the test is performed. The
second step requires that the Company determine an estimate of
the implied fair value of goodwill and compare the estimated
implied fair value to the book value of the related goodwill.
The amount of goodwill impairment, if any, would be the
difference between the book value and the estimated implied fair
value of the related goodwill, as determined by the application
of the second step of the impairment test.
The impairment analysis of goodwill is performed
on a market-by-market basis. The Company performed its
transitional impairment analysis as of January 1, 2002. As
a result of the required change in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
methodology used to evaluate goodwill for
impairment and performing the two-step test required by
SFAS No. 142, the Company determined that its goodwill
balance for certain reporting units was impaired resulting in a
charge of $23.1 million. The impairment charge has been
recorded as a cumulative effect of a change in accounting
principle, net of tax, in the Companys consolidated
statements of operations for 2002.
The Companys reporting units that were
determined to be impaired generated cash flows that did not meet
Company expectations and management does not anticipate cash
flows in the future that would support an implied fair value of
goodwill greater than its adjusted carrying value. Possible
reasons for the short-falls include increased competition, a
reduction in residential home building within the geographic
markets that these reporting units serve, or management issues.
In the case of each reporting unit, fair value was estimated
using the present value of future cash flows.
On August 31, 2000, the Company and certain
of its subsidiaries entered into an agreement to sell on a
non-recourse basis a pool of trade receivables to a wholly owned
bankruptcy-remote special purpose funding subsidiary (the
Funding Subsidiary) of the Company. The Funding
Subsidiary, in turn, sold the trade receivables to a
securitization company. The agreement with the securitization
company expired August 28, 2003 (the Expiration
Date) and the Funding Subsidiary was dissolved. Prior to
the Expiration Date, trade receivables sold to the
securitization company were not reflected on the Companys
consolidated balance sheets and any receivables not sold to the
securitization company were recorded as retained interest in the
receivables portfolio of the Funding Subsidiary.
The Company recognized losses on the accounts
receivable sold to the securitization company based on the fair
value of the receivables sold. The fair value of the retained
interest was determined after considering such factors as loss
history, payment discounts, weighted average life and product
returns. From the inception of the securitization to the
Expiration Date, there were no substantive changes in the
Companys key measurement and valuation assumptions.
Pre-tax losses on these sales, net of servicing fee, totaled
$0.6 million and $2.2 million in 2003 and 2002,
respectively, and were recorded in other expense, net in the
accompanying consolidated statements of operations.
During the tenure of the securitization, the
Company received an annual servicing fee of 0.5% of the
securitized account receivables, which amount is recorded in
other expense, net in the accompanying consolidated statements
of operations. The Company recognized no servicing asset or
liability because the servicing fee represented adequate
compensation for the services performed.
The following table summarizes certain cash flows
received from the securitization vehicle during the years ended
December 31:
Cash flow information:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Managed Portfolio Data:
The table below summarizes information regarding
delinquencies at the end of the period and net credit losses
during 2003 and 2002.
During 2003, the Company developed and executed a
plan to close a facility in Texas and one in South Carolina due
to the locations being unable to sustain a consistent level of
profitability. In conjunction with the plan, the Company began
disposing of assets, severing employees, and pursuing sale of
the related real estate. The Company completed the exit plan
prior to December 31, 2003. During 2003, the Company
recognized approximately $0.5 million in expenses related
to the facility closure, including termination benefits to
severed employees and adjustments to reflect certain asset
balances at net realizable value. The Company also recorded an
impairment charge of approximately $0.6 million to adjust
the carrying value of the real estate related to these
operations to its estimated fair value, less reasonable direct
selling costs. At December 31, 2004 and 2003, the Company
classified the carrying value of the real estate of
$1.4 million as held for sale and is included as a
component of other assets, net in the accompanying consolidated
balance sheets.
During 2001, the Company developed and executed a
plan to close various facilities in Texas, South Carolina, North
Carolina, and Tennessee. The facility closures were partially
due to the Company consolidating locations from separate
acquisitions within certain markets in an attempt to achieve
economies of scale. The facility closures were also due to
certain locations not being able to achieve the desired levels
of profitability. In conjunction with the plan, the Company
began disposing of assets, severing employees, and exiting the
facilities. The Company completed the exit plan on three
facilities prior to December 31, 2002. The Company
recognized certain expenses related to the facility closure,
including the present value of future minimum rental payments,
termination benefits to severed employees, and adjustments to
reflect certain asset balances at net realizable value. During
2002, the Company recorded $0.8 million in expenses related
to the final stages of the exit plan.
Facility closure costs on the accompanying
consolidated statements of operations, consisted of the
following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
An analysis of the Companys facility
closure reserves for the periods reflected is as follows:
The facility and other exit cost reserves of
$2.7 million at December 31, 2004, of which
$2.4 million is recorded as other long-term liabilities,
are primarily related to future minimum lease payments on
vacated facilities. There were no facility closure costs
incurred in 2004.
During 2003, the Company acquired various
businesses that provide building materials and services
primarily to professional contractors and residential builders
in the United States. The aggregate purchase price (including
final working capital adjustments), consisting of cash
consideration, for these businesses approximated
$4.6 million. Of this amount, $2.1 million was
allocated to goodwill and intangible assets. There were no
acquisitions in 2004.
These acquisitions have been accounted for by the
purchase method, and accordingly the results of operations of
each have been included in the Companys consolidated
financial statements from the respective dates of acquisition.
Under this method, the consideration was allocated to the assets
acquired and liabilities assumed based on the estimated fair
values at the date of acquisition. Any excess of the purchase
price over the estimated fair value of the net assets acquired
and liabilities assumed was recorded as goodwill. Pro forma
results of operations have not been presented due to the
immateriality of the acquisitions.
During 2002, the Company closed a facility in
Colorado as part of a location consolidation in attempt to
achieve certain economies of scale, including reduced operating
costs. The Company recorded $1.2 million in expenses in
2002 for the closure of this facility primarily related to
future minimum lease payments due on the vacated facilities.
This amount is included in income (loss) from discontinued
operations in the accompanying consolidated statements of
operations for 2002.
In September 2003, based upon several factors
including unfavorable market conditions and a poor competitive
position which prevented the Company from generating profitable
results, the Company announced its intent to exit its operations
in Colorado. The cessation of operations in this market has been
treated as a discontinued operation as it had distinguishable
cash flow and operations that have been eliminated from the
on-going Company and the Company will have no further
involvement in this market. The Company completed the exit plan
prior to December 31, 2003.
As a result of the exit plan, in 2003 the Company
recorded an expense of $1.5 million in order to adjust
asset balances to net realizable value, an expense of
$0.2 million related to facility exit costs, and an
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
impairment charge of $1.2 million to
write-off the carrying value of goodwill pertaining to these
operations. The Company also recorded an impairment charge of
approximately $0.4 million to adjust the carrying value of
the real estate and equipment related to these operations to
estimated fair value, less reasonable direct selling costs.
These amounts are included in income (loss) from discontinued
operations in the accompanying consolidated statements of
operations for 2003. As of December 31, 2003, the Company
classified the carrying value of the real estate and equipment
of $1.6 million as held for sale and is included as a
component of other assets, net in the accompanying consolidated
balance sheets.
During 2004, the Company recorded an additional
impairment of approximately $0.2 million for the real
estate based on a revised estimate of fair value. The Company
also favorably settled the outstanding lease obligation and
collected several customer balances that were previously
written-off. The Company reduced expenses by approximately
$0.4 million related to these items. These amounts are
included in income (loss) from discontinued operations in the
accompanying consolidated statements of operations for 2004.
During 2004, the Company sold certain equipment that was held
for sale for cash proceeds of $0.2 million less direct
selling costs. No gain or loss was recorded on the sale as the
net cash proceeds equaled the carrying value of the equipment at
the time of the sale. The Company also transferred approximately
$0.2 million of other equipment that was held for sale to
other locations and reclassified the balances to property, plant
and equipment, net. As of December 31, 2004, the Company
classified the carrying value of the real estate of
$1.0 million as held for sale and is included as a
component of other assets, net in the accompanying consolidated
balance sheets. In March 2005, the Company sold the real estate
for cash proceeds of $1.2 million less direct selling
costs. No gain or loss was recorded on the sale as the net cash
proceeds equaled the carrying value of the real estate at the
time of the sale.
Sales and income (loss) attributable to the
Colorado operations, which are reported as discontinued
operations, are as follows:
The major classes of assets and liabilities of
the discontinued Colorado operations in the consolidated balance
sheets as December 31, 2003 are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
An analysis of the Companys reserves
related to the Colorado discontinued operations for the periods
reflected is as follows:
Property, plant and equipment consist of the
following:
Depreciation expense relating to continuing
operations approximated $19.2 million, $19.4 million
(as restated) and $19.3 (as restated), of which
$5.1 million, $4.7 million, and $4.0 million were
included in cost of sales, for 2004, 2003 and 2002, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Accrued liabilities consist of the following:
Long-term debt consists of the following:
On February 25, 2004, the Company entered
into a $405.0 million senior secured credit agreement (the
Credit Agreement) with a syndicate of banks. The
Credit Agreement was initially comprised of a $90.0 million
long-term revolver due February 25, 2009; a
$230.0 million Tranche A term loan due in quarterly
installments of $0.6 million beginning June 30, 2004
and ending March 31, 2009 and quarterly installments of
$54.6 million beginning June 30, 2009 and ending
February 25, 2010; and an $85.0 million Tranche B
term loan due on August 25, 2010. During 2004, the Company
paid down approximately $1.7 million under the term loan
which permanently reduced the borrowing capacity under the
Credit Agreement.
Interest rates under the credit agreement for the
revolving loans and the Tranche A term loan are based on
the prime rate in the United States or LIBOR (plus a margin,
based on leverage ratios, which is currently 1.25% for revolving
loans and 3.0% for the Tranche A term loan), at the
Companys option at the time of borrowing. Interest rates
under the credit agreement for the Tranche B term loan are
based on the prime rate in the United States or LIBOR (plus a
fixed margin, which is 8.50%), at our option at the time of
borrowing provided that the base interest rate shall in no event
be less than 2.0%. The weighted-average
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
interest rate at December 31, 2004 for
borrowings under the Credit Agreement was 6.9%. A variable
commitment fee based on the total leverage ratio is charged on
the unused amount of the revolver (0.375% at December 31,
2004). At December 31, 2004 the available borrowing
capacity of the revolver totaled $73.8 million after being
reduced by outstanding letters of credit of approximately
$16.2 million.
The Credit Agreement is collateralized by all
tangible and intangible property and interest in property and
proceeds thereof now owned or hereafter acquired by the Company
and its wholly-owned subsidiaries. The Credit Agreement also
contains certain restrictive covenants, which, among other
things, relate to the payment of dividends, incurrence of
indebtedness, repurchase of common stock or other distributions,
and asset sales and also require compliance with certain
financial covenants with respect to a maximum total leverage
ratio and a minimum interest coverage ratio. The Company can
also be required to make mandatory prepayments of amounts
outstanding under the Credit Agreement based on the results of
an excess cash flow calculation that must be performed annually
under the terms of the Agreement.
Proceeds from the new Credit Agreement were used
to retire the Companys existing debt facility and to pay a
cash dividend, as discussed in Note 14. In connection with
the refinancing, the Company incurred fees and expenses
aggregating $11.1 million, which are included as a
component of other assets, net on the consolidated balance
sheets at December 31, 2004 and are being amortized over
the term of the Credit Agreement. In addition, the Company
expensed $2.2 million in deferred loan costs in 2004 due to
the early retirement of the prior debt facility. This amount is
included in interest expense in the accompanying consolidated
statements of operations for 2004.
During November of 2003, the Company modified and
extended its credit agreement due to expire in part on
December 30, 2003. The extended credit agreement changed
the expiration date of the revolving credit facility
(Revolver) to December 31, 2004 and increased
its borrowing availability to $175 million from
$150 million. The maturity date for the Tranche B term
loan remained December 30, 2005. In connection with the
extension of the credit agreement, deferred loan costs of
$1.3 million were incurred. These costs are included as a
component of other assets, net on the accompanying consolidated
balance sheets as of December 31, 2003.
The Company paid a commitment fee ranging from
0.325% to 0.50% on the unused amount of the Revolver. Borrowings
under the Revolver bore interest at a rate based on either the
Bank of America base rate or LIBOR plus an additional spread
based upon performance. At December 31, 2003, the Revolver
rates were Bank of America base rate plus 1.5% and LIBOR plus
2.5%. The interest rate on the Tranche B term loan was
based on either the Bank of America base rate plus 2.75% or
LIBOR plus 3.75%. The weighted average interest rates during
2003 on the Revolver, Tranche A term loan and
Tranche B term loan were 5.65%, 4.11% and 4.99%,
respectively.
The Company also has other notes aggregating
$0.2 million and $0.3 million at December 31,
2004 and 2003, respectively, due at various times through 2010.
Subsequent to December 31, 2004, the Company
entered into a new long-term credit agreement. Accordingly,
borrowings under the Credit Agreement have been reclassified to
be consistent with the terms of the new agreement. See
Note 21.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Future maturities of long-term debt as of
December 31, 2004 are as follows (in thousands):
These future maturities reflect the refinancing
of the Companys credit agreement as discussed in
Note 21.
The components of income tax expense from
continuing operations are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Temporary differences, which give rise to
deferred tax assets and liabilities, are as follows:
A reconciliation of the statutory federal income
tax rate to the Companys effective rate is provided below:
The Company has $76.2 million of state
operating loss carryforwards expiring at various dates through
2025.
In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. The Company considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. The Company
concluded that it was appropriate to maintain a valuation
allowance for state net operating losses in certain
jurisdictions where it is more likely than not that the deferred
tax asset will not be realized and accordingly increased the
valuation allowance by $2.4 million during 2004. This
increase was off-set by a reversal of $0.4 million of
valuation allowance related to certain state net operating
losses that were able to be utilized due to a new state
operating structure initiated in 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During 1998, the Company implemented the Builders
FirstSource, Inc. 1998 Stock Incentive Plan (the
Plan), a stock-based incentive compensation plan. Under
the Plan, the Company is authorized to issue shares of common
stock pursuant to Awards granted in various forms,
including incentive stock options (intended to qualify under
Section 422 of the Internal Revenue Code of 1986 (as
amended)), non-qualified stock options and other stock-based
awards. The Plan also authorizes the sale of common stock on
terms determined by the Companys board of directors.
The Company had notes receivable from employees
aggregating $0.2 million at December 31, 2003 in
connection with the issuance of common stock under the Plan.
These notes were repaid in 2004. As of December 31, 2004,
there were 6.4 million shares authorized and
1.1 million shares available for issuance.
Options to purchase shares of common stock
generally cliff vest after a period of seven to nine years. A
portion of certain option grants are subject to acceleration if
certain financial targets are met. These financial targets
include return on net assets and earnings before interest,
taxes, depreciation, and amortization. These targets are based
on the performance of the operating group in which the employee
performs their responsibilities and the performance of the
Company as a whole for employees whose job responsibilities
cover all of the company. The expiration date is generally
ten years subsequent to date of issuance. To date, these
targets have generally been met. The Company recognized a tax
benefit of $0.1 million in 2004 related to the tax
deduction from option exercises. This amount was recorded as an
increase to additional paid-in capital.
On February 25, 2004, the Companys
board of directors declared a special cash dividend of
$5.56 per common share, or $139.6 million to
shareholders of record as of February 25, 2004. The Company
fully reduced retained earnings by $48.0 million and
reduced additional paid-in capital by $91.6 million for the
remainder of the dividend. As a result of the special dividend,
the board of directors exercised its discretion under the
anti-dilution provisions of the employee stock plan to adjust
the exercise price of stock options to reflect the change in the
share price on the dividend date. The Company did not record any
expense related to adjustment of the exercise price as the
modification did not increase the aggregate intrinsic value of
any award and the ratio of the exercise price per share to the
market value per share was not reduced.
Approximately $0.4 million was also paid to
certain option holders whose exercise price could not be
adjusted for the dividend. The cash payment to these option
holders was expensed and is included in selling, general, and
administrative expenses in the accompanying consolidated
statements of operations for 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A summary of the status of the Companys
stock options as of December 31, 2004, 2003 and 2002 and
the changes during the periods including the effect of the
anti-dilution adjustment is presented below:
The minimum value of each stock option granted is
estimated on the date of grant using a Black-Scholes
option-pricing model. The following weighted-average assumptions
were used for grants during 2004, 2003 and 2002: expected
term six years; expected volatility 0.00%; expected
dividend yield 0.00%; and risk-free rate 3.01%,
3.12% and 4.37%, respectively. No adjustment was made for
non-transferability or risk of forfeitures.
The following table summarizes information about
employee stock options outstanding at December 31, 2004
(options are in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company maintains one active defined
contribution 401(k) plan as discussed below:
Employees of the Company are eligible after
completing six months of employment to participate in the
Builders FirstSource, Inc. 401(k) Plan. Participants can
contribute up to 15% of their annual compensation, subject to
federally mandated maximums. The Company will match 50% of
employee contributions up to 6% of employee contributions. The
Companys matching contributions are subject to a pro-rata
five-year vesting schedule.
The Company recognized expense of
$3.6 million, $3.0 million and $3.2 million in
2004, 2003 and 2002, respectively, for contributions to the plan.
The Company leases certain land, buildings and
equipment used in operations. These leases are accounted for as
operating leases with terms ranging from one to twenty years and
generally contain renewal options. Certain operating leases are
subject to contingent rentals based on various measures. Total
rent expense under operating leases was approximately
$28.7 million, $25.9 million and $25.3 million
for the years ended December 31, 2004, 2003 and 2002,
respectively.
In addition, the Company has residual value
guarantees on certain equipment leases. Under these leases the
Company has the option of (a) purchasing the equipment at
the end of the lease term at its then fair market value,
(b) arranging for the sale of the equipment to a third
party, or (c) returning the equipment to the lessor to sell
the equipment. If the sales proceeds in either case are less
than the residual value, the Company is required to reimburse
the lessor for the deficiency up to a specified level as stated
in each lease agreement. If the sales proceeds exceed the
residual value, the Company is entitled to all of such excess
amounts. The guarantees under these leases for the residual
values of equipment at the end of the respective operating lease
periods approximated $10.8 million as of December 31,
2004. Based upon the expectation that none of these leased
assets will have a residual value at the end of the lease term
that is materially less than the value specified in the related
operating lease agreement or that the Company will purchase the
equipment at the end of the lease term, the Company does not
believe it is probable that it will be required to fund any
amounts under the terms of these guarantee arrangements.
Accordingly, no accruals have been recognized for these
guarantees.
Future minimum commitments for noncancelable
operating leases with initial or remaining lease terms in excess
of one year are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company is a party to various legal
proceedings in the ordinary course of business. Although the
ultimate disposition of these proceedings cannot be predicted
with certainty, management believes the outcome of any claim
that is pending or threatened, either individually or on a
combined basis, will not have a materially adverse effect on the
consolidated financial position, cash flows or operations of the
Company.
During 2001, the Company entered into a
termination agreement (the Agreement) with a former
senior executive (the Executive). As part of the
Agreement, the Company agreed to repurchase from the Executive
approximately 210,000 shares of Company common stock at
estimated fair market value of $2.1 million. The Agreement
provided for 77,000 shares to be repurchased upon execution
of the Agreement with the remaining shares to be repurchased
ratably over a 24-month period. At December 31, 2003, all
obligations under the Agreement had been fulfilled by the
Company.
In 2004, 2003 and 2002, the Company paid
approximately $2.4 million, $3.3 million and
$3.2 million, respectively, in rental expense to
shareholders of the Company for leases of land and buildings.
In 2004, 2003 and 2002, the Company paid JLL
Partners approximately $0.3 million for certain
out-of-pocket expenses incurred. These amounts are recorded in
selling, general, and administrative expenses.
The Company maintains cash at financial
institutions in excess of federally insured limits. Accounts
receivable potentially expose the Company to concentrations of
credit risk. The Company provides credit in its normal course of
business to customers in the residential construction industry.
The Company performs ongoing credit evaluations of its customers
and maintains allowances for potential credit losses.
Because customers are dispersed among the
Companys various markets, its credit risk to any one
customer or state economy is not significant.
Sales by product category for the years ended
December 31, 2004, 2003 and 2002 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cash flows from operating activities included
cash payments as follows:
On February 11, 2005, the Company entered
into a $350.0 million senior secured credit facility with a
syndicate of banks. The senior secured credit facility is
comprised of a $110.0 million long-term revolver due
February 11, 2010; a $225.0 million term loan due in
quarterly installments of $0.6 million beginning
June 30, 2005 and ending June 30, 2011 and a final
payment of $210.9 million on August 11, 2011; and a
$15.0 million prefunded letter of credit facility due
August 11, 2011.
Interest rates on loans under the credit
agreement are based on the base rate of interest determined by
the administrative agent rate in the United States or LIBOR
(plus a margin, based on leverage ratios, which is currently
1.50% for base rate revolving loans and 2.50% for term loans),
at the Companys option at the time of borrowing. A
variable commitment fee (currently 0.50%) based on the total
leverage ratio is charged on the unused amount of the revolving
loan commitment.
The senior secured credit facility is
collateralized by all tangible and intangible property and
interest in property and proceeds thereof now owned or hereafter
acquired by the Company and its wholly-owned subsidiaries. The
credit facility also contains certain restrictive covenants,
which, among other things, relate to the payment of dividends,
incurrence of indebtedness, repurchase of common stock or other
distributions, and asset sales and also require compliance with
certain financial covenants with respect to a maximum total
leverage ratio and a minimum interest coverage ratio. The
Company can be required to make mandatory prepayments of amounts
outstanding under the agreement based on the results of an
excess cash flow calculation that must be performed annually
under the terms of the facility.
On February 11, 2005, the Company also
issued $275.0 million in aggregate principal amount of
floating rate notes. The floating rate notes mature on
February 15, 2012. Interest accrues at a rate of LIBOR plus
4.25%. LIBOR is reset at the beginning of each quarter. Interest
on the floating rate notes is payable quarterly in arrears
beginning May 15, 2005. At any time on or after
February 15, 2007, the Company can redeem some or all of
the notes at a redemption price equal to par plus a specified
premium that declines ratably to par. At any time before
February 15, 2007, the Company can redeem the notes, in
whole or in part, at a redemption price equal to par, plus a
make whole premium. The Company may also redeem up to 35% of the
aggregate principal amount of the notes with the proceeds of
certain equity offerings any time before February 15, 2007.
In the event of a change in control, the Company may be required
to offer to purchase the notes at a purchase price equal to 101%
of the principal, plus accrued and unpaid interest.
The notes are secured by a second priority lien
on all tangible and intangible property and interest in property
and proceeds thereof now owned or hereafter acquired by the
Company and its wholly-owned subsidiaries. The indenture
covering the notes contains certain restrictive covenants,
which, among other
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
things, relate to the payment of dividends,
incurrence of indebtedness, repurchase of common stock or other
distributions, asset sales, and investments.
Proceeds from the new senior secured credit
agreement and the issuance of the floating rate notes were used
to retire the Companys existing debt facility, pay a cash
dividend to shareholders of $8.00 per share, or
$201.2 million, and make a cash payment of approximately
$35.8 million to stock option holders in-lieu of adjusting
the exercise price. In connection with the refinancing, the
Company incurred estimated fees and expenses aggregating
$21.1 million and paid a $1.7 million early
termination penalty related to the prepayment of the
Tranche B term loan under the prior credit facility. The
Company had approximately $9.3 million in unamortized
deferred loan costs remaining at the refinancing date related to
the prior credit facility. In the first quarter of 2005, the
total cash payment to option holders and the termination penalty
related to the prepayment of the Tranche B term loan were
expensed and recorded as stock compensation expense and a
component of interest expense, respectively. Also, based on the
final syndicate of banks, the Company expensed approximately
$7.3 million of the unamortized deferred financing costs
related to the prior credit facility and approximately
$2.4 million of costs incurred in connection with the
refinancing. These costs were recorded as interest expense. The
remaining $2.0 million of unamortized deferred financing
costs related to the prior credit facility and
$18.7 million of costs incurred in connection with the
refinancing will be included as a component of other assets, net
and amortized over the terms of the new senior secured credit
facility and floating rate notes.
On May 24, 2005, the board of directors
recommended and the Companys shareholders approved a
1-for-10 reverse stock split of the Companys common stock.
After the reverse stock split effective
May 24, 2005, each holder of record held one share of
common stock for every 10 shares held immediately prior to
the effective date. As a result of the reverse stock split, the
board of directors also exercised its discretion under the
anti-dilution provisions of the employee stock plan to adjust
the number of shares underlying stock options and the related
exercise prices to reflect the change in the share price and
outstanding shares on the date of the reverse stock split. The
effect of fractional shares is not material.
Following the effective date of the reverse stock
split, the par value of the common stock remained at
$.01 per share. As a result, the Company has reduced the
common stock in the accompanying consolidated balance sheets and
statements of changes in stockholders equity on a
retroactive basis for all periods presented, with a
corresponding increase to additional paid-in capital. All share
and per-share amounts and related disclosures have also been
retroactively adjusted for all periods presented to reflect the
1-for-10 reverse stock split.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Builders FirstSource, Inc. and
Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
The accompanying notes are an integral part of
these condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE
SHEETS
The accompanying notes are an integral part of
these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
The accompanying notes are an integral part of
these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY (DEFICIT)
The accompanying notes are an integral part of
these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
Builders FirstSource, Inc. and subsidiaries (the
Company) is a leading provider of manufactured
components, building materials and construction services to
professional homebuilders and contractors in the United States.
In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include
all recurring adjustments and normal accruals necessary for a
fair statement of the Companys financial position and its
results of operations and cash flows for the dates and periods
presented. Results for interim periods are not necessarily
indicative of the results to be expected during the remainder of
the current year or for any future period. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
These unaudited condensed consolidated financial
statements should be read in conjunction with the more detailed
audited consolidated financial statements for the years ended
December 31, 2004, 2003, and 2002. Accounting policies used
in the preparation of these unaudited condensed consolidated
financial statements are consistent in all material respects
with the accounting policies described in the Notes to
Consolidated Financial Statements.
Accounting Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those estimates.
Estimates are used when accounting for items such
as revenue, vendor rebates, allowance for returns, discounts and
doubtful accounts, employee compensation programs, depreciation
and amortization periods, taxes, inventory values, insurance
programs, goodwill, other intangible assets and long-lived
assets.
Net Income (Loss) Per Common Share
Net income (loss) per common share
(EPS) is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128,
Earnings per Share, which requires the presentation
of basic and diluted EPS. Basic EPS is computed using the
weighted average number of common shares outstanding during the
period. Diluted EPS is computed using the weighted average
number of common shares outstanding during the period, plus the
dilutive effect of common stock equivalents. Options to
purchase 4.5 million shares of common stock
outstanding at March 31, 2004 were included in the
computation of diluted EPS. Options to
purchase 4.5 million shares of common stock
outstanding at March 31, 2005, were not included in the
computation of diluted EPS because their effect would have been
anti-dilutive.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) (continued)
The table below presents a reconciliation of
weighted average common shares, in thousands, used in the
calculation of basic and diluted EPS:
Stock Compensation
The Company applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations in accounting for employee stock-based
compensation costs related to its stock incentive plan.
APB 25 is an intrinsic value approach for measuring
stock-based compensation costs. SFAS No. 123,
Accounting for Stock-Based Compensation, is a fair
value approach for measuring stock-based compensation costs.
Had the compensation cost for the Companys
stock-based compensation been determined in accordance with
SFAS No. 123, the Companys net income (loss) and
net income (loss) per share for the three month periods ended
March 31, 2005 and 2004 would approximate the pro forma
amounts below:
The effects of applying SFAS No. 123 in
this pro forma disclosure may not be indicative of future
results.
Recently Issued Accounting
Pronouncements
In December 2004, the FASB issued Staff Position
109-1 (FSP 109-1), Application of FASB Statement
No. 109 (FASB No. 109), Accounting
for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004. FSP 109-1 clarifies guidance that applies to the new
deduction for qualified domestic production activities. When
fully phased-in, the deduction will be up to 9% of the lesser of
qualified production activities income or taxable
income. FSP 109-1 clarifies that the deduction should be
accounted for as a special deduction under FASB No. 109 and
will reduce tax expense in the period or periods that the
amounts are deductible on the tax return. Any tax benefits
resulting from the new deduction will be effective for the
Companys fiscal year ending December 31, 2005. The
Company is currently reviewing the effect of FSP 109-1 on its
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) (continued)
In March 2005, the Securities and Exchange
Commission released SEC Staff Accounting Bulletin
(SAB) No. 107,
Share-Based Payment
.
SAB No. 107 provides the SEC staff position regarding
the application of SFAS No. 123(R). SAB No. 107
contains interpretive guidance related to the interaction
between SFAS No. 123(R) and certain SEC rules and
regulations, as well as provides the staffs views
regarding the valuation of share-based payment arrangements for
public companies. SAB No. 107 also highlights the
importance of disclosures made related to the accounting for
share-based payment transactions. The Company is currently
reviewing the effect of SAB No. 107 on its
consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation.
On February 11, 2005, the Companys
board of directors declared a special cash dividend of
$8.00 per common share, or $201.2 million to
shareholders of record as of February 11, 2005. The Company
fully reduced retained earnings and additional paid in capital
to zero by $26.4 million and $160.2 million,
respectively. The remainder of the dividend reduced retained
earnings by $14.6 million. The Company also made a cash
payment of $35.8 million to stock option holders in-lieu of
adjusting the exercise price. This payment, plus applicable
payroll taxes of $0.6 million, was recorded as stock
compensation expense in the accompanying unaudited condensed
consolidated statements of operations for the three months ended
March 31, 2005.
On February 25, 2004, the Companys
board of directors declared a special cash dividend of
$5.56 per common share, or $139.6 million to
shareholders of record as of February 25, 2004. The Company
fully reduced retained earnings by $48.0 million and
reduced additional paid-in capital by $91.6 million for the
remainder of the dividend. As a result of the special dividend,
the board of directors exercised its discretion under the
anti-dilution provisions of the employee stock plan to adjust
the exercise price of stock options to reflect the change in the
share price on the dividend date. The Company did not record any
expense related to adjustment of the exercise price as the
modification did not increase the aggregate intrinsic value of
any award and the ratio of the exercise price per share to the
market value per share was not reduced.
Approximately $0.4 million was also paid to
certain option holders whose exercise price could not be
adjusted for the dividend. The cash payment to these option
holders was expensed and is included in as stock compensation
expense in the accompanying unaudited condensed consolidated
statements of operations for the three month period ended
March 31, 2004.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) (continued)
Long-term debt consists of the following:
2005 Senior Secured Credit Agreement
On February 11, 2005, the Company entered
into a $350.0 million senior secured credit agreement (the
2005 Agreement) with a syndicate of banks. The 2005
Agreement is comprised of a $110.0 million long-term
revolver due February 11, 2010; a $225.0 million term
loan due in quarterly installments of $0.6 million
beginning June 30, 2005 and ending June 30, 2011 and a
final payment of $210.9 million on August 11, 2011;
and a $15.0 million prefunded letter of credit agreement
due August 11, 2011.
Interest rates under the 2005 Agreement for the
revolving loans and the term loan are based on the rate of
interest determined by the administrative agent rate in the
United States or LIBOR (plus a margin, based on leverage ratios,
which is 1.50% for base rate revolving loans and 2.50% for term
loans at March 31, 2005), at the Companys option at
the time of borrowing. A variable commitment fee (currently
0.50%) based on the total leverage ratio is charged on the
unused amount of the revolver. The weighted-average interest
rate at March 31, 2005 for borrowings under the 2005
Agreement was 5.49%. At March 31, 2005, the available
borrowing capacity of the revolver totaled $83.8 after being
reduced by outstanding letters of credit of approximately
$16.2 million and borrowings under the long-term revolver
of $10.0 million.
The 2005 Agreement is collateralized by all
tangible and intangible property and interest in property and
proceeds thereof now owned or hereafter acquired by the Company
and its wholly-owned subsidiaries. The 2005 Agreement also
contains certain restrictive covenants, which, among other
things, relate to the payment of dividends, incurrence of
indebtedness, repurchase of common stock or other distributions,
and asset sales and also require compliance with certain
financial covenants with respect to a maximum total leverage
ratio and a minimum interest coverage ratio. The Company can be
required to make mandatory prepayments of amounts outstanding
under the agreement based on the results of an excess cash flow
calculation that must be performed annually under the terms of
the agreement.
Second Priority Senior Secured Floating Rate
Notes
On February 11, 2005, the Company issued
$275.0 million in aggregate principal amount of floating
rate notes. The floating rate notes mature on February 15,
2012. Interest accrues at a rate of LIBOR plus
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) (continued)
4.25%. LIBOR is reset at the beginning of each
quarterly period. Interest on the floating rate notes is payable
quarterly in arrears beginning May 15, 2005. The
weighted-average interest rate at March 31, 2005 for the
floating rate notes was 7.02%. At any time on or after
February 15, 2007, the Company can redeem some or all of
the notes at a redemption price equal to par plus a specified
premium that declines ratably to par. At any time before
February 15, 2007, the Company can redeem the notes, in
whole or in part, at a redemption price equal to par, plus a
make whole premium. The Company may also redeem up to 35% of the
aggregate principal amount of the notes with the proceeds of
certain equity offerings any time before February 15, 2007.
In the event of a change in control, the Company may be required
to offer to purchase the notes at a purchase price equal to 101%
of the principal, plus accrued and unpaid interest.
The notes are secured by a second priority lien
on all tangible and intangible property and interest in property
and proceeds thereof now owned or hereafter acquired by the
Company and its wholly-owned subsidiaries. The indenture
covering the notes contains certain restrictive covenants,
which, among other things, relate to the payment of dividends,
incurrence of indebtedness, repurchase of common stock or other
distributions, asset sales, and investments.
In April 2005, the Company entered into an
interest rate swap in order to obtain a fixed rate with respect
to $100 million of the Companys outstanding floating
rate debt and thereby reduce the Companys exposure to
interest rate volatility. The swap will fix $100 million of
the Companys outstanding debt at an interest rate of 4.12%
for three years starting July 1, 2005. The Companys
effective interest rate of the swap will also include the
applicable margin payable under its debt agreement.
2004 Senior Secured Credit Agreement
Interest rates under the 2004 Agreement for the
revolving loans and the Tranche A term loan were based on
the prime rate in the United States or LIBOR (plus a margin, or
LIBOR spread, based on leverage ratios, which were
1.25% for revolving loans and 3.0% for the Tranche A term
loan at December 31, 2004), at the Companys option at
the time of borrowing. Interest rates under the credit agreement
for the Tranche B term loan were based on the prime rate in
the United States or LIBOR (plus a fixed margin, or LIBOR
spread, which was 8.50%), at our option at the time of
borrowing provided that the base interest rate shall in no event
be less than 2.0%. The weighted-average interest rate at
December 31, 2004 for borrowings under the 2004 Agreement
was 6.9%. A variable commitment fee based on the total leverage
ratio was charged on the unused amount of the revolver (0.375%
at December 31, 2004). At December 31, 2004 the
available borrowing capacity of the revolver totaled
$73.8 million after being reduced by outstanding letters of
credit of approximately $16.2 million.
Other Notes
Proceeds from the 2005 Agreement and the issuance
of the floating rate notes were used to retire the
Companys 2004 Agreement. The proceeds were also used to
pay a cash dividend to shareholders of $201.2 million and
make a cash payment of approximately $35.8 million to stock
option holders in lieu of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) (continued)
adjusting the exercise price, as discussed in
Note 2. In connection with the refinancing, the Company incurred
estimated fees and expenses aggregating $21.1 million and
paid a $1.7 million early termination penalty related to
the prepayment of the Tranche B term loan under the 2004
Agreement. The Company had approximately $9.3 million in
unamortized deferred loan costs remaining at the refinancing
date related to the 2004 Agreement. In the first quarter of
2005, the termination penalty related to the prepayment of the
Tranche B term loan was expensed and recorded as a component of
interest expense. Also, based on the final syndicate of banks,
the Company expensed approximately $7.3 million of the
unamortized deferred financing costs related to the 2004
Agreement and approximately $2.4 million of costs incurred
in connection with the refinancing. These costs were recorded as
interest expense. The remaining $2.0 million of unamortized
deferred financing costs related to the 2004 Agreement and
$18.7 million of costs incurred in connection with the
refinancing are included as a component of other assets, net and
are being amortized over the terms of the 2005 Agreement and
floating rate notes.
Proceeds from the 2004 Agreement were used to
retire the Companys then existing debt facility and to pay
a cash dividend, as discussed in Note 2. In connection with the
refinancing, the Company incurred fees and expenses aggregating
$11.1 million, which were included as a component of other
assets, net on the consolidated balance sheets at
December 31, 2004 and were being amortized over the terms
of the 2004 Agreement. In addition, the Company expensed $2.2
million in deferred loan costs in 2004 due to the early
retirement of the prior debt facility. This amount is included
in interest expense in the accompanying condensed consolidated
statements of operations for 2004.
Future maturities of long-term debt as of
March 31, 2005 are as follows (in thousands):
4. COMMITMENTS
AND CONTINGENCIES
The Company is a party to various legal
proceedings in the ordinary course of business. Although the
ultimate disposition of these proceedings cannot be predicted
with certainty, management believes the outcome of any claim
that is pending or threatened, either individually or on a
combined basis, will not have a materially adverse effect on the
consolidated financial position, cash flows or operations of the
Company. However, there can be no assurances that future costs
would not be material to the results of operations or liquidity
of the Company for a particular period.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) (continued)
5. SALES BY
PRODUCT CATEGORY
Sales by product category for the three months
ended March 31, 2005 and 2004 were as follows:
6. SUBSEQUENT
EVENT
On May 24, 2005, our board of directors and
the Companys stockholders approved a 1-for-10 reverse
stock split of the Companys common stock.
After the reverse stock split, effective
May 24, 2005, each holder of record held one share of
common stock for every 10 shares held immediately prior to
the effective date. As a result of the reverse stock split, the
board of directors also exercised its discretion under the
anti-dilution provisions of our 1998 Stock Incentive Plan to
adjust the number of shares underlying stock options and the
related exercise prices to reflect the change in the share price
and outstanding shares on the date of the reverse stock split.
The effect of fractional shares is not material.
Following the effective date of the reverse stock
split, the par value of the common stock remained at $0.01 per
share. As a result, the Company has reduced the common stock in
the unaudited condensed consolidated balance sheets and
statements of changes in shareholders equity (deficit)
included herein on a retroactive basis for all periods
presented, with a corresponding increase to additional paid-in
capital. All share and per-share amounts and related disclosures
have also been retroactively adjusted for all periods presented
to reflect the 1-for-10 reverse stock split.
Through and
including ,
2005 (the 25th day after the date of this prospectus), federal
securities law may require all dealers that effect transactions
in our common stock, whether or not participating in this
offering, to deliver a prospectus. This requirement is in
addition to the dealers obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Builders FirstSource, Inc.
Common Stock
,
2005
/s/ PRICEWATERHOUSECOOPERS LLP
Year ended December 31,
2004
2003
2002
(in thousands, except per share amounts)
Restated
Restated
$
2,058,047
$
1,675,093
$
1,500,006
1,574,535
1,300,410
1,155,375
483,512
374,683
344,631
376,096
327,027
308,060
1,171
750
107,416
46,485
35,821
620
2,220
24,458
11,124
12,055
82,958
34,741
21,546
31,480
13,343
8,611
51,478
21,398
12,935
103
(3,822
)
(2,980
)
(19,504
)
$
51,581
$
17,576
$
(9,549
)
$
2.05
$
0.85
$
0.51
(0.15
)
(0.12
)
(0.77
)
$
2.05
$
0.70
$
(0.38
)
$
1.93
$
0.85
$
0.51
(0.15
)
(0.12
)
(0.77
)
$
1.93
$
0.70
$
(0.38
)
25,135
25,204
25,363
26,714
25,252
25,411
Year Ended December 31,
2004
2003
2002
(In thousands)
Restated
Restated
$
51,581
$
17,576
$
(9,549
)
19,350
20,187
20,745
3,986
1,954
2,065
2,125
3,148
81
19,504
3,101
2,361
2,032
871
(159
)
3,598
1,653
(537
)
(975
)
(1,601
)
(9,357
)
(145,448
)
17,012
63,397
(34,409
)
(15,306
)
(16,139
)
14,788
372
628
68
1,469
492
1,789
28,600
1,109
10,515
9,160
7,079
3,837
94,385
(40,162
)
48,530
(20,718
)
(15,592
)
(15,061
)
2,046
7,115
6,401
(4,563
)
(1,651
)
(18,672
)
(13,040
)
(10,311
)
(68,900
)
61,400
(9,800
)
(101,153
)
315,000
(22,573
)
(14,504
)
(11,128
)
(1,340
)
(139,592
)
38
6
10
(351
)
(1,451
)
(1,805
)
196
13
98
(24,780
)
20,484
(13,279
)
(30,670
)
56,539
(39,280
)
45,043
3,337
(1,061
)
5,585
2,248
3,309
$
50,628
$
5,585
$
2,248
Stock
Common Stock
Additional
purchase
Paid-In
Loans
Retained
Shares
Amount
Capital
receivable
earnings
Total
(in thousands, except share amounts)
25,377,453
$
254
$
254,267
$
(307
)
$
41,529
$
295,743
(2,708
)
(2,708
)
25,377,453
$
254
$
254,267
$
(307
)
$
38,821
$
293,035
100,000
1
999
1,000
3,489
10
10
(180,518
)
(2
)
(1,803
)
(1,805
)
98
98
(9,549
)
(9,549
)
25,300,424
$
253
$
253,473
$
(209
)
$
29,272
$
282,789
600
6
6
(145,168
)
(1
)
(1,450
)
(1,451
)
13
13
17,576
17,576
25,155,856
$
252
$
252,029
$
(196
)
$
46,848
$
298,933
27,372
123
123
(35,015
)
(1
)
(350
)
(351
)
(91,589
)
(48,003
)
(139,592
)
196
196
51,581
51,581
25,148,213
$
251
$
160,213
$
$
50,426
$
210,890
1.
DESCRIPTION OF BUSINESS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
2004
2003
(in thousands)
Restated
$
216,521
$
210,488
13,039
12,105
229,560
222,593
6,318
5,738
$
223,242
$
216,855
15 to 40 years
3 to 10 years
3 to 5 years
The shorter of the estimated useful life or the
remaining lease term, as defined by SFAS 13, as amended.
Year ended December 31,
2004
2003
2002
25,135
25,204
25,363
1,579
48
48
26,714
25,252
25,411
2004
2003
2002
(in thousands, except per share amounts)
Restated
Restated
$
51,581
$
17,576
$
(9,549
)
(924
)
(877
)
(872
)
$
50,657
$
16,699
$
(10,421
)
$
2.05
$
0.70
$
(0.38
)
$
2.02
$
0.66
$
(0.41
)
$
1.93
$
0.70
$
(0.38
)
$
1.90
$
0.66
$
(0.41
)
3.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
Year ended or at December 31, 2003
Year ended or at December 31, 2002
As
As
Previously
As
Previously
As
reported
Adjustments
Restated
Reported
Adjustments
Restated
(in thousands)
$
1,301,728
$
(1,318
)
$
1,300,410
$
1,155,369
$
6
$
1,155,375
373,365
1,318
374,683
344,637
(6
)
344,631
326,419
608
327,027
307,317
743
308,060
45,775
710
46,485
36,570
(749
)
35,821
34,031
710
34,741
22,295
(749
)
21,546
13,048
295
13,343
8,955
(344
)
8,611
20,983
415
21,398
13,340
(405
)
12,935
17,161
415
17,576
(9,144
)
(405
)
(9,549
)
$
0.83
$
0.02
$
0.85
$
0.53
$
(0.02
)
$
0.51
$
0.68
$
0.02
$
0.70
$
0.52
$
(0.01
)
$
0.51
$
0.83
$
0.02
$
0.85
$
(0.36
)
$
(0.02
)
$
(0.38
)
$
0.68
$
0.02
$
0.70
$
(0.36
)
$
(0.02
)
$
(0.38
)
$
214,855
$
2,000
$
216,855
125,152
(2,600
)
122,552
13,820
225
14,045
89,399
(3,658
)
85,741
626,161
(4,033
)
622,128
9,369
(1,335
)
8,034
324,530
(1,335
)
323,195
49,546
(2,698
)
46,848
301,631
(2,698
)
298,933
626,161
(4,033
)
622,128
$
49,546
$
(2,698
)
$
46,848
$
32,385
$
(3,113
)
$
29,272
17,161
415
17,576
(9,144
)
(405
)
(9,549
)
4.
GOODWILL AND COVENANTS NOT TO
COMPETE
$
162,080
2,131
(1,181
)
$
163,030
(1)
See Note 9 related to discontinued
operations.
Net
Carrying
Accumulated
carrying
amount
amortization
amount
$
5,362
$
(4,567
)
$
795
237
237
(818
)
(818
)
5,599
(5,385
)
214
67
67
(159
)
(159
)
(5,184
)
5,184
$
482
$
(360
)
$
122
5.
CHANGE IN ACCOUNTING PRINCIPLE
6.
SECURITIZATION OF TRADE RECEIVABLES
2003
2002
(in thousands)
$
69,000
$
49,000
332,738
419,126
534,927
958,667
For the year ended
December 31,
December 31,
2003
2002
2003
(in thousands)
$
1,905
$
4,361
n/a
n/a
n/a
5.7
%
7.
FACILITY CLOSURE COSTS
For the year
ended
2003
2002
(in thousands)
$
43
$
491
193
135
899
73
36
51
$
1,171
$
750
December 31,
December 31,
December 31,
2002
Additions
Payments
2003
Additions
Payments
2004
(in thousands)
$
3,784
$
43
$
(562
)
$
3,265
$
175
$
(793
)
$
2,647
193
(126
)
67
50
(75
)
42
301
36
(337
)
$
4,085
$
272
$
(1,025
)
$
3,332
$
225
$
(868
)
$
2,689
8.
ACQUISITIONS
9.
DISCONTINUED OPERATIONS
Year ended December 31,
2004
2003
2002
(in thousands)
$
$
25,600
$
32,943
159
(5,880
)
(4,585
)
December 31,
2003
$
206
678
45
1,629
2,558
1,021
559
1,580
$
978
December 31,
December 31,
December 31,
2002
Additions
Payments
2003
Additions
Payments
Adjustments
2004
(in thousands)
$
894
$
128
$
(301
)
$
721
$
$
(363
)
$
(358
)
$
55
55
(55
)
36
36
(21
)
15
$
894
$
219
$
(301
)
$
812
$
$
(439
)
$
(358
)
$
15
10.
PROPERTY, PLANT AND EQUIPMENT
December 31,
2004
2003
(in thousands)
Restated
$
13,324
$
12,291
45,836
41,268
85,644
80,806
29,486
27,767
5,060
1,042
179,350
163,174
(91,864
)
(77,433
)
$
87,486
$
85,741
11.
ACCRUED LIABILITIES
December 31,
2004
2003
(in thousands)
$
25,234
$
21,759
12,956
10,927
9,149
8,047
2,862
930
2,185
319
1,245
629
1,186
5,529
3,756
$
58,863
$
47,850
12.
LONG-TERM DEBT
December 31,
2004
2003
(in thousands)
$
228,275
$
85,000
99,358
68,900
205
275
313,480
168,533
1,688
1,731
$
311,792
$
166,802
$
1,688
2,250
2,250
2,250
2,250
302,792
$
313,480
13.
INCOME TAXES
2004
2003
2002
(in thousands)
Restated
Restated
$
25,380
$
12,151
$
7,795
4,669
968
749
$
30,049
$
13,119
$
8,544
2,229
(74
)
197
(798
)
298
(130
)
1,431
224
67
$
31,480
$
13,343
$
8,611
December 31,
2004
2003
(in thousands)
Restated
$
6,520
$
8,832
2,448
1,437
4,925
3,757
3,339
1,206
17,232
15,232
(3,137
)
(1,187
)
14,095
14,045
9,462
6,013
747
2,021
10,209
8,034
$
3,886
$
6,011
2004
2003
2002
Restated
Restated
35.0
%
35.0
%
35.0
%
3.0
%
2.5
%
2.7
%
(0.1)
%
0.9
%
2.3
%
37.9
%
38.4
%
40.0
%
14.
EMPLOYEE STOCK BASED COMPENSATION
Number of shares
Weighted average
underlying options
exercise price
(in thousands)
3,011
$
9.74
69
10.00
(4
)
2.50
(100
)
10.00
2,976
9.74
160
10.00
(1
)
10.00
(88
)
10.00
3,047
9.75
1,513
3.15
(27
)
1.44
(29
)
3.15
4,504
3.11
$
2.30
$
1.79
$
0.54
Options Outstanding
Options Exercisable
Weighted Average
Weighted
Outstanding at
Remaining
Exercisable at
Average
December 31,
Exercise
Contractual
December 31,
Exercise
Range of Exercise Prices
2004
Price
Life
2004
Price
80
$
1.13
4.00
80
$
1.13
4,424
$
3.15
7.46
2,408
$
3.15
4,504
$
3.11
7.40
2,488
$
3.09
15.
EMPLOYEE BENEFIT PLANS
16.
COMMITMENTS AND CONTINGENCIES
Related party
Total*
(in thousands
$
2,080
$
31,072
2,078
23,768
2,151
21,596
1,942
19,654
1,830
16,449
5,658
60,125
$
15,739
$
172,664
*
Includes related party future minimum
commitments for noncancelable operating leases.
17.
RELATED PARTY TRANSACTIONS
18.
CONCENTRATIONS
19.
SALES BY PRODUCT CATEGORY
2004
2003
2002
(in thousands)
$
815,295
$
593,693
$
515,387
391,199
354,584
325,170
385,938
303,449
257,349
175,957
158,680
151,148
289,658
264,687
250,952
$
2,058,047
$
1,675,093
$
1,500,006
20.
SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31,
2004
2003
2002
(in thousands)
$
20,681
$
9,445
$
11,644
26,953
9,941
6,268
$
2,185
$
$
21.
SUBSEQUENT EVENT - RECAPITALIZATION
22.
SUBSEQUENT EVENT - REVERSE STOCK
SPLIT
Three Months Ended
March 31,
2005
2004
(unaudited)
(unaudited)
(in thousands, except
per share amounts)
$
509,342
$
429,354
388,407
333,577
120,935
95,777
96,902
82,513
36,364
437
(12,331
)
12,827
19,204
6,506
(31,535
)
6,321
(12,675
)
2,433
(18,860
)
3,888
246
$
(18,860
)
$
4,134
$
(0.75
)
$
0.15
0.01
$
(0.75
)
$
0.16
25,148
25,138
25,148
25,633
Three months ended
March 31,
2005
2004
(unaudited)
(unaudited)
(in thousands)
$
(18,860
)
$
4,134
4,712
4,823
10,365
2,549
1,406
1,129
688
(379
)
(75
)
(77
)
(28,099
)
(6,209
)
(14,066
)
(6,090
)
(235
)
243
514
(377
)
34,583
45,067
(59
)
(4,943
)
(8,685
)
39,429
(5,487
)
(4,119
)
1,275
451
(4,212
)
(3,668
)
10,000
(68,900
)
225,000
315,000
275,000
(313,275
)
(99,364
)
(21,149
)
(10,823
)
(201,186
)
(139,592
)
(351
)
196
(24,091
)
(25,610
)
(27,925
)
(38,507
)
7,836
50,628
5,585
$
12,121
$
13,421
Additional
Common Stock
paid-in
Retained earnings
Shares
Amunt
captalnaudi
(accumulatd deficit)
Toal
(In thousands, except share amounts)
25,148,213
$
251
$
160,213
$
50,426
$
210,890
(160,213
)
(40,973
)
(201,186
)
(18,860
)
(18,860
)
25,148,213
$
251
$
$
(9,407
)
$
(9,156
)
1.
BASIS OF PRESENTATION
Three months
ended March 31,
2005
2004
25,148
25,138
496
25,148
25,634
2.
SPECIAL CASH DIVIDENDS
3.
LONG-TERM DEBT
March 31,
December 31,
2005
2004
(in thousands)
$
10,000
$
228,275
85,000
225,000
275,000
205
205
510,205
313,480
2,250
1,688
$
507,955
$
311,792
$
1,688
2,250
2,250
2,250
2,250
499,517
$
510,205
2005
2004
(in thousands)
$
188,388
$
167,802
97,388
84,783
103,142
74,855
44,162
37,968
76,262
63,946
$
509,342
$
429,354
INFORMATION NOT REQUIRED IN THE
PROSPECTUS
Item 13. Other
Expenses of Issuance and Distribution
The following table sets forth the costs and
expenses, other than underwriting discounts and commissions,
payable by the Registrant in connection with the sale of common
stock being registered.
The registrant will bear all of the expenses
shown above.
Item 14. Indemnification of Officers and
Directors
Section 145 of the Delaware General
Corporation Law (the DGCL) provides, in summary,
that directors and officers of Delaware corporations are
entitled, under certain circumstances, to be indemnified against
all expenses and liabilities (including attorneys fees)
incurred by them as a result of suits brought against them in
their capacity as directors or officers, if they acted in good
faith and in a manner they reasonably believed to be in or not
opposed to our best interests, and, with respect to any criminal
action or proceeding, if they had no reasonable cause to believe
their conduct was unlawful; provided that no indemnification may
be made against expenses in respect of any claim, issue, or
matter as to which they shall have been adjudged to be liable to
us, unless and only to the extent that the court in which such
action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all
the circumstances of the case, they are fairly and reasonably
entitled to indemnity for such expenses as the court shall deem
proper. Any such indemnification may be made by us only as
authorized in each specific case upon a determination by the
stockholders, disinterested directors or independent legal
counsel that indemnification is proper because the indemnitee
has met the applicable standard of conduct.
Section 102(b)(7) of the DGCL permits a
corporation to provide in its certificate of incorporation that
a director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability for
any breach of the directors duty of loyalty to the
corporation or its stockholders, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, for unlawful payments of dividends or unlawful
stock repurchases, redemptions or other distributions, or for
any transaction from which the director derived an improper
personal benefit.
Our amended and restated certificate of
incorporation and amended and restated by-laws provide that we
shall indemnify our directors and officers to the fullest extent
permitted by law and that no director shall be liable for
monetary damages to us or our stockholders for any breach of
fiduciary duty, except to the extent provided by applicable law.
Prior to the completion of this offering, we intend to enter
into indemnification agreements with our directors. The
idemnification agreements provide indemnification to
our directors under certain circumstances for
acts or omissions that may not be covered by directors and
officers liability insurance and may, in some cases, be
broader than the specific indemnification provisions contained
under Delaware law. We currently maintain liability insurance
for our directors and officers.
ITEM 15. Recent
Sales of Unregistered Securities
In the three years preceding the filing of this
Registration Statement, the Registrant has issued the following
securities that were not registered under the Securities Act:
On February 11, 2005, we issued
$275.0 million aggregate principal amount of second
priority senior secured floating rate notes due 2012. These
securities were issued only to qualified institutional buyers in
accordance with Rule 144A and to non-U.S. persons outside
the U.S. in accordance with Regulation S under the
Securities Act. The securities were issued to UBS Securities LLC
and Deutsche Bank Securities Inc. as initial purchasers. We and
the guarantors have agreed to use all commercially reasonable
efforts to file a registration statement enabling holders of
these floating rate notes to exchange their privately placed
floating rate notes for publicly registered notes with
substantially identical terms as the floating rate notes; cause
the registration statement to be declared effective by the SEC
on or prior to 240 days after the issue date; and complete
the exchange offer within 30 business days after the date on
which the registration statement is declared effective, subject
to certain exceptions. In addition, in certain circumstances, we
will agree to file a shelf registration statement
that would allow some or all of the floating rate notes to be
offered to the public and to use all commercially reasonable
efforts to cause such a shelf registration statement to be
declared effective by the SEC.
In the past three calendar years, the Company has
granted stock options to employees under its 1998 Stock
Incentive Plan, as amended, covering an aggregate of 1,763,703
shares. Of these options, 251,200 were issued at an exercise
price of $10.00 per share, and 1,512,503 options were
issued at an exercise price of $3.15 per share. All of the
options were issued pursuant to the Companys stock
incentive plan in reliance on Rule 701 of the Securities
Act.
On February 25, 2004, the Companys
board of directors declared a special cash dividend of $5.56 per
common share, or an aggregate of $139.6 million, to
shareholders of record as of February 25, 2004. As a result
of the special dividend, the board of directors exercised its
discretion under the anti-dilution provisions of the employee
stock plan to adjust the exercise price of stock options from
$10.00 per common share to $3.15 per share and to
adjust certain other options from $2.50 per common share to
$1.125 per common share to reflect the change in the share
value on the dividend date. Approximately $0.4 million was
also paid to certain option holders whose exercise price could
not be adjusted for the dividend.
ITEM
16. Exhibits
ITEM
17. Undertakings
The undersigned registrant hereby undertakes to
provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful
defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
$
$
1
.1*
Form of Underwriting Agreement
3
.1*
Form of Amended and Restated Certificate of
Incorporation of Builders FirstSource, Inc.
3
.2
Form of Amended and Restated By-Laws of Builders
FirstSource, Inc.
4
.1
Indenture, dated as of February 11, 2005,
among Builders FirstSource, Inc., the Subsidiary Guarantors
thereto, and The Wilmington Trust Corporation, as Trustee
4
.2
Form of Specimen Certificate
4
.3
Registration Rights Agreement, dated as of
February 11, 2005, among Builders FirstSource, Inc., the
Guarantors named therein, and UBS Securities LLC and Deutsche
Bank Securities Inc.
4
.4
Form of Second Amended and Restated Stockholders
Agreement, dated as
of ,
2005, among JLL Building Products, LLC, Builders
FirstSource, Inc., Floyd F. Sherman, Charles L. Horn, Kevin P.
OMeara, and Donald F. McAleenan
4
.5
Stockholders Agreement, dated as of June 11,
1999, among Stonegate Resources Holdings, LLC, BSL Holdings,
Inc., Holmes Lumber Company, and Lockwood Holmes
4
.6
Stock Purchase Agreement, dated as of
March 3, 2000, among Stonegate Resources Holdings, LLC,
Builders FirstSource, Inc., and William A. Schwartz
5
.1**
Opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, regarding the legality of the common stock being issued
8
.1**
Opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, regarding certain tax matters
10
.1
Credit Agreement, dated as of February 11,
2005, among Builders FirstSource, Inc., as borrower, JLL
Building Products, LLC, and the guarantors party thereto, the
lenders party thereto, UBS Securities LLC, as joint arranger and
joint book runner, UBS AG, Stamford Branch, as issuing bank,
administrative agent, and collateral trustee for the secured
parties, UBS Loan Finance LLC as swingline lender, and
Deutsche Bank Securities Inc. as joint arranger, joint
book-runner, and syndication agent
10
.2
Collateral Trust Agreement, dated as of
February 11, 2005, among Builders FirstSource, Inc., the
other Pledgors from time to time party hereto, UBS AG, Stamford
Branch, as Administrative Agent under the Credit Agreement,
Wilmington Trust Company, as Trustee under the Indenture, UBS
AG, Stamford Branch, as Priority Collateral Trustee, and UBS AG,
Stamford Branch, as Parity Collateral Trustee
10
.3
Pledge and Security Agreement, dated as of
February 11, 2005, by Builders FirstSource, Inc., the Guarantors
party hereto, and UBS AG, Stamford Branch, as Collateral Trustee
10
.4
Builders FirstSource, Inc. 1998 Stock Incentive
Plan, as amended
10
.5
2004 Form of Builders FirstSource, Inc. 1998
Stock Incentive Plan Nonqualified Stock Option Agreement
10
.6
2003 Form of Builders FirstSource, Inc. 1998
Stock Incentive Plan Nonqualified Stock Option Agreement
10
.7
Form of Builders FirstSource, Inc. Management
Incentive Plan
10
.8
Builders FirstSource, Inc. 2004 Cash Incentive
Bonus Plan
10
.9
Employment Agreement, dated September 1,
2001, between Builders FirstSource and Floyd F. Sherman
10
.10
Employment Agreement, dated January 15,
2004, between Builders FirstSource and Kevin P. OMeara
10
.11
Employment Agreement, dated January 15,
2004, between Builders FirstSource and Charles L. Horn
10
.12
Employment Agreement, dated January 15,
2004, between Builders FirstSource and Donald F. McAleenan
10
.13
Form of Director Indemnification Agreement
10
.14*
Form of 2005 Equity Incentive Plan
10
.15*
Amendment to Employment Agreement, dated
June 1, 2005, between Builders FirstSource, Inc. and
Floyd F. Sherman
21
.1
Subsidiaries of Builders FirstSource, Inc.
23
.1*
Consent of PricewaterhouseCoopers LLP
23
.2**
Consent of Skadden, Arps, Slate, Meagher &
Flom LLP (included as part of Exhibit 5.1)
23
.3**
Consent of Skadden, Arps, Slate, Meagher &
Flom LLP (included as part of Exhibit 8.1)
24
.1
Powers of Attorney
99
.1
Consent of Director Nominee (Robert C.
Griffin)
Previously filed.
*
Filed herewith.
**
To be filed by subsequent amendment.
(1) For purposes of determining any
liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4)or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any
liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 4 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on June 3, 2005.
BUILDERS FIRSTSOURCE, INC. |
By: | /s/ FLOYD F. SHERMAN |
|
|
Floyd F. Sherman, | |
President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||||
|
|
|
||||
/s/ FLOYD F. SHERMAN
Floyd F. Sherman |
President and Chief Executive Officer
(Principal Executive Officer and Director) |
June 3, 2005 | ||||
/s/ CHARLES L. HORN
Charles L. Horn |
Senior Vice PresidentFinance and Chief
Financial Officer
(Principal Financial Officer) |
June 3, 2005 | ||||
/s/ M. CHAD CROW
M. Chad Crow |
Vice PresidentFinance and Controller
(Controller) |
June 3, 2005 | ||||
*
Paul S. Levy |
Chairman of the Board and Director | June 3, 2005 | ||||
*
Alexander R. Castaldi |
Director | June 3, 2005 | ||||
*
Ramsey A. Frank |
Director | June 3, 2005 | ||||
*
Brett N. Milgrim |
Director | June 3, 2005 | ||||
*By: |
/s/ DONALD F. MCALEENAN
Donald F. McAleenan Attorney-in-Fact |
EXHIBIT 1.1
[ Shares]
Builders FirstSource, Inc.
Common Stock
($0.01 Par Value)
FORM OF
UNDERWRITING AGREEMENT
June __, 2005
FORM OF UNDERWRITING AGREEMENT
June ___, 2005
UBS Securities LLC
Deutsche Bank Securities Inc.
as Joint Book-Running Managers
c/o UBS Securities LLC
299 Park Avenue
New York, New York 10171
Ladies and Gentlemen:
Builders FirstSource, Inc., a Delaware corporation (the "Company"), proposes to issue and sell, and the persons named as selling stockholders on Schedule B annexed hereto (the "Selling Stockholders") propose to sell, to the underwriters named in Schedule A annexed hereto (the "Underwriters"), for whom UBS Securities LLC ("UBS") and Deutsche Bank Securities Inc. ("Deutsche Bank" and, together with UBS, the "Managing Underwriters" or "you") are acting as representatives, an aggregate of ___________ shares (the "Firm Shares") of Common Stock, $0.01 par value (the "Common Stock"), of the Company, of which ___________ shares (the "Primary Shares") are to be issued and sold by the Company and an aggregate of _____________ shares (the "Secondary Shares") are to be sold by the Selling Stockholders in the respective amounts set forth under the caption "Firm Shares" in Schedule B annexed hereto. In addition, solely for the purpose of covering over-allotments, the Selling Stockholders propose to grant to the Underwriters the option to purchase from the Selling Stockholders up to an additional ____________ shares of Common Stock (the "Additional Shares") in the respective amounts set forth under the caption "Additional Shares" in Schedule B annexed hereto. The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the "Shares." The Shares are described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the "Act"), with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-122788) including a prospectus, relating to the Shares on February 14, 2005, as amended by a first amendment filed on April 27, 2005, as further amended by a second amendment filed on April 27, 2005, as further amended by a third amendment filed on May 26, 2005, and as further amended by a fourth amendment filed on June __, 2005. The Company has furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") relating to the Shares. Except where the context otherwise requires, the registration statement, as amended when it becomes effective, including all documents filed as a part thereof, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430(A) under the Act and also including any registration statement filed pursuant to Rule 462(b) under the Act, is herein called the "Registration Statement," and the prospectus, in the form filed by the Company with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act) or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the "Prospectus." The registration, issuance and sale of the Shares and
the effectiveness of the Registration Statement and Prospectus are collectively referred to as the "Transactions." As used herein, "business day" shall mean a day on which the New York Stock Exchange is open for trading.
The Company, the Selling Stockholders and the Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company and each of the Selling Stockholders, severally and not jointly, agree to issue and sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company and each of the Selling Stockholders the respective number of Firm Shares (subject to such adjustment as you may determine to avoid fractional shares) which bears the same proportion to the number of Firm Shares to be sold by the Company or by such Selling Stockholders, as the case may be, as the number of Firm Shares set forth opposite the name of such Underwriter set forth on Schedule A annexed hereto, subject to adjustment in accordance with Section 8 hereof, in each case at a purchase price of $______ per Share. The Company and each Selling Stockholder is advised by you that the Underwriters intend (i) to make a public offering of their respective portions of the Firm Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Firm Shares upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine.
In addition, the Selling Stockholders hereby grant to the several Underwriters the option to purchase, and upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Underwriters shall have the right to purchase, severally and not jointly, from the Selling Stockholders, ratably in accordance with the number of Firm Shares to be purchased by each of them, all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per share to be paid by the Underwriters to the Selling Stockholders for the Firm Shares. This option may be exercised by the Managing Underwriters on behalf of the several Underwriters at any time and from time to time on or before the thirtieth day following the date hereof, by written notice to the Company and the Selling Stockholders. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the date and time when the Additional Shares are to be delivered (such date and time being herein referred to as the "additional time of purchase"); provided, however, that the additional time of purchase shall not be earlier than the time of purchase (as defined below) nor earlier than the second business day after the date on which the option shall have been exercised nor later than the tenth business day after the date on which the option shall have been exercised. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter set forth on Schedule A annexed hereto bears to the total number of Firm Shares (subject, in each case, to such adjustment as you may determine to eliminate fractional shares), subject to adjustment in accordance with Section 10 hereof.
Pursuant to irrevocable powers of attorney, which shall be satisfactory to counsel for the Underwriters, granted by each Selling Stockholder, ______________ and _________________ will act as representatives of each Selling Stockholder. The foregoing representatives (the "Representatives of the Selling Stockholders") are authorized, on behalf of each Selling Stockholder, to execute any documents necessary or desirable in connection with the sale of the Shares to be sold hereunder by each Selling Stockholder, to make delivery of the certificates of such Shares, to receive the proceeds of the sale of such
Shares, to give receipts for such proceeds, to pay therefrom the expenses to be borne by each Selling Stockholder in connection with the sale and public offering of the Shares, to distribute the balance of such proceeds to each Selling Stockholder in proportion to the number of Shares sold by each Selling Stockholder, to receive notices on behalf of each Selling Stockholder and to take such other action as may be necessary or desirable in connection with the transactions contemplated by this Underwriting Agreement (this "Agreement").
2. Payment and Delivery. Payment of the purchase price for the Firm Shares shall be made to the Company and each of the Selling Stockholders by Federal Funds wire transfer, against delivery of the certificates for the Firm Shares to you through the facilities of The Depository Trust Company ("DTC") for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time, on _______________, 2005 (unless another time shall be agreed to by you and the Company and the Representatives of the Selling Stockholders or unless postponed in accordance with the provisions of Section 10 hereof) (such date and time, the "Closing Date"). The time at which such payment and delivery are to be made is hereinafter sometimes called "the time of purchase." Electronic transfer of the Firm Shares shall be made to you at the time of purchase in such names and in such denominations as you shall specify.
Payment of the purchase price for the Additional Shares shall be made at the additional time of purchase in the same manner and at the same office as the payment for the Firm Shares. Electronic transfer of the Additional Shares shall be made to you at the additional time of purchase in such names and in such denominations as you shall specify.
Deliveries of the documents described in Section 8 hereof with respect
to the purchase of the Shares shall be made at the offices of Skadden, Arps,
Slate, Meagher & Flom, LLP, Four Times Square, New York, NY 10036-6522, at 9:00
A.M., New York City time, on the date of the closing of the purchase of the Firm
Shares or the Additional Shares, as the case may be.
3. Representations and Warranties of the Company. The Company represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has been declared effective under the Act; no stop order of the Commission preventing or suspending the use of any Preliminary Prospectus or the effectiveness of the Registration Statement has been issued and no proceedings for such purpose have been instituted or, to the actual knowledge of the Chief Executive Officer, Chief Financial Officer or General Counsel of the Company (the "Company's Knowledge"), are contemplated by the Commission; each Preliminary Prospectus, at the time of filing thereof, complied in all material respects to the requirements of the Act and the last Preliminary Prospectus distributed in connection with the offering of the Shares did not, as of its date, and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; the Registration Statement complied when it became effective, complies and will comply, at the time of purchase and any additional time of purchase, in all material respects with the requirements of the Act and the Prospectus will comply, as of its date and at the time of purchase and any additional times of purchase, in all material respects with the requirements of the Act and any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement have been and will be so described or filed; the conditions to the use
of Form S-1 have been satisfied; the Registration Statement did not when it became effective, does not and will not, at the time of purchase and any additional time of purchase, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus will not, as of its date and at the time of purchase and any additional time of purchase, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Preliminary Prospectus, the Registration Statement or the Prospectus in reliance upon and in conformity with information concerning an Underwriter and furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in the Preliminary Prospectus, the Registration Statement or the Prospectus; and the Company has not distributed and will not distribute any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus and the Prospectus;
(b) as of March 31, 2005, the Company had an authorized and outstanding capitalization as set forth under the heading "Actual" in the section of the Registration Statement and the Prospectus entitled "Capitalization" and, as of the time of purchase and the additional time of purchase, as the case may be, the Company shall have an authorized and outstanding capitalization as set forth under the heading "As Adjusted" in the section of the Registration Statement and the Prospectus entitled "Capitalization"; all of the issued and outstanding shares of capital stock, including the Common Stock, of the Company have been duly authorized and validly issued and are fully paid and non-assessable, have been issued in compliance with all federal and state securities laws and were not issued in violation of any preemptive right, resale right, right of first refusal or similar right;
(c) as of the date of this Agreement, at the time of purchase and the additional time of purchase, as the case may be, the authorized capital stock of the Company consists only of __________ shares of Common Stock, par value $0.01 per share, and _________ shares of undesignated preferred stock, par value $0.01 per share (the "Preferred Stock"); as of the date of this Agreement, there are ____________ shares of Common Stock outstanding and outstanding options to purchase _________ shares of Common Stock and no shares of Preferred Stock outstanding;
(d) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with the corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus, to execute and deliver this Agreement and to issue, sell and deliver the Shares as contemplated herein;
(e) the Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified and in good standing would not, individually or in the aggregate, have a material adverse effect on, or result in a material adverse change in, the financial condition, results of operation, stockholders' equity, properties or prospects of the Company and the Subsidiaries (as hereinafter defined), taken as a whole (a "Material Adverse Effect," or a "Material Adverse Change," respectively);
(f) annexed hereto as Schedule C is a true and complete list of each
entity in which the Company has a direct or indirect voting interest (each, a
"Subsidiary" and, collectively, the "Subsidiaries"); other than the capital
stock or other equity interests of the Subsidiaries, the Company does not
own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in
any limited liability company, firm, partnership, joint venture, association
or other entity; complete and correct copies of the charter, by-laws, or
other formation and organizational documents of the Company and the
Subsidiaries and all amendments thereto have been delivered or made available
to you, and except as set forth in the exhibits to the Registration
Statement, no changes therein will be made subsequent to the date hereof and
prior to the time of purchase or, if later, the additional time of purchase;
each Subsidiary is a corporation, limited liability company, partnership or
other entity duly organized or formed and validly existing in good standing
under the laws of the jurisdiction of its organization or formation, with
requisite corporate or other power and authority necessary to own, lease and
operate its properties and to conduct its business as currently conducted and
described in the Registration Statement and the Prospectus; each Subsidiary
is duly qualified to do business as a foreign corporation, limited liability
company, partnership or other entity, and is in good standing in each
jurisdiction where the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure to be
so qualified and in good standing would not, individually or in the
aggregate, have a Material Adverse Effect or have an adverse effect on the
ability of the Company to consummate the Transactions; all of the issued and
outstanding shares of capital stock or other equity interests of each of the
Subsidiaries have been duly authorized and validly issued and all of the
issued and outstanding shares of capital stock of each of the Subsidiaries
that is a corporation are fully paid and non-assessable, and in each case
have been issued in compliance with all federal and state securities laws and
were not issued in violation of any preemptive right, resale right, right of
first refusal or similar right, and (except as otherwise described in this
Section 3(f)) are owned by the Company free and clear of all liens, security
interests, other encumbrance or adverse claims (other than transfer
restrictions imposed by the Act, the securities or Blue Sky laws of certain
jurisdictions and security interests granted pursuant to an Indenture, dated
as of February 11, 2005, by and among the Company, Wilmington Trust Company,
as trustee, and the Guarantors, as defined in the Indenture (the
"Indenture"), the Security Documents (as defined in the Indenture) (the
"Security Documents"), and the Credit Agreement (as defined in the Indenture)
and any documents relating to such Credit Agreement (the "Credit
Documents")); and, except as set forth in the Prospectus, there are no
outstanding options, warrants or other rights to acquire or purchase,
agreements or other obligations to issue or other rights to convert any
obligation into shares of capital stock or ownership interests in the
Subsidiaries;
(g) the Shares to be issued and sold by the Company pursuant to this Agreement have been duly authorized and, when issued and delivered against payment therefor as provided herein, will be validly issued, fully paid and non-assessable and free of statutory and contractual preemptive rights, resale rights, rights of first refusal and similar rights; the issuance of the Shares to be sold by the Selling Stockholders pursuant to this Agreement were duly authorized by the Company and such Shares were validly issued and are fully paid and non-assessable, and free of statutory preemptive rights, resale rights and similar rights;
(h) the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Registration Statement and the Prospectus and the certificates for the Shares are in due and proper form and the holders of the Shares will not be
subject to personal liability for the debts or obligations of the Company solely by reason of being such holders;
(i) the Company has the corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions; this Agreement and the Transactions have been duly authorized by all necessary corporate action on the part of the Company; this Agreement has been duly executed and delivered by the Company, and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally, except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as may be limited by state or federal laws or policies relating to the non-enforceability of the indemnification provisions contained herein;
(j) neither the Company nor any Subsidiary is (i) in violation of its certificate of incorporation or other charter document, as applicable, bylaws or other organizational documents, (ii) in default (nor to the Company's Knowledge has any event occurred which, with notice or lapse of time or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note, indenture, mortgage, deed of trust, loan or credit agreement, lease, license, franchise agreement, authorization, permit, certificate or other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them is bound or to which any of their assets or properties is subject (collectively, "Agreements and Instruments"), or (iii) in violation of any law, statute, rule or regulation or any judgment, order or decree of any domestic or foreign court or other federal, state or local governmental or regulatory commission, board, authority, agency or other body with jurisdiction over any of them or any of their assets or properties ("Governmental Authority"), except in the case of clauses (ii) and (iii), for such defaults or violations as would not, individually or in the aggregate, have a Material Adverse Effect or have an adverse effect on the ability of the Company to consummate the Transactions contemplated hereby;
(k) the execution, delivery and performance by the Company of this
Agreement and the other documents relating to the Transactions (collectively,
the "Transaction Documents") and consummation of the Transactions, including
issuance of the Shares and the use of the proceeds therefrom in the manner
set forth under the caption "Use of Proceeds" in the Registration Statement
and Prospectus, does not and will not (i) violate the certificate of
incorporation or bylaws of the Company, (ii) conflict with or constitute a
breach of or a default under (or an event that with notice or lapse of time,
or both, would constitute a default), or require consent under, or result in,
the creation or imposition of a lien, charge or encumbrance on any property
or assets of the Company under any of the Agreements and Instruments, or
(iii) violate any law, statute, rule or regulation, including, without
limitation, Regulation T, U or X of the Board of Governors of the Federal
Reserve System, or any judgment, order or decree of any Governmental
Authority, except, in the case of clauses (ii) and (iii), for such conflicts,
breaches, defaults or violations as would not, individually or in the
aggregate, have a Material Adverse Effect or have an adverse effect on the
ability of the Company to consummate the Transactions contemplated hereby;
(l) no consent, approval, authorization or order of, or filing, registration, qualification, license or permit of or with, any Governmental Authority is required to be obtained
or made by the Company in connection with the issuance and sale of the Shares
or the consummation by the Company of the Transactions, except (i)
registration of the Shares under the Act, which has been or will be effected,
(ii) any necessary qualification under the securities or blue sky laws of the
various jurisdictions in which the Shares are being offered by the
Underwriters, (iii) under the rules and regulations of the NASD, Inc., f/k/a
the National Association of Securities Dealers, Inc. (the "NASD"), and (iv)
such as have been or will be obtained or made on or prior to the Closing
Date; no consents or waivers from any other person or entity are required for
the execution, delivery and performance by the Company of the Transaction
Documents and the consummation by the Company of the Transactions, other than
such consents and waivers (x) as have been obtained or will be obtained prior
to the Closing Date and will be in full force and effect on the Closing Date,
and (y) the failure of which to obtain would not, individually or in the
aggregate, have a Material Adverse Effect or have an adverse effect on the
ability of the Company to consummate the Transactions contemplated hereby;
(m) except as set forth in the Registration Statement and the
Prospectus, (i) no person has the right, contractual or otherwise, to cause
the Company to issue or sell to it any shares of Common Stock or shares of
any other capital stock or other equity interests of the Company, (ii) no
person has any preemptive rights, nor upon or following consummation of the
Transactions, resale rights, rights of first refusal or other rights to
purchase any shares of Common Stock or shares of any other capital stock or
other equity interests of the Company arising by statute or out of any
contract with the Company, and (iii) no person has the right to act as an
underwriter or as a financial advisor to the Company in connection with the
offer and sale of the Shares, in the case of each of the foregoing clauses
(i), (ii) and (iii), whether as a result of the filing or effectiveness of
the Registration Statement or the sale of the Shares as contemplated thereby
or otherwise, and (iv) no person has the right, contractual or otherwise, to
cause the Company to register under the Act any shares of Common Stock or
shares of any other capital stock or other equity interests of the Company,
or to include any such shares or interests in the Registration Statement or
the offering contemplated thereby, whether as a result of the filing or
effectiveness of the Registration Statement or the sale of the Shares as
contemplated thereby or otherwise;
(n) the Company and the Subsidiaries (i) have all licenses, certificates, permits, authorizations, approvals, franchises and other rights from, and have made all declarations and filings with, all applicable Governmental Authorities (each, an "Authorization") necessary to engage in the business conducted by them in the manner described in the Prospectus, except where the failure to hold such Authorizations would not, individually or in the aggregate, have a Material Adverse Effect, and (ii) to the Company's Knowledge, no Governmental Authority is threatening to limit, suspend or revoke any such Authorization, except where such limitation, suspension or revocation would not, individually or in the aggregate, have a Material Adverse Effect; all such Authorizations are valid and in full force and effect, and the Company and the Subsidiaries are in compliance in all material respects with the terms and conditions of all such Authorizations, except for any invalidity, failure to be in full force and effect or noncompliance with any Authorization that would not, individually or in the aggregate, have a Material Adverse Effect or have an adverse effect on the ability of the Company to consummate the Transactions contemplated hereby;
(o) all legal or governmental proceedings, affiliate transactions, off-balance sheet transactions, contracts, licenses, agreements, leases or documents of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required;
(p) except as set forth in the Registration Statement and the
Prospectus, there is (i) no action, suit, claim, investigation or proceeding
before or by any Governmental Authority pending or, to the Company's
Knowledge, threatened, to which the Company or any Subsidiary is a party,
(ii) to the Company's Knowledge, no law, statute, rule or regulation that has
been enacted, adopted or issued or, that has been proposed by any
Governmental Authority to which the business, assets or property of the
Company or any Subsidiary is or may be subject, and (iii) to the Company's
Knowledge, no judgment, decree or order of any Governmental Authority to
which the business, assets or property of the Company or any Subsidiary is or
may be subject that, in the case of any of clause (i), (ii) or (iii), would,
individually or in the aggregate, result in a Material Adverse Effect or have
an adverse effect on the ability of the Company to consummate the
Transactions contemplated hereby;
(q) PricewaterhouseCoopers LLP, whose report on the consolidated financial statements of the Company and its Subsidiaries is filed with the Commission as part of the Registration Statement and the Prospectus, are independent public accountants as required by the Act;
(r) the audited financial statements (including the related notes and schedules thereto) included in the Registration Statement and the Prospectus present fairly in all material respects the consolidated financial position, results of operations, cash flows and changes in stockholder's equity of the Company and the Subsidiaries at the respective dates and for the respective periods indicated; all such financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") applied on a consistent basis throughout the periods presented (except as disclosed therein) and in compliance in all material respects with Regulation S-X ("Regulation S-X") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except that the interim financial statements do not include full footnote disclosure; the historical statement of operations data, balance sheet data and other financial data derived from the audited financial statements set forth under the captions "Prospectus Summary--Summary of Historical Financial Information and Other Data" and "Selected Historical Consolidated Financial Data" included in the Prospectus and Registration Statement have been prepared on a basis consistent in all material respects with that of the audited financial statements of the Company; there are no financial statements (historical or as adjusted) that are required to be included in the Registration Statement and the Prospectus that are not included as required;
(s) subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as set forth in
the Registration Statement, there has not been (i) any Material Adverse
Change or any development involving a prospective material adverse change in
the business, financial condition, results of operations, stockholders'
equity or properties of the Company and the Subsidiaries, taken as a whole,
(ii) any obligation, direct or contingent (including any off-balance sheet
obligations), incurred by the Company or the Subsidiaries, which is material
to the Company and the Subsidiaries taken as a whole (other than indebtedness
obligations and liabilities incurred in the ordinary course of business,
including, without limitation, indebtedness incurred under the Company's
revolving credit facility), (iii) any
change in the outstanding indebtedness of the Company or the Subsidiaries, or
(iv) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company;
(t) the Company has obtained for the benefit of the Underwriters the agreement (a "Lock-Up Agreement"), in the form annexed hereto as Exhibit A, of (i) each of the Selling Stockholders, (ii) each of the Company's directors and (iii) the Company's executive officers, officers and those employees of the Company, in each case, named on Exhibit A-1 annexed hereto;
(u) neither the Company nor any Subsidiary is, and, upon the issuance and sale of the Shares as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus, none of them will be, required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulation of the Commission thereunder;
(v) the Company and the Subsidiaries have valid and marketable title in fee simple to all items of owned real property described in the Registration Statement and the Prospectus as being owned by each of them, including, without limitation, all property subject to a mortgage, and valid title to all material personal property described in the Registration Statement and in the Prospectus as being owned by each of them, in each case free and clear of any pledge, lien, encumbrance, security interest or other defect or claim of any third party, including, without limitation, with respect to any such defect or lien under any Environmental Law (as defined below) or any Tax (as defined below) lien (other than liens for taxes not yet due and liens for taxes being contested in good faith), whether imposed by any federal, state or other taxing authority, except (i) such as do not materially and adversely affect the value of such property and do not materially interfere with the use presently made of such property by the Company or such Subsidiary, (ii) as created by the Indenture, the Security Documents and the Credit Documents or permitted by any of the foregoing, and (iii) liens described in the Registration and the Prospectus; all material real property (including, without limitation, all property subject to a leasehold mortgage), material personal property and material buildings as described in the Registration Statement and the Prospectus as being held under lease by the Company or any such Subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as do not materially interfere with the use presently made of such property and buildings by the Company or such Subsidiary;
(w) the Company and each Subsidiary owns, possesses or has the valid right to employ all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, the "Intellectual Property") necessary to conduct the businesses operated by it as described in the Registration Statement and the Prospectus, except where the failure to own, possess or have the valid right to employ such Intellectual Property would not, individually or in the aggregate, have a Material Adverse Effect; neither the Company nor any Subsidiary has received any written notice of infringement of or conflict with (and neither knows of any such infringement or a conflict with) asserted rights of others with respect to any of the foregoing that could result in a Material Adverse Effect; to the Company's Knowledge, the use by the Company or any of the Subsidiaries of any of the Intellectual Property in connection with the business and operations of the Company
and the Subsidiaries does not infringe on the rights of any person, except for such infringement as would not result in a Material Adverse Effect;
(x) except for matters which would not, individually or in the aggregate, have a Material Adverse Effect (i) neither the Company nor any of the Subsidiaries is engaged in any unfair labor practice, (ii) there is (1) no unfair labor practice complaint pending or, to the Company's Knowledge after due inquiry, threatened against the Company or any of the Subsidiaries before the National Labor Relations Board, and no grievances or arbitration proceeding arising out of or under collective bargaining agreements is pending or threatened, and (2) no strike, labor dispute or work stoppage by the employees of the Company or any Subsidiary exists or, to the Company's Knowledge, is threatened, and (iii) to the Company's Knowledge, there is not any existing or threatened labor disturbances by the employees of any of its or any Subsidiary's principal suppliers, manufacturers, customers, or contractors;
(y) except as disclosed in the Registration Statement or in the
Prospectus or as would not, individually or in the aggregate, have a Material
Adverse Effect, (i) the Company and the Subsidiaries are in compliance with
and not subject to any pending or threatened claim under applicable
Environmental Laws (as defined below) and to the Company's Knowledge, no fact
or circumstances exist and no event or condition is occurring or has occurred
with respect to the Company or any Subsidiary relating to any Environmental
Law, that would reasonably be expected to result in the Company's or any
Subsidiary's non-compliance with current requirements of Environmental Law,
(ii) the Company and the Subsidiaries have made all filings and provided all
notices required under any applicable Environmental Law, and have, and are in
compliance with, all permits, licenses or other approvals required under any
applicable Environmental Laws for their current operations, and each of them
is in full force and effect, (iii) there is no civil, criminal or
administrative action, suit, demand, claim, hearing, notice of violation,
investigation, proceeding, notice or demand letter or request for information
pending or threatened against the Company or any Subsidiary under any
Environmental Law, and (iv) neither the Company nor any Subsidiary has
received notice that it has been identified as a potentially responsible
party under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), or any comparable state law;
for purposes of this Agreement, "Environmental Laws" means the common law and
all applicable federal, state, local and foreign laws, regulations, rules,
ordinances, codes, orders, decrees, judgments, injunctions or any other
legally enforceable requirement issued, promulgated, approved or entered
thereunder, relating to pollution or protection of human health or the
environment, including, without limitation, laws relating to: (i) emissions,
discharges, releases or threatened releases of hazardous materials into the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) and (ii) underground and
aboveground storage tanks and related piping, emissions, discharges, releases
or threatened releases therefrom;
(z) no "prohibited transaction" (as defined in either Section 406 of
the Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder ("ERISA") or Section
4975 of the Internal Revenue Code of 1986, as amended from time to time (the
"Code")), "accumulated funding deficiency" (as defined in Section 302 of
ERISA) or other event of the kind described in Section 4043(b) of ERISA
(other than events with respect to which the 30-day notice requirement under
Section 4043 of ERISA has been waived) has occurred with respect to any
"employee benefit plan" (as defined in Section
3(3) of ERISA) for which the Company or any Subsidiary would have any liability which could, individually or in the aggregate, result in a Material Adverse Effect; each employee benefit plan for which the Company or any Subsidiary would have any liability is in compliance with applicable law, including, without limitation, ERISA and the Code other than such non-compliance as would not, individually or in the aggregate, have a Material Adverse Effect; the Company has not incurred and does not reasonably expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from any "pension plan" (as defined in Section 3(2) of ERISA); and each plan for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code has received a favorable determination from the Internal Revenue Service that it is so qualified and nothing has occurred, whether by action or by failure to act, which would reasonably be expected to cause the loss of such qualification;
(aa) each of the Company and the Subsidiaries has (i) timely filed all federal, state, local, foreign and other tax returns, reports or statements ("Tax Returns") that are required to be filed by it, and (ii) paid all taxes, assessments, governmental or other similar charges, including, without limitation, all income, sales, use, withholding, value added, franchise, estimated, property, ad velorum and other taxes or assessments (including any interest and penalties with respect thereto) (each, a "Tax," and collectively, "Taxes") shown to be due and payable thereon, except, in each case, (1) those Taxes that are not expected to result in a Material Adverse Effect, (2) those Taxes that are being contested in good faith, if such Taxes are adequately reserved for on the books and records of the Company, or (3) as described in the Registration Statement and the Prospectus; to the Company's Knowledge, no audits, examinations or deficiencies for Taxes are currently pending or have been proposed or threatened by any Governmental Authority against the Company or any Subsidiary, except that would not, individually or in the aggregate, have a Material Adverse Effect;
(bb) the Company and each of the Subsidiaries is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which it is engaged; none of the Company or its Subsidiaries has received a notice of cancellation with respect to any existing insurance;
(cc) neither the Company nor any of the Subsidiaries has sustained, since the date of the last audited financial statements included in the Registration Statement and the Prospectus, any loss or interference with its respective business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, except for any such losses or interference which would not, individually or in the aggregate, have a Material Adverse Effect;
(dd) the Company has not sent or received any communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in, or filed as an exhibit to, the Registration Statement, and no such termination or non-renewal has been threatened by the Company or, to the Company's Knowledge, any other party to any such contract or agreement, except for any such termination which would not, individually or in the aggregate, have a Material Adverse Effect;
(ee) the Company and each of the Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in
accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of their financial statements in conformity with GAAP and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for their assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; to the Company's Knowledge, the Company's auditors have been advised of (x) any significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data, and (y) any fraud, whether or not material, that involves management or other employees who have a role in the Company's internal controls;
(ff) the Company has established and maintains disclosure controls and procedures (as such term is defined in Rules 13a-14 and 15d-14 under the Exchange Act); such disclosure controls and procedures are designed to ensure that material information relating to the Company and the Subsidiaries is made known to the chief executive officer and the chief financial officer of the Company by others within the Company or any Subsidiary, and such disclosure controls and procedures are reasonably effective to perform the functions for which they were established, subject to the limitations of any such control system; any material weaknesses in internal controls have been identified for the Company's auditors; since the date of the most recent evaluation of such disclosure controls and procedures, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weakness;
(gg) the Company has provided or made available to you or your counsel true and complete copies of all extant minutes or draft minutes of meetings, or resolutions adopted by written consent, of the board of directors of the Company and each Subsidiary and each committee of such board in the past three years, and all agendas for each such meeting for which minutes or draft minutes do not exist;
(hh) the Company has provided you true, correct, and complete copies of
all documentation pertaining to any extension of credit in the form of a
personal loan made since January 1, 2005, directly or indirectly, by the
Company to any director or executive officer of the Company, or to any family
member or affiliate of any director or executive officer of the Company; and
since January 1, 2005, the Company has not, directly or indirectly, including
through any subsidiary, (i) extended credit, arranged to extend credit, or
renewed any extension of credit, in the form of a personal loan, to or for
any director or executive officer of the Company, or to or for any family
member or affiliate of any director or executive officer of the Company, or
(ii) made any material modification, including any renewal thereof, to any
term of any personal loan to any director or executive officer of the
Company, or any family member or affiliate of any director or executive
officer, which loan was outstanding on January 1, 2005.
(ii) neither the Company nor any of the Subsidiaries nor, to the Company's Knowledge, any employee or agent of the Company or the Subsidiaries has made any payment of funds of the Company or the Subsidiaries or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Registration Statement or the Prospectus;
(jj) neither the Company nor, to the Company's Knowledge, any of its affiliates (within the meaning of Rule 144 under the Act) (each, an "Affiliate"), has taken, nor will the Company, or to the Company's Knowledge, any of such Affiliates take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares; the Company acknowledges that you may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Regulation M under the Exchange Act;
(kk) since January 1, 2002, neither the Company nor any of its Subsidiaries nor, to the best of the Company's Knowledge, any director, officer, agent, employee or any beneficial owner of 10 percent or more of the capital stock of the Company or any of its Subsidiaries has, with respect to the Company or any of its Subsidiaries, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) made any unlawful payment to any foreign or domestic government official or employee from corporate funds, (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment;
(ll) except as described in the section entitled "Underwriting" in the Registration Statement and in the Prospectus, there are no contracts, agreements or understandings between the Company or any Subsidiary and any other person other than the Underwriters pursuant to this Agreement that would give rise to a valid claim against the Company, any Subsidiary or any of the Underwriters for a brokerage commission, finder's fee or like payment in connection with the issuance, registration and sale of the Shares; and
(mm) to the Company's Knowledge after due inquiry, there are no affiliations or associations between any member of the NASD and any of the Company's officers, directors or 5% or greater securityholders, except as set forth in the Registration Statement and the Prospectus.
In addition, any certificate signed by any officer of the Company or any of the Subsidiaries and delivered to the Underwriters or counsel for the Underwriters in connection with the offering of the Shares shall be deemed to be a representation and warranty by the Company or Subsidiary, as the case may be, as to matters covered thereby, to each Underwriter.
4. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder, severally and not jointly, represents and warrants to each Underwriter that:
(a) such Selling Stockholder now is, and at the time of delivery of such Shares (whether the time of purchase or additional time of purchase, as the case may be) will be, the lawful owner of the number of Shares to be sold by such Selling Stockholder pursuant to this Agreement and has and, at the time of delivery thereof, will have valid title to such Shares, and upon delivery of and payment for such Shares (whether at the time of purchase or the additional time of purchase, as the case may be), the Underwriters will acquire valid title to such Shares free and clear of any claim, lien, encumbrance, contractual preemptive rights, rights of first refusal, security interest, community property right, restriction on transfer or other defect in title;
(b) such Selling Stockholder, to the extent such Selling Stockholder is not an individual, has been duly organized or incorporated, and is validly existing and in good standing as a limited liability company or corporation, as the case may be, under the laws of the jurisdiction of its organization or formation;
(c) such Selling Stockholder has, and at the time of delivery of such Shares (whether the time of purchase or additional time of purchase, as the case may be) will have, the limited liability company, corporate or other power and authority and any approval required by law (other than those imposed by the Act and the securities or blue sky laws of certain jurisdictions), to sell, assign, transfer and deliver such Shares in the manner provided in this Agreement;
(d) such Selling Stockholder has full limited liability company or other power and authority to execute and deliver this Agreement, the Lock-Up Agreement of such Selling Stockholder and the Custody Agreement among ___________, as custodian, and such Selling Stockholder (the "Irrevocable Power of Attorney and Custody Agreement"), and to consummate the Transactions; this Agreement, the Lock-Up Agreement of such Selling Stockholder and the Custody Agreement have been duly executed and delivered by such Selling Stockholder and each is a legally valid and binding agreement of such Selling Stockholder enforceable against such Selling Stockholder in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally, except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as may be limited by state or federal laws or policies relating to the non-enforceability of the indemnification provisions contained herein;
(e) the execution, delivery and performance by such Selling Stockholder
of this Agreement and any of the other Transaction Documents, to the extent
that such Selling Stockholder is a party or signatory thereto, and the
consummation by such Selling Stockholder of the Transactions, including the
sale of the Shares to the Underwriters by such Selling Stockholder, does not
and will not (i) violate the certificate of incorporation or other charter
documents, as applicable, bylaws or other organizational documents of such
Selling Stockholder, (ii) conflict with or constitute a breach of or a
default under (or an event that with notice or lapse of time, or both, would
constitute a default), or require consent under, or result in, the creation
or imposition of a lien, charge or encumbrance on any property or assets of
such Selling Stockholder under any Agreements and Instruments or (iii)
violate any law, statute, rule or regulation, or any judgment, order or
decree of any Governmental Authority, except, in the case of clauses (ii) and
(iii), for such conflicts, breaches, defaults or violations as would not,
individually or in the aggregate, have an adverse effect on the ability of
such Selling Stockholder to consummate the Transactions contemplated hereby;
(f) no approval, authorization, license, consent or order of, or filing with, any Governmental Authority is required in connection with the sale of the Shares by such Selling Stockholder or the consummation by such Selling Stockholder of the Transactions contemplated hereby other than the registration of the Shares under the Act, which has been or will be effected, and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters or under the rules and regulations of the NASD;
(g) neither such Selling Stockholder nor, to the knowledge of such Selling Stockholder, any of its directors, managers, members, officers, affiliates or controlling persons has taken, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares;
(h) when the Registration Statement becomes effective and at all times subsequent thereto through the latest of the time of purchase, additional time of purchase or the termination of the offering of the Shares, the Registration Statement and Prospectus, and any supplements or amendments thereto as relate to such Selling Stockholder will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and
(i) such Selling Stockholder has duly and irrevocably authorized the Representatives of the Selling Stockholders, on behalf of such Selling Stockholder, to execute and deliver this Agreement and any other document necessary or desirable in connection with the Transactions contemplated thereby and to deliver the Shares to be sold by such Selling Stockholder and receive payment therefor pursuant hereto.
5. Certain Covenants of the Company. The Company hereby agrees:
(a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states or other jurisdictions as you may designate and to maintain such qualifications in effect so long as you may request for the distribution of the Shares; provided that the Company shall not be required to qualify as a foreign corporation or to consent to the service of process under the laws of any such jurisdiction (except service of process with respect to the offering and sale of the Shares) or execute a general consent or take any action, except as expressly required hereby, that would subject it to service of process in any such jurisdiction or subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject; and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;
(b) to make available to the Underwriters in New York City, as soon as
practicable after the Registration Statement becomes effective, and
thereafter from time to time to furnish to the Underwriters, without charge,
as many copies of the Prospectus (or of the Prospectus as amended or
supplemented if the Company shall have made any amendments or supplements
thereto after the effective date of the Registration Statement) as the
Underwriters may request for the purposes contemplated by the Act; in case
any Underwriter is required to deliver a prospectus after the nine-month
period referred to in Section 10(a)(3) of the Act in connection with the sale
of the Shares, the Company will prepare, at its expense, promptly upon
request such amendment or amendments to the Registration Statement and the
Prospectus as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act;
(c) if, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or any post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration
Statement or such post-effective amendment to become effective as soon as possible and the Company will advise you promptly and, if requested by you, will confirm such advice in writing, (i) when the Registration Statement and any such post-effective amendment thereto has become effective, and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rule);
(d) to advise you promptly, confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order, suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to use its best efforts to obtain the lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or the Prospectus and to provide you and Underwriters' counsel copies of any such documents for review and comment a reasonable amount of time prior to any proposed filing and to file no such amendment or supplement to which you shall object in writing;
(e) subject to Section 5(d) hereof, to file promptly all reports and any definitive proxy or information statement required to be filed by the Company with the Commission in order to comply with the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; to provide you with a copy of such reports and statements and other documents to be filed by the Company pursuant to Section 13, 14 or 15(d) of the Exchange Act during such period a reasonable amount of time prior to any proposed filing, and to promptly notify you of such filing;
(f) if necessary or appropriate, to file a registration statement pursuant to Rule 462(b) under the Act;
(g) to advise the Underwriters promptly of the happening of any event within the time during which a prospectus relating to the Shares is required to be delivered under the Act which could require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, and, during such time, subject to Section 5(d) hereof, to prepare and furnish, at the Company's expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change;
(h) to make generally available to its security holders, and to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) of the Act) as soon as is reasonably practicable after the termination of such twelve-month period but not later than______ , 200__;
(i) to furnish to its shareholders as soon as practicable after the end of each fiscal year an annual report (including a consolidated balance sheet and statements of income, shareholders' equity and cash flow of the Company and the Subsidiaries for such fiscal year,
accompanied by a copy of the certificate or report thereon of the Company's nationally recognized independent certified public accountants);
(j) to furnish to you copies of the Registration Statement in such quantities as you shall reasonably request, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto) and sufficient copies of the foregoing (other than exhibits) for distribution of a copy to each of the other Underwriters;
(k) to furnish to you promptly and, upon request, to each of the other
Underwriters for a period of three years from the date of this Agreement (i)
copies of any reports or other communications which the Company shall send to
its stockholders or shall from time to time publish or publicly disseminate,
(ii) copies of all annual, quarterly and current reports filed with the
Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be
designated by the Commission, and (iii) copies of documents or reports filed
with any national securities exchange on which any class of securities of the
Company is listed, except, in each case, to the extent such materials are
publicly available on the Commission's EDGAR database system or otherwise;
(l) to furnish to you as early as practicable prior to the time of purchase and any additional time of purchase, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim and monthly consolidated financial statements, if any, of the Company and the Subsidiaries which have been read by the Company's independent certified public accountants, as stated in their letter to be furnished pursuant to Section 8(c) hereof;
(m) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus;
(n) to pay all costs, expenses, fees and taxes (other than the fees and
expenses of counsel for the Underwriters except as set forth in Section 7
hereof or clauses (ii), (iv) and (vi) of this Section 5(n)) in connection
with (i) the preparation and filing of the Registration Statement, each
Preliminary Prospectus, the Prospectus, and any amendments or supplements
thereto, and the printing and furnishing of copies of each thereof to the
Underwriters and to dealers (including costs of mailing and shipment), (ii)
the registration, issuance, sale and delivery of the Shares, including any
stock or transfer taxes and stamp or similar duties payable upon the sale,
issuance or delivery of the Primary Shares issued and sold to the
Underwriters, (iii) the producing, word processing and/or printing of this
Agreement, any Agreement Among Underwriters, any dealer agreements, any
Powers of Attorney and any closing documents (including compilations thereof)
and the reproduction and/or printing and furnishing of copies of each thereof
to the Underwriters and (except closing documents) to dealers (including
costs of mailing and shipment), (iv) the qualification of the Shares for
offering and sale under state or foreign laws and the determination of their
eligibility for investment under state or foreign law as aforesaid (including
the reasonable legal fees and filing fees and other disbursements of counsel
for the Underwriters) and the printing and furnishing of copies of any blue
sky surveys or legal investment surveys to the Underwriters and to dealers,
(v) any listing of the Shares on any securities exchange or qualification of
the Shares for quotation on NASDAQ and any registration thereof under the
Exchange Act, (vi) any filing for review of the public offering of the Shares
by the NASD, including the reasonable legal fees and filing fees and other
disbursements of counsel to the
Underwriters in connection therewith, (vii) the fees and disbursements of any transfer agent or registrar for the Shares, (viii) the costs and expenses of the Company relating to presentations or meetings undertaken in connection with the marketing of the offering and sale of the Shares to prospective investors and the Underwriters' sales forces, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, and (ix) the performance of the Company's other obligations hereunder; provided, however, that except as provided in this Section 5(n) and Section 7, the Underwriters will pay all of their own costs and expenses, including the fees and expenses of their counsel; provided, further, each Selling Stockholder will pay its pro rata portion of all stock or transfer taxes and stamp or similar duties payable upon the sale and delivery of the Secondary Shares and its pro rata portion of any Additional Shares which such Selling Stockholder may sell to the Underwriters;
(o) not to sell, offer to sell, contract or agree to sell, hypothecate,
pledge, grant any option to purchase or otherwise dispose of or agree to
dispose of, directly or indirectly, any Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock or warrants
or other rights to purchase Common Stock or any other securities of the
Company that are substantially similar to Common Stock, or file or cause to
be declared effective a registration statement under the Act relating to the
offer and sale of any shares of Common Stock or securities convertible into
or exercisable or exchangeable for Common Stock or other rights to purchase
Common Stock or any other securities of the Company that are substantially
similar to Common Stock for a period of 180 days after the date hereof (the
"Lock-Up Period"), without the prior written consent of the Managing
Underwriters, except for (i) the registration of the Shares and the sales to
the Underwriters pursuant to this Agreement, (ii) the issuance of Common
Stock upon the exercise of options or warrants disclosed as outstanding in
the Registration Statement and the Prospectus and the filing of a
registration statement under the Act with respect thereto, (iii) the issuance
of stock options to director, officers and employees of the Company not
exercisable during the Lock-Up Period pursuant to stock option plans
described in the Registration Statement and the Prospectus and the filing of
a registration statement under the Act with respect thereto; (iv) the
granting or issuance of restricted stock directors, officers or employees of
the Company and the filing of a registration statement under the Act with
respect thereto, (v) restricted Common Stock which cannot be registered at
any time during the Lock-Up Period issued in connection with one or more
acquisitions, mergers or other business combination transactions with any
entity other than a publicly traded corporation whose common equity is listed
on a national securities exchange or quoted on The Nasdaq National Market and
(vi) Common Stock issued in connection with one or more acquisitions, mergers
or other business combination transactions with a publicly held corporation
and the filing of a registration statement under the Act with respect
thereto;
(p) to use its best efforts to cause the Common Stock to be listed for quotation on the National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ"); and
(q) to maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock.
6. Certain Covenants of the Selling Stockholders. Each of the Selling Stockholders agrees with each Underwriter as follows:
(a) the Selling Stockholder will not during the Lock-Up Period (as the same may be extended as set forth in the Lock-Up Agreement), without the prior written consent of UBS and Deutsche Bank, make any demand for, or exercise any right with respect to, the registration of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or warrants or other rights to purchase Common Stock;
(b) the Selling Stockholder will advise the Company and the Underwriters promptly of the happening of any event known to the Selling Stockholder within the time during which a prospectus relating to the Shares is required to be delivered under the Act that could require the making of any change in the Prospectus then being used so that the Prospectus would not include, with respect to such Selling Stockholder, an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and
(c) such Selling Stockholder will pay all the fees and disbursements of its own counsel, if any, and its pro rata portion of all stock or transfer taxes and stamp or similar duties payable upon the sale and delivery of the Secondary Shares and its pro rata portion of any Additional Shares which such Selling Stockholder may sell to the Underwriters; provided, however, that the Underwriters will bear any stock transfer taxes arising from the resale of any Secondary Shares by them. Notwithstanding the foregoing, nothing herein shall affect any agreement that the Company and the Selling Stockholders have for the sharing or allocation of such costs and expenses.
7. Reimbursement of Underwriters' Expenses. If the Shares are not delivered for any reason other than the termination of this Agreement pursuant to the fifth paragraph of Section 10 hereof or the default by one or more of the Underwriters in its or their respective obligations hereunder, the Company shall, in addition to paying the amounts described in Section 5(n) hereof, reimburse the Underwriters for all of their out-of-pocket expenses, including the fees and disbursements of their counsel.
8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders on the date hereof, at the time of purchase and, if applicable, at the additional time of purchase, the performance by the Company and of the Selling Stockholders of its obligations hereunder and to the following additional conditions precedent:
(a) The Company shall furnish to you at the time of purchase and, if applicable, at the additional time of purchase, an opinion and negative assurance statement of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form and substance satisfactory to Latham & Watkins LLP, counsel for the Underwriters, substantially in the form set forth on Exhibit B-1 and Exhibit B-2 annexed hereto, respectively.
(b) The Selling Stockholders shall furnish to you at the time of purchase and at the additional time of purchase, as the case may be, an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, Proskauer Rose LLP and _____________, respective counsel for each of the Selling
Stockholders, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters, and in form and substance satisfactory to Latham & Watkins LLP, counsel for the Underwriters, substantially in the form set forth on Exhibit C-1, Exhibit C-2 and Exhibit C-3 annexed hereto, respectively.
(c) You shall have received from PricewaterhouseCoopers LLP, on each of the date of this Agreement, the time of purchase and, if applicable, the additional time of purchase, a letter dated the date hereof, the time of purchase or the additional time of purchase, as the case may be, and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in form and substance satisfactory to you and your counsel.
(d) You shall have received at the time of purchase and, if applicable, at the additional time of purchase, the favorable opinion of Latham & Watkins LLP, counsel for the Underwriters, dated the time of purchase or the additional time of purchase, as the case may be, as to the matters referred to in subparagraphs (iv), (v), (viii) (with respect to the Shares only), (ix) and (x) of Exhibit B-1 and the negative assurance statement of Exhibit B-2.
(e) No Prospectus or amendment or supplement to the Registration Statement or the Prospectus shall have been filed to which you reasonably object in writing.
(f) The Registration Statement shall become effective not later than 5:30 P.M. New York City time on the date of this Agreement and, if Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act at or before 5:30 P.M., New York City time, on the second full business day after the date of this Agreement.
(g) Prior to the time of purchase, and, if applicable, the additional time of purchase, (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act, (ii) the Registration Statement and all amendments thereto shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus and all amendments or supplements thereto shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading.
(h) Between the time of execution of this Agreement and the time of purchase or the additional time of purchase, as the case may be, no Material Adverse Change shall occur or become known.
(i) The Company will, at the time of purchase and, if applicable, at the additional time of purchase, deliver to you a certificate of its Chief Executive Officer and its Chief Financial Officer in the form annexed hereto as Exhibit D.
(j) The Company will, at the time of purchase and, if applicable, at the additional time of purchase, deliver to you a Certificate of its Secretary in the form annexed hereto as Exhibit E.
(k) You shall have received signed Lock-up Agreements referred to in
Section 3(t) hereof.
(l) The Company and the Selling Stockholders shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement and the Prospectus as of the time of purchase and, if applicable, the additional time of purchase, as you may reasonably request.
(m) The Shares shall have been approved for quotation on NASDAQ, subject only to notice of issuance at or prior to the time of purchase or the additional time of purchase, as the case may be.
(n) The Selling Stockholders will, at the time of purchase and the additional time of purchase, as the case may be, deliver to you a certificate of the Representatives of the Selling Stockholders to the effect that the representations and the warranties of the Selling Stockholders as set forth in this Agreement are true and correct as of each such date substantially in the form annexed hereto as Exhibit F.
9. Effective Date of Agreement; Termination. This Agreement shall become effective (i) if Rule 430A under the Act is not used, when you shall have received notification of the effectiveness of the Registration Statement, or (ii) if Rule 430A under the Act is used, when the parties hereto have executed and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of UBS and Deutsche Bank or any group of
Underwriters (which may include UBS and Deutsche Bank) which has agreed to
purchase in the aggregate at least 50% of the Firm Shares, if (x) since the time
of execution of this Agreement or the earlier respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
been any Material Adverse Change or any development involving a prospective
material adverse change in the business, financial condition, results of
operations, stockholders' equity or properties of the Company and the
Subsidiaries, taken as a whole, which would, in the judgment of UBS and Deutsche
Bank or in the judgment of such group of Underwriters, make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares on
the terms and in the manner contemplated in the Registration Statement and the
Prospectus, (y) there shall have occurred: (i) a suspension or material
limitation in trading in securities generally on the New York Stock Exchange,
the American Stock Exchange or the NASDAQ; (ii) a suspension or material
limitation in trading in the Company's securities on NASDAQ; (iii) a general
moratorium on commercial banking activities declared by either federal or New
York State authorities or a material disruption in commercial banking or
securities settlement or clearance services in the United States; (iv) an
outbreak or escalation of hostilities or acts of terrorism involving the United
States or a declaration by the United States of a national emergency or war; or
(v) any other calamity or crisis or any change in financial, political or
economic conditions in the United States or elsewhere, if the effect of any such
event specified in clause (iv) or (v) in UBS' judgment or in the judgment of
such group of Underwriters makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares on the terms and in the manner
contemplated in the Registration Statement and the Prospectus, or (z) there
shall have occurred any downgrading, or any notice or announcement shall have
been given or made of: (i) any intended or potential downgrading, or (ii) any
watch, review or possible change that does not indicate an affirmation or
improvement, in the rating accorded any securities of or guaranteed by the
Company or any Subsidiary by any "nationally recognized statistical rating organization," as that term is defined in Rule 436(g)(2) under the Act.
If UBS and Deutsche Bank or any group of Underwriters elects to terminate this Agreement as provided in this Section 9, the Company, the Representatives of the Selling Stockholders and each other Underwriter shall be notified promptly in writing.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company or the
Selling Stockholders, as the case may be, shall be unable to comply with any of
the terms of this Agreement, the Company or the Selling Stockholders, as the
case may be, shall not be under any obligation or liability under this Agreement
(except to the extent provided in Sections 5(n), 7 and 11 hereof), and the
Underwriters shall be under no obligation or liability to the Company and the
Selling Stockholders under this Agreement (except to the extent provided in
Section 9 hereof) or to one another hereunder.
10. Increase in Underwriters' Commitments. Subject to Sections 8 and 9 hereof, if any Underwriter shall default in its obligation to take up and pay for the Firm Shares to be purchased by it hereunder (otherwise than for a failure of a condition set forth in Section 8 hereof or a reason sufficient to justify the termination of this Agreement under the provisions of Section 9 hereof) and if the number of Firm Shares which all Underwriters so defaulting shall have agreed but failed to take up and pay for does not exceed 10% of the total number of Firm Shares, the non-defaulting Underwriters shall take up and pay for (in addition to the aggregate number of Firm Shares they are obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares agreed to be purchased by all such defaulting Underwriters, as hereinafter provided. Such Shares shall be taken up and paid for by such non-defaulting Underwriters in such amount or amounts as you may designate with the consent of each Underwriter so designated or, in the event no such designation is made, such Shares shall be taken up and paid for by all non-defaulting Underwriters pro rata in proportion to the aggregate number of Firm Shares set opposite the names of such non-defaulting Underwriters set forth on Schedule A annexed hereto.
Without relieving any defaulting Underwriter from its obligations hereunder, the Company and the Selling Stockholders agree with the non-defaulting Underwriters that it will not sell any Firm Shares hereunder unless all of the Firm Shares are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company or selected by the Company with your approval).
If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company or you shall have the right to postpone the time of purchase for a period not exceeding five business days in order that any necessary changes in the Registration Statement and the Prospectus and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and include any Underwriter substituted under this Section 10 with like effect as if such substituted Underwriter had originally been named in Schedule A annexed hereto.
If the aggregate number of Firm Shares which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the total number of Firm Shares which all Underwriters agreed to
purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the five business day period stated above for the purchase of all the Firm Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall terminate without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
11. Indemnity and Contribution.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter, its partners, directors and officers, and any person who
controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and the successors and assigns of all of the
foregoing persons, from and against any loss, damage, expense, liability or
claim (including the reasonable cost of investigation) which, jointly or
severally, any such Underwriter or any such person may incur under the Act,
the Exchange Act, the common law or otherwise, insofar as such loss, damage,
expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the term
Prospectus for the purpose of this Section 11 being deemed to include any
Preliminary Prospectus, the Prospectus and the Prospectus as amended or
supplemented by the Company), or arises out of or is based upon any omission
or alleged omission to state a material fact required to be stated in either
such Registration Statement or such Prospectus or necessary to make the
statements made therein not misleading, except insofar as any such loss,
damage, expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in and in
conformity with information concerning such Underwriter furnished in writing
by or on behalf of such Underwriter through you to the Company expressly for
use in such Registration Statement or such Prospectus or arises out of or is
based upon any omission or alleged omission to state a material fact in
connection with such information required to be stated in such Registration
Statement or such Prospectus or necessary to make such information not
misleading.
Each Selling Stockholder agrees to indemnify, defend and hold harmless
each Underwriter, its partners, directors and officers, and any person who
controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and the successors and assigns of all of the
foregoing persons, from and against any loss, damage, expense, liability or
claim (including the reasonable cost of investigation) which, jointly or
severally, any such Underwriter or any such person may incur under the Act,
the Exchange Act, the common law or otherwise, insofar as such loss, damage,
expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in and in
conformity with the information concerning such Selling Stockholder furnished
in writing by or on behalf of such Selling Stockholder to the Company
expressly for use in such Registration Statement (or in the Registration
Statement as amended by any post-effective amendment thereof by the Company)
or in a Prospectus, or arises out of or is based upon any omission or alleged
omission to state a material fact in connection with such information
required to be stated in either such Registration Statement or such
Prospectus or necessary to make the statements made therein not misleading;
provided, however, that such Selling Stockholder shall not be responsible
pursuant to this indemnity for any such losses, damages, expenses, liability
or
claims for an amount in excess of the gross proceeds to be received by such Selling Stockholder (before deducting expenses) from its sale of Shares hereunder.
If any action, suit or proceeding (each, a "Proceeding") is brought
against an Underwriter or any such person in respect of which indemnity may
be sought against the Company or any Selling Stockholder pursuant to the
foregoing paragraph, such Underwriter or such person shall promptly notify
the Company and the representatives of the Selling Stockholders in writing of
the institution of such Proceeding and the Company or such Selling
Stockholder, as the case may be, shall assume the defense of such Proceeding,
including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses; provided, however,
that the omission to so notify the Company or the representatives of the
Selling Stockholders shall not relieve the Company or such Selling
Stockholder from any liability which the Company or such Selling Stockholder
may have to any Underwriter or any such person or otherwise, except to the
extent that such omission results in either (i) the forfeiture by the Company
or such Selling Stockholder of substantial rights and defenses or (ii) the
actual material prejudice to the Company or such Selling Stockholder. Such
Underwriter or such person shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such Underwriter or of such person unless the employment of
such counsel shall have been authorized in writing by the Company or such
Selling Stockholder in connection with the defense of such Proceeding, or the
Company or such Selling Stockholder shall not have, within a reasonable
period of time in light of the circumstances, employed counsel to have charge
of the defense of such Proceeding, or such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are in conflict with those available to the Company or such Selling
Stockholder (in which case the Company or such Selling Stockholder shall not
have the right to direct the defense of such Proceeding on behalf of the
indemnified party or parties), in any of which events the reasonable fees and
expenses of such counsel shall be borne by the Company or such Selling
Stockholder and paid as incurred (it being understood, however, that the
Company or such Selling Stockholder shall not be liable for the expenses of
more than one separate counsel (in addition to any local counsel) in any one
Proceeding or series of related Proceedings representing the indemnified
parties who are parties to such Proceeding). The Company or such Selling
Stockholder shall not be liable for any settlement of any Proceeding effected
without its written consent but if settled with the written consent of the
Company or such Selling Stockholder, the Company or such Selling Stockholder
agrees to indemnify and hold harmless any Underwriter and any such person
from and against any loss or liability by reason of such settlement.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second sentence of
this paragraph, then the indemnifying party agrees that it shall be liable
for any settlement of any Proceeding effected without its written consent if
(i) such settlement is entered into more than 120 business days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall not have fully reimbursed the indemnified party in accordance
with such request prior to the date of such settlement and (iii) such
indemnified party shall have given the indemnifying party at least 60 days'
prior notice of its intention to settle. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of
any pending or threatened Proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party by all parties to such
settlement from all liability
on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party.
(b) Each Underwriter severally agrees to indemnify, defend and hold harmless the Company, its directors and officers, each Selling Stockholder and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Company, any Selling Stockholder or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information concerning such Underwriter furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading.
If any Proceeding is brought against the Company, any Selling
Stockholder or any such person in respect of which indemnity may be
sought against any Underwriter pursuant to the foregoing paragraph, the
Company, any Selling Stockholder or such person shall promptly notify
such Underwriter in writing of the institution of such Proceeding and
such Underwriter shall assume the defense of such Proceeding, including
the employment of counsel reasonably satisfactory to such indemnified
party and payment of all fees and expenses; provided, however, that the
omission to so notify such Underwriter shall not relieve such
Underwriter from any liability which such Underwriter may have to the
Company, any Selling Stockholder or any such person or otherwise,
except to the extent that such omission results in either (i) the
forfeiture by such Underwriter of substantial rights and defenses or
(ii) the actual material prejudice to such Underwriter. The Company,
any Selling Stockholder or such person shall have the right to employ
its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of the Company, any Selling Stockholder
or such person unless the employment of such counsel shall have been
authorized in writing by such Underwriter in connection with the
defense of such Proceeding or such Underwriter shall not have, within a
reasonable period of time in light of the circumstances, employed
counsel to defend such Proceeding or such indemnified party or parties
shall have reasonably concluded that there may be defenses available to
it or them which are in conflict with those available to such
Underwriter (in which case such Underwriter shall not have the right to
direct the defense of such Proceeding on behalf of the indemnified
party or parties, but such Underwriter may employ counsel and
participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of such Underwriter), in any of which
events the reasonable fees and expenses of such counsel shall be borne
by such Underwriter and paid as incurred (it being understood, however,
that such Underwriter shall not be liable for the expenses of more than
one separate counsel (in addition to any local counsel) in any one
Proceeding or series of related Proceedings representing the
indemnified parties who are parties to such Proceeding). No Underwriter
shall be liable for any settlement of any such Proceeding effected
without the written consent of such Underwriter but if settled with the
written consent of such Underwriter, such Underwriter agrees to
indemnify and hold harmless the Company, any Selling Stockholder and
any such person from and against any loss or liability by reason of
such
settlement. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second sentence of this paragraph, then the
indemnifying party agrees that it shall be liable for any settlement of
any Proceeding effected without its written consent if (i) such
settlement is entered into more than 60 business days after receipt by
such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement and
(iii) such indemnified party shall have given the indemnifying party at
least 30 days' prior notice of its intention to settle. No indemnifying
party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened Proceeding in
respect of which any indemnified party is or could have been a party
and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party by all parties to such settlement from all liability
on claims that are the subject matter of such Proceeding.
(c) If the indemnification provided for in this Section 11 is unavailable to an indemnified party under subsections (a) and (b) of this Section 11 or insufficient to hold an indemnified party harmless in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters, respectively, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above, but also the relative fault of the Company, the Selling Stockholders and the Underwriters, respectively, in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholders and the Underwriters, respectively, shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Stockholders and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the Shares. The relative fault of the Company, the Selling Stockholders and the Underwriters, respectively, shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding.
(d) The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 11 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 11, (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damage which such Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission and (ii) no Selling Stockholder shall be required to contribution any amount in excess of the gross proceeds to be received by such Selling Stockholder (before deducting expenses) from its sale of Shares hereunder by reason of such untrue statement or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 11 are several in proportion to their respective underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this Section 11 and the covenants, warranties and representations of the Company and the Selling Stockholders contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, its partners, directors or officers or any person (including each partner, officer or director of such person) who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of the Company, its directors or officers, any Selling Stockholder or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Shares. The Company, each of the Selling Stockholders and each Underwriter agree promptly to notify each other of the commencement of any Proceeding against it and, in the case of the Company or the Selling Stockholders, against any of the Company's or Selling Stockholder's officers or directors, as the case may be, in connection with the issuance and sale of the Shares, or in connection with the Registration Statement or the Prospectus.
12. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page of the Prospectus and the statements in the Prospectus set forth under the caption "Underwriting" that are (i) in the paragraph immediately preceding the sub-heading "Over-Allotment Option," (ii) in the first paragraph immediately under the sub-heading "Commissions and Discounts" and (iii) in the paragraphs under the sub-heading "Price Stabilization, Short Sales" constitute the only information furnished by or on behalf of the Underwriters as such information is referred to in Sections 3 and 11 hereof.
13. Notices. All communications with respect to or under this Agreement, except as may be otherwise specifically provided in the Agreement, shall be in writing and:
(a) if sent to the Underwriters, shall be mailed, delivered or telecopied and confirmed in writing to:
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171-0026
Attention: Syndicate Department
Fax: (212) 821-4607
with a copy (which shall not constitute notice) to:
Latham & Watkins LLP
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: J. Scott Hodgkins, Esq.
Fax: (213) 891-8763
(b) if sent to the Company, shall be mailed, delivered or telecopied and confirmed in writing to:
Builders FirstSource, Inc.
2001 Bryan Street, Suite 1600
Dallas, TX 75201
Attention: General Counsel
Fax: (214) 880-3577
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square, 7th Floor
Wilmington, DE 19801
Attention: Allison Amorison, Esq.
Fax: (888) 329-4123
(c) if sent to the Selling Stockholders, shall be mailed, delivered or telecopied and confirmed in writing to:
JLL Partners, Inc.
450 Lexington Avenue, Suite 3350
New York, NY 10017
Attention: Brett N. Milgrim
Fax: (212) 286-8626
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square, 7th Floor
Wilmington, DE 19801
Attention: Allison Amorison, Esq.
Fax: (888) 329-4123
All such notices and communications shall be deemed to have been uly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged by telecopier machine, if telecopied; and one business day after being timely delivered to a next-day air courier.
14. Governing Law; Construction. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.
15. Submission to Jurisdiction. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and the Company consents to the jurisdiction of such courts and personal service with respect thereto. The Company and the Selling Stockholders hereby consent to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against UBS or any indemnified party. Each of UBS, the Selling Stockholders and the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Company and the Selling Stockholders agree that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Company and may be enforced in any other courts to the jurisdiction of which the Company is or may be subject, by suit upon such judgment.
16. Parties at Interest. The Agreement herein set forth has been and is made solely for the benefit of the Underwriters, the Selling Stockholders and the Company and to the extent provided in Section 11 hereof the controlling persons, partners, agents, employees, officers and directors referred to in such section, and their respective successors, assigns, heirs, personal representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement.
17. Counterparts. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties.
18. Successors and Assigns. This Agreement shall be binding upon the Underwriters, the Selling Stockholders and the Company and their successors and assigns and any successor or assign of any substantial portion of the Company's, the Selling Stockholders' and any of the Underwriters' respective businesses and/or assets.
19. Miscellaneous. UBS, an indirect, wholly owned subsidiary of UBS AG, is not a bank and is separate from any affiliated bank, including any U.S. branch or agency of UBS AG. Because UBS is a separately incorporated entity, it is solely responsible for its own contractual obligations and commitments, including obligations with respect to sales and purchases of securities. Securities sold, offered or recommended by UBS are not deposits, are not insured by the Federal Deposit Insurance Corporation, are not guaranteed by a branch or agency, and are not otherwise an obligation or responsibility of a branch or agency.
A lending affiliate of UBS may have lending relationships with issuers of securities underwritten or privately placed by UBS. To the extent required under the securities laws, prospectuses and other disclosure documents for securities underwritten or privately placed by UBS will disclose the
existence of any such lending relationships and whether the proceeds of the issue will be used to repay debts owed to affiliates of UBS.
(Signature Page Follows)
If the foregoing correctly sets forth the understanding among the Company, the Selling Stockholders and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this agreement and your acceptance shall constitute a binding agreement among the Company and the Underwriters, severally.
Very truly yours,
BUILDERS FIRSTSOURCE, INC.
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE B ANNEXED HERETO
Accepted and agreed to as of the
date first above written, on
behalf of themselves
and the other several Underwriters
named in Schedule A
UBS SECURITIES LLC
DEUTSCHE BANK SECURITIES INC.
By: UBS SECURITIES LLC
By: DEUTSCHE BANK SECURITIES INC.
SCHEDULE A
Number of Number of Underwriters Firm Shares Additional Shares ------------ ----------- ----------------- UBS Securities LLC Deutsche Bank Securities Inc. J.P. Morgan Securities Inc. Robert W. Baird & Co. Incorporated BB&T Capital Markets, a division of Scott & Stringfellow, Inc. --------------------- -------------------------- Total......................... ===================== ========================== |
SCHEDULE B
Number of Number of Selling Stockholders Firm Shares Additional Shares -------------------- ----------- ----------------- JLL Building Products, LLC Poole Holdings, Inc. William A. Schwartz --------------------- -------------------------- Total......................... ===================== ========================== |
SCHEDULE C
List of Subsidiaries
BFS, LLC
BFS IP, LLC
BFS Texas, LLC
Builders FirstSource Financing, Inc.
Builders FirstSource Holdings, Inc.
Builders FirstSource of Nashville, Inc.
Builders FirstSource--Atlantic Group, LLC
Builders FirstSource--Colorado Group, LLC
Builders FirstSource--Colorado, LLC
Builders FirstSource--Dallas, LLC
Builders FirstSource--Florida Design Center, LLC
Builders FirstSource--Florida, LLC
Builders FirstSource--Intellectual Property, L.P.
Builders FirstSource--MBS, LLC
Builders FirstSource--Northeast Group, LLC
Builders FirstSource--Ohio Valley, LLC
Builders FirstSource--Raleigh, LLC
Builders FirstSource--South Texas, L.P.
Builders FirstSource--Southeast Group, LLC
Builders FirstSource--Texas GenPar, LLC
Builders FirstSource--Texas Group, L.P.
Builders FirstSource--Texas Installed Sales, L.P.
CCWP, Inc.
EXHIBIT A
Builders FirstSource, Inc.
Common Stock
($0.01 Par Value)
June __, 2005
UBS Securities LLC
Deutsche Bank Securities Inc.
As Representatives of the several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, New York 10171
Ladies and Gentlemen:
This Lock-Up Letter Agreement is being delivered to you in connection with the proposed Underwriting Agreement (the "Underwriting Agreement") to be entered into by Builders FirstSource, Inc. (the "Company") and you, as Representatives of the several Underwriters named therein, with respect to the initial public offering (the "Initial Public Offering") of Common Stock, par value $0.01 per share, of the Company (the "Common Stock"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Underwriting Agreement.
In order to induce you to enter into the Underwriting
Agreement, the undersigned agrees that for a period of 180 days after the date
of the final prospectus relating to the Initial Public Offering the undersigned
will not, without the prior written consent of the Managing Underwriters, (i)
sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any
option to purchase or otherwise dispose of or agree to dispose of, directly or
indirectly, or file (or participate in the filing of) a registration statement
(except for a registration statement on Form S-8) with the Securities and
Exchange Commission (the "Commission") in respect of, or establish or increase a
put equivalent position or liquidate or decrease a call equivalent position
within the meaning of Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the Commission
promulgated thereunder with respect to, any Common Stock of the Company or any
securities convertible into or exercisable or exchangeable for Common Stock, or
warrants or other rights to purchase Common Stock, (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, or warrants or other
rights to purchase Common Stock, whether any such transaction is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise, or
(iii) publicly announce an intention to effect any transaction specified in
clause (i) or (ii). The foregoing sentence shall not apply to (a) the
registration of or sale to the Underwriters of any Common Stock pursuant to the
Initial Public Offering and the Underwriting Agreement, (b) bona fide gifts,
provided the recipient thereof agrees in writing with the Underwriters to be
bound by the terms of this Lock-Up Letter Agreement and confirms that he, she or
it has been in compliance with the terms of
Exhibit A-1
this Lock-Up Letter Agreement since the date hereof, (c) on death, by will or intestacy, (d) dispositions to the undersigned's immediate family or to any trust, partnership or other entity for the direct or indirect benefit of the undersigned and/or the immediate family of the undersigned, provided that such trust, partnership or other entity agrees in writing with the Underwriters to be bound by the terms of this Lock-Up Letter Agreement and confirms that it has been in compliance with the terms of this Lock-Up Letter Agreement since the date hereof or (e) pursuant to a court order or settlement agreement approved by a court of competent jurisdiction; provided that such court order or settlement agreement provides that such transferee agrees in writing with the Underwriters to be bound by the terms of this Lock-Up Letter Agreement and confirms that he, she or it has been in compliance with the terms of this Lock-Up Letter Agreement since the date hereof.
In addition, the undersigned hereby waives any rights the undersigned may have to require registration of Common Stock in connection with the filing of a registration statement (except for a registration statement on Form S-8) relating to the Initial Public Offering. The undersigned further agrees that, for a period of 180 days after the date of the final prospectus relating to the Initial Public Offering, the undersigned will not, without the prior written consent of UBS, make any demand for, or exercise any right with respect to, the registration of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for Common Stock, or warrants or other rights to purchase Common Stock.
If (i) during the period that begins on the date that is 15 calendar days plus 3 business day before the last day of the 180-day restricted period and ends on the last day of the 180-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period, the restrictions imposed by this Lock-Up Letter Agreement shall continue to apply until the expiration of the date that is 15 calendar days plus 3 business days after the date on which the issuance of the earnings release or material news or the material event occurs; [provided, however, that this sentence shall not apply if the research published or distributed with respect to the Company is compliant under Rule 139 of the Securities Act of 1933, as amended, and the Company's securities are "actively traded" as such term is defined in Rule 101(c)(1) of Regulation M of the Exchange Act.]
If (i) the Company notifies you in writing that it does not intend to proceed with the Initial Public Offering, (ii) the registration statement filed with the Commission with respect to the Initial Public Offering is withdrawn or (iii) for any reason the Underwriting Agreement shall be terminated prior to the "time of purchase", this Lock-Up Letter Agreement shall terminate and the undersigned shall be released from its obligations hereunder.
Yours very truly,
Title:
Exhibit A-2
EXHIBIT A-1
PERSONS OR PARTIES EXECUTING LOCK-UP AGREEMENTS
JLL Building Products, LLC
Poole Holdings, Inc.
Lockwood Holmes
William A. Schwartz
Floyd F. Sherman
Alexander R. Castaldi
Ramsey A. Frank
Paul S. Levy
Brett N. Milgrim
Robert C. Griffin
Kevin P. O'Meara
Charles L. Horn
Donald F. McAleenan
Frederick B. Schenkel
Morris E. Tolly
Douglas E. Schweinhart
Alan K. Davenport
Exhibit A-1-1
EXHIBIT B-1
FORM OF OPINION OF SKADDEN, ARPS, SLATE, MEAGER & FLOM LLP
Exhibit B-1-1
EXHIBIT B-2
FORM OF NEGATIVE ASSURANCE STATEMENT OF SKADDEN, ARPS, SLATE, MEAGER & FLOM LLP
Exhibit B-2-1
Exhibit C-1-1
Exhibit C-2-1
Exhibit C-3-1
1. The Company has performed all of its obligations under the Underwriting Agreement as are required to be performed by it at or before the time of purchase and at or before the additional time of purchase, as the case may be and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated or threatened by the Commission.
2. All the representations and warranties of the Company contained in Section 3 of the Underwriting Agreement are true and correct as of the date hereof with the same force and effect as if made on and as of the date hereof.
3. The final Prospectus has been filed pursuant to Rule 424.
4. He has reviewed the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment.
5. The financial statements and other financial information included in the Registration Statement and the Prospectus fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in the Registration Statement.
6. Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any Material Adverse Change, whether or not arising in the ordinary course of business.
Exhibit D-1
7. Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP are entitled to rely on this certificate in connection with the opinions that such firms are rendering pursuant to the Underwriting Agreement.
(Signature Page Follows)
Exhibit D-2
IN WITNESS WHEREOF, I have hereunto signed my name on behalf of the Company on the date first written above.
BUILDERS FIRSTSOURCE, INC.,
A DELAWARE CORPORATION
Exhibit D-3
1. Attached hereto as Exhibit A are true, complete and correct copies of (i) a certificate of good standing of the Company, certified by the Secretary of State of the State of Delaware, as of the date given on such certification and (ii) the Amended and Restated Certificate of Incorporation of the Company, as in effect on the date hereof. Such Amended and Restated Certificate of Incorporation, has not been further amended or restated, and no document with respect to any amendment, nor any certificates of cancellation, liquidation, dissolution or merger or consolidation has been filed by or on behalf of the Company in the office of the Secretary of State of the State of Delaware since the date shown on the face of the certification of such governmental authorities attached hereto as Exhibit A, and no action has been taken, is pending or is contemplated by the Company in connection with any such amendment or the liquidation, dissolution, merger or consolidation of the Company.
2. Attached hereto as Exhibit B is a true, complete and correct copy of the By-laws of the Company, as in full force and effect at all times from the date thereof through the date hereof.
3. Attached hereto as Exhibit C is a true, complete and correct copy of the resolutions duly adopted by the Board of Directors of the Company on, February 11, 2005, (i) approving, among other things, the initial public offering (the "Initial Public Offering") of up to $350,000,000 aggregate offering price of shares of Common Stock and (ii) authorizing the execution and filing with the Securities and Exchange Commission of the Registration Statement relating to the Initial Public Offering of such shares of Common Stock. Attached hereto as Exhibit D is a true, complete and correct copy of the resolutions duly adopted by the Board of Directors of the Company on June __, 2005, authorizing the preparation, execution and delivery of, and the performance of the Company's obligations under, the Underwriting Agreement and documents to be executed and delivered by the Company in connection with the Underwriting Agreement and the Initial Public Offering. Attached hereto at Exhibit E is a true, complete and correct copy of the resolutions duly adopted by the Board of Directors of the Company on June __, 2005, approving the Initial Public Offering at a price of $_____ per share. Such resolutions have not in any way been amended, supplemented, modified, annulled, revoked or rescinded since their adoption and remain in full force and effect in the form adopted as of the date hereof and are the only board of directors' authorizations adopted by the Company now in force relating to or affecting the matters referred to in the Underwriting Agreement.
4. The persons whose names appear on Exhibit F attached hereto are the duly elected, qualified and acting officers of the Company occupying the offices set forth opposite their respective names, and the signatures set forth opposite their respective
Exhibit E-1
names are the true and genuine signatures of such officers, and
such officers, at the time or the respective times of the execution of (i) the
Underwriting Agreement, and (ii) any other document delivered by the Company
prior hereto or on the date hereof in connection with the execution and delivery
by the Company of the Underwriting Agreement and the consummation of the
transactions contemplated thereby (each of the documents referred to in clauses
(i) and (ii) are collectively referred to herein as the "Documents"), were duly
elected or appointed, qualified and acting as such officer and authorized to
execute and deliver, on behalf of the Company, the Documents to which the
Company is a party and any certificate or other document by the Company pursuant
to such Documents and the signature of such officer on such Documents are the
true and genuine signatures of such officers.
5. Attached hereto as Exhibit G is a true, correct and complete specimen of the certificate representing the Shares. The facsimile seal of the Company appearing thereon is a facsimile of the genuine seal of the Company and the facsimile signature of each of the officers of the Company appearing thereon is a facsimile of the genuine signature of each such officer, who was duly elected or appointed, qualified and acting as such officer on the date hereof and was duly authorized to sign such certificate in such capacity.
6. The Underwriting Agreement, as executed and delivered on behalf of the Company, was approved by appropriate officers of the Company pursuant to authority granted to them by the Company's Board of Directors.
7. La Salle Bank, N.A., has been duly appointed by the Company to serve as, and is, the registrar and transfer agent for the Common Stock.
8. The minute books and records of the Company relating to all proceedings of the stockholders, the Boards of Directors and all committees thereof made available to Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP are the original minute books and records of the Company or are true, correct and complete copies thereof. The minute books, records, and other documents of the Company made available to Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP were true and complete in all material respects. There have been no material changes, additions or alterations in said minute books, records and other documents that have not been disclosed to Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP in writing.
9. Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP are entitled to rely on this certificate in connection with the opinions that such firms are rendering pursuant to the Underwriting Agreement.
(Signature Page Follows)
Exhibit E-2
IN WITNESS WHEREOF, I have hereunto signed my name as of the date first above written.
I, Charles L. Horn, in my capacity as Chief Financial Officer of Builders FirstSource, Inc., a Delaware corporation, do hereby certify that Donald F. McAleenan is the duly elected or appointed, qualified and acting Secretary of Builders FirstSource, Inc., and that the signature set forth above is his true and genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name as of the date first above written.
Exhibit E-3
The undersigned, _________ and __________, each in his capacity as a Representative of the Selling Stockholders and not individually, pursuant to the Underwriting Agreement, dated as of June ___, 2005 (the "Underwriting Agreement"), among Builders FirstSource, Inc., a Delaware corporation (the "Company"), UBS Securities LLC ("UBS") and Deutsche Bank Securities Inc. ("Deutsche Bank" and, together with UBS, the "Managing Underwriters") as representatives of the underwriters named in Schedule A of the Underwriting Agreement, providing for the sale to the Underwriters of an aggregate of ___________ shares (the "Shares"), $0.01 par value per share, of the Company's common stock (the "Common Stock"), do each hereby certify on this ___ day of June, 2005, that (capitalized terms used herein without definition have the meanings assigned to them in the Underwriting Agreement):
1. The Selling Stockholders have reviewed the Registration Statement and the Prospectus.
2. The representations and warranties of the Selling Stockholders contained in Section 4 of the Underwriting Agreement are true and correct as of the date hereof with the same force and effect as if made on and as of the date hereof.
3. To the knowledge of each of the Selling Stockholders, the Prospectus, as amended or supplemented, if applicable, did not, as of its date, and does not, as of the date hereof, contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the were made, not misleading; provided, however, that none of the Selling Stockholders makes any representation with respect to any statement containe in, or omission from,the Prospectus except for information based upon and in conformity with information concerning such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder to the Company expressly for use in the Prospectus.
4. Each of the Selling Stockholders has performed all of its obligations under the Underwriting Agreement as are required to be performed by it at or before the time of purchase and at or before the additional time of purchas as the case may be.
(Signature Page Follows)
Exhibit F-1
IN WITNESS WHEREOF, I have hereunto signed my name as of the date first above written.
Title: Representative
Title: Representative
Exhibit F-2
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BUILDERS FIRSTSOURCE, INC.
Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware
BUILDERS FIRSTSOURCE, INC. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify as follows:
1. The name of the Corporation is Builders FirstSource, Inc. The Corporation was originally incorporated under the name BSL Holdings, Inc. The original certificate of incorporation of the Corporation was filed with the office of the Secretary of State of the State of Delaware on March 4, 1998.
2. This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation (the "Board of Directors"), and by the stockholders of the Corporation in accordance with Sections 228, 242 and 245 of the DGCL.
3. This Amended and Restated Certificate of Incorporation restates and integrates and further amends the certificate of incorporation of the Corporation, as heretofore amended or supplemented.
4. The text of the Certificate of Incorporation is restated in its entirety as follows:
FIRST: The name of the Corporation is Builders FirstSource, Inc. (hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at that address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the DGCL as set forth in Title 8 of the Delaware Code.
FOURTH: (1) Authorized Capital Stock. The total number of shares of stock that the Corporation shall have authority to issue is 210,000,000 of which the Corporation shall have authority to issue 200,000,000 shares of Common Stock, each having a par value of $0.01 per share, and 10,000,000 shares of Preferred Stock, each having a par value of $0.01 per share.
(2) Common Stock. The powers, preferences and rights, and the qualifications, limitations and restrictions, of the Common Stock are as follows:
(a) No Cumulative Voting. The holders of shares of Common Stock shall not have cumulative voting rights.
(b) Dividends; Stock Splits. Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Amended and Restated Certificate of Incorporation, as it may be amended from time to time, holders of shares of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock, or property of the Corporation when, as, and if declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor.
(c) Liquidation, Dissolution, etc. In the event of any liquidation, dissolution, or winding up (either voluntary or involuntary) of the Corporation, the holders of shares of Common Stock shall be entitled to receive the assets and funds of the Corporation available for distribution after payments to creditors and to the holders of any Preferred Stock of the Corporation that may at the time be outstanding, in proportion to the number of shares held by them.
(d) No Preemptive or Subscription Rights. No holder of shares of Common Stock shall be entitled to preemptive or subscription rights.
(3) Preferred Stock. The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the Preferred Stock in one or more classes or series and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional, or other special rights, and such qualifications,
limitations, or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of such class or series and as may be permitted by the DGCL, including,
without limitation, the authority to provide that any such class or series may
be (i) subject to redemption at such time or times and at such price or prices;
(ii) entitled to receive dividends (which may be cumulative or non-cumulative)
at such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series; (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation; or (iv) convertible
into, or exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock, of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions.
(4) Power to Sell and Purchase Shares. Subject to the requirements of applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock herein or hereafter authorized to such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law.
FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation, and regulation of the powers of the Corporation and of its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stock-holders to make, alter, amend, change, add to, or repeal the By-Laws of the Corporation.
(3) The Board of Directors shall consist of not less than 3 nor more than 13 members, the exact number of which shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the Board of Directors. Election of directors need not be by written ballot unless the By-Laws so provide.
(4) The directors shall be divided into three classes, designated Class I, Class II, and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The initial division of the Board of Directors into classes shall be made by the decision of the affirmative vote of a majority of the Board of Directors. The term of the initial Class I directors shall terminate on the date of the 2006 Annual Meeting; the term of the initial Class II directors shall terminate on the date of the 2007 Annual Meeting; and the term of the initial Class III directors shall terminate on the date of the 2008 Annual Meeting. At each Annual Meeting of Stockholders beginning in 2006, successors to the class of directors whose term expires at that Annual Meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.
(5) A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification, or removal from office. Any director may resign at any time in accordance with the By-Laws.
(6) Subject to the terms of any one or more classes or series of Preferred Stock, any vacancy on the Board of Directors that results from an increase in the number of directors may be filled only by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring on the Board of Directors may be filled only by a majority of the Board of Directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in
the number of directors shall have the same remaining term as that of his or her predecessor. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the Corporation's then outstanding capital stock entitled to vote generally in the election of directors. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, and other features of such directorships shall be governed by the terms of this Amended and Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless otherwise expressly provided by the terms of such class or series of Preferred Stock.
(7) No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that to the extent required by the provisions of Section 102(b)(7) of the DGCL or any successor statute, or any other laws of the State of Delaware, this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended after the date of this Certificate to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided in this Certificate, shall be limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of this Clause (7) of Article FIFTH shall not adversely affect any limitation on the personal liability or any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
(8) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the DGCL, this Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors that would have been valid if such By-Laws had not been adopted.
SIXTH: Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the DGCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation.
SEVENTH: Unless otherwise required by law, Special Meetings of
Stockholders, for any purpose or purposes, may be called by either the Chairman
of the Board of Directors, if there be one, or the Chief Executive Officer, if
there be one, and shall be called by any officer at the request in writing of
(i) the Board of Directors, or (ii) a committee of the Board of Directors that
has been duly designated by the Board of Directors and whose powers and
authority include the power to call such meetings. The ability of the
stockholders to call a Special Meeting of Stockholders is hereby specifically
denied.
EIGHTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called Annual or Special Meeting of Stockholders of the Corporation, and the ability of the stockholders to consent in writing without a meeting to the taking of any action is hereby specifically denied.
NINTH: The Corporation shall not be governed by the provisions of
Section 203 of the DGCL.
TENTH: The Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by applicable law, as now or hereafter in effect, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of his or her heirs, executors, and personal and legal representatives; provided, however, that, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors, or personal or legal representatives) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors. The right to indemnification conferred by this Article TENTH shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition upon receipt by the Corporation of an undertaking by or on behalf of the director or officer receiving advancement to repay the amount advanced if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation under this Article TENTH.
The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article TENTH to directors and officers of the Corporation.
The rights to indemnification and to the advancement of expenses conferred in this Article TENTH shall not be exclusive of any other right that any person may have or hereafter acquire under this Certificate of Incorporation, the By-Laws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors, pursuant to the direction (howsoever embodied) of any court of competent jurisdiction, or otherwise.
Any repeal or modification of this Article TENTH by the stockholders of the Corporation shall not adversely affect any rights to indemnification and to the advancement of expenses of a director, officer, employee, or agent of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.
ELEVENTH: Notwithstanding anything contained in this Certificate of Incorporation or the By-Laws to the contrary, any provision in the By-Laws that provides for more than a majority vote for any action may only be amended or repealed by a supermajority vote equal to the supermajority vote called for in such provision.
TWELFTH: The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Amended and Restated Certificate of Incorporation (and in addition to any other vote that may be required by law), the affirmative vote of the holders of at least sixty-six and two-thirds percent (66.67%) of the voting power of the shares entitled to vote at an election of directors shall be
required to amend, alter, change, or repeal, or to adopt any provision as part of this Amended and Restated Certificate of Incorporation inconsistent with the purpose and intent of Articles FIFTH and TENTH of this Amended and Restated Certificate of Incorporation or this Article TWELFTH.
THIRTEENTH: If any provision in this Amended and Restated Certificate of Incorporation is determined to be invalid, void, illegal, or unenforceable, the remaining provisions of this Amended and Restated Certificate of Incorporation shall continue to be valid and enforceable and shall in no way be affected, impaired, or invalidated.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be duly executed on its behalf this ___ day of June, 2005.
BUILDERS FIRSTSOURCE, INC.
Title:
EXHIBIT 10.14
BUILDERS FIRSTSOURCE, INC.
FORM OF
2005 EQUITY INCENTIVE PLAN
BUILDERS FIRSTSOURCE, INC.
FORM OF 2005 EQUITY INCENTIVE PLAN
Section Page
1. Purpose; Types of Awards; Construction..................................1
2. Definitions.............................................................1
3. Administration..........................................................6
4. Eligibility.............................................................6
5. Stock Subject to the Plan...............................................7
6. Specific Terms of Awards................................................8
7. Change in Control Provisions...........................................12
8. General Provisions.....................................................13
BUILDERS FIRSTSOURCE, INC.
FORM OF 2005 EQUITY INCENTIVE PLAN
1. Purpose; Types of Awards; Construction.
The purposes of the Builders FirstSource, Inc. 2005 Equity Incentive Plan (the "Plan") are to afford an incentive to non-employee directors, selected officers and other employees, advisors and consultants of Builders FirstSource, Inc. (the "Company"), or any Parent or Subsidiary of the Company that now exists or hereafter is organized or acquired, to continue as non-employee directors, officers, employees, advisors or consultants, as the case may be, to increase their efforts on behalf of the Company and its Subsidiaries and to promote the success of the Company's business. The Plan provides for the grant of Options (including "incentive stock options" and "nonqualified stock options"), stock appreciation rights, restricted stock, restricted stock units and other equity-based awards. The Plan is designed so that Awards granted hereunder intended to comply with the requirements for "performance-based compensation" under Section 162(m) of the Code may comply with such requirements.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set forth below:
(a) "Award" means any Option, SAR, Restricted Stock, Restricted Stock Unit or Other Stock-Based Award granted under the Plan.
(b) "Award Agreement" means any written agreement, contract or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means the occurrence of any of the following:
(i) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Company and its Subsidiaries taken as a whole to any "person" (as that term is used in Section 13(d)(3) of the Exchange Act) other than a Principal or a Related Party of a Principal;
(ii) the adoption of a plan relating to the liquidation or dissolution of the Company;
(iii) the consummation of any transaction (including, without limitation, any merger or consolidation), the result of which is that
any "person" (as defined in clause (i) above) other than a Principal or a Related Party of a Principal, becomes the Beneficial Owner, directly or indirectly, of more than 30% of the Voting Stock of the Company, measured by voting power rather than number of shares; or
(iv) after an Initial Public Offering, during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (together with any new directors whose election to the Board or whose nomination for election was approved by a vote of a majority of the members of the Board, which members comprising such majority are then still in office and were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board.
For purposes of this Section 2(d) only:
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the Beneficial Ownership of any particular "person" (as that term is used in Section 13(d)(3) of the Exchange Act), such "person" will be deemed to have beneficial ownership of all securities that such "person" has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only after the passage of time. The terms "Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in
the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of corporate
stock; (3) in the case of a partnership or limited liability company,
partnership interests (whether general or limited) or membership interests; and
(4) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person, but excluding from all of the foregoing any debt securities
convertible into Capital Stock, whether or not such debt securities include any
right of participation with Capital Stock.
"Initial Public Offering" means the initial offering and sale of Capital Stock pursuant to a registration statement on Form S-1 that has been declared effective by the Securities and Exchange Commission pursuant to the Securities Act.
"Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity.
"Principal" means JLL Building Products, LLC, a Delaware limited liability company, JLL Partners, Inc., a Delaware corporation, and their respective Affiliates.
"Related Party" means (1) any controlling stockholder, 80% (or more) owned Subsidiary, or immediate family member (in the case of an individual) of any Principal; or (2) any trust, corporation, partnership, limited liability company or other entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially holding an 80% or more controlling interest of which consist of any one or more Principals and/or such other persons referred to in the immediately preceding clause (1).
"Subsidiary" means (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency and after giving effect to any voting agreement or stockholders' agreement that effectively transfers voting power) to vote in the election of directors, managers or trustees of the corporation, association or other business entity is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are that Person or one or more Subsidiaries of that Person (or any combination thereof).
"Voting Stock" means any securities of the Company which vote generally in the election of directors.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder.
(f) "Committee" means the committee established by the Board to administer the Plan, the composition of which shall at all times consist of "non-employee directors" within the meaning of Rule 16b-3, and "outside directors" within the meaning of Section 162(m) of the Code.
(g) "Company" means Builders FirstSource, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation.
(h) "Effective Date" means [________], 2005, the date of consummation of the initial public offering of Company Stock.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder.
(j) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Board. Unless otherwise determined by the Board in good faith, the per share Fair Market Value of Stock as of a particular date shall mean (i) the closing sales price per share of Stock on the national securities exchange on which the Stock is principally traded, for the last preceding date on which there was a sale of such Stock on such exchange; (ii) if the shares of Stock are then traded in an over-the-counter market, the average of the closing
bid and asked prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market; or (iii) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Board, in its sole discretion, shall determine.
(k) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code.
(l) "NQSO" means any Option that is not designated as an ISO.
(m) "Option" means a right, granted to a Participant under Section
6(b)(i), to purchase shares of Stock. An Option may be either an ISO or an NQSO,
provided that ISOs may be granted only to employees of the Company or a Parent
or Subsidiary of the Company.
(n) "Other Stock-Based Award" means a right or other interest
granted to a Participant that may be denominated or payable in, valued in whole
or in part by reference to, or otherwise based on, or related to, Stock,
including but not limited to (i) unrestricted Stock awarded as a bonus or upon
the attainment of Performance Goals or otherwise as permitted under the Plan and
(ii) a right granted to a Participant to acquire Stock from the Company
containing terms and conditions prescribed by the Board.
(o) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code.
(p) "Participant" means a person who, as a non-employee director, officer or other employee, advisor or consultant to the Company or a Parent or Subsidiary of the Company, has been granted an Award under the Plan.
(q) "Performance Goals" means performance goals based on one or more
of the following criteria, determined in accordance with generally accepted
accounting principles, where applicable: (i) pre-tax income or after-tax income;
(ii) earnings including operating income, earnings before or after taxes,
earnings before or after interest, depreciation, amortization, or extraordinary
or special items; (iii) net income excluding amortization of intangible assets,
depreciation and impairment of goodwill and intangible assets; (iv) operating
income; (v) earnings or book value per share (basic or diluted); (vi) return on
assets (gross or net), return on investment, return on capital, or return on
equity; (vii) return on revenues; (viii) net tangible assets (working capital
plus property, plants and equipment) or return on net tangible assets (operating
income divided by average net tangible assets); (ix) operating cash flow
(operating income plus or minus changes in working capital less capital
expenditures); (x) cash flow, free cash flow, cash flow return on investment
(discounted or otherwise), net cash provided by operations, or cash flow in
excess of cost of capital; (xi) economic value created; (xii) operating margin
or profit margin; (xiii) stock price or total stockholder return; (xiv) earnings
from continuing operations; (xv) cost targets, reductions or savings,
productivity or efficiencies; (xvi) strategic business criteria, consisting of
one or more objectives based on meeting specified market penetration or market
share, geographic
business expansion, customer satisfaction, employee satisfaction, human
resources management, supervision of litigation, information technology, or
goals relating to divestitures, joint ventures or similar transactions; or
(xvii) any other criteria determined by the Board to be appropriate. Where
applicable, the Performance Goals may be expressed in terms of attaining a
specified level of the particular criterion or the attainment of a percentage
increase or decrease in the particular criterion, and may be applied to one or
more of the Company or a Parent or Subsidiary of the Company, or a division or
strategic business unit of the Company, all as determined by the Board. The
Performance Goals may include a threshold level of performance below which no
payment will be made (or no vesting will occur), levels of performance at which
specified payments will be paid (or specified vesting will occur) and a maximum
level of performance above which no additional payment will be made (or at which
full vesting will occur). Each of the foregoing Performance Goals shall be
evaluated in accordance with generally accepted accounting principles, where
applicable, and shall be subject to certification by the Board. The Board shall
have the authority to make equitable adjustments to the Performance Goals in
recognition of unusual or non-recurring events affecting the Company or any
Parent or Subsidiary of the Company or the financial statements of the Company
or any Parent or Subsidiary of the Company, in response to changes in applicable
laws or regulations or to account for items of gain, loss or expense determined
to be extraordinary or unusual in nature or infrequent in occurrence or related
to the disposal of a segment of a business or related to a change in accounting
principles.
(r) "Plan" means this Builders FirstSource, Inc. 2005 Equity Incentive Plan, as amended from time to time.
(s) "Restricted Stock" means an Award of shares of Stock to a Participant under Section 6(b)(iii) that may be subject to certain restrictions and to a risk of forfeiture.
(t) "Restricted Stock Unit" or "RSU" means a right granted to a Participant under Section 6(b)(iv) to receive Stock or cash at the end of a specified period, which right may be conditioned on the satisfaction of specified performance or other criteria.
(u) "Rule 16b-3" means Rule 16b-3, as from time to time in effect promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule.
(v) "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder.
(w) "Stock" means shares of the common stock, par value $0.01 per share, of the Company.
(x) "Stock Appreciation Right" or "SAR" means the right, granted to a Participant under Section 6(b)(ii), to be paid an amount measured by the
appreciation in the Fair Market Value of Stock from the date of grant to the date of exercise of the right.
(y) "Subsidiary" means, for all purposes other than with respect to the definition of "Change in Control," a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Administration.
The Plan shall be administered by the Board. The Board may appoint a Committee to administer all or a portion of the Plan and to make recommendations to the Board with respect to the Plan and any Awards; provided, that such Committee's authorities and responsibilities shall always be limited by the Board's sole authority to make all final determinations under the Plan. The Board may delegate to one or more agents such administrative duties as it may deem advisable, and the Committee or any other person to whom the Board has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Board or such Committee or person may have under the Plan. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder.
The Board shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to: (i) grant Awards; (ii) determine the persons to whom and the time or times at which Awards shall be granted; (iii) determine the type and number of Awards to be granted, the number of shares of Stock to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Award; (iv) determine Performance Goals no later than such time as required to ensure that an underlying Award that is intended to comply with the requirements of Section 162(m) of the Code so complies; (v) determine whether, to what extent, and under what circumstances an Award may be settled, cancelled, forfeited, exchanged, or surrendered; (vi) make adjustments in the terms and conditions of, and the Performance Goals (if any) included in, Awards; (vii) construe and interpret the Plan and any Award; (viii) prescribe, amend and rescind rules and regulations relating to the Plan; (ix) determine the terms and provisions of the Award Agreements (which need not be identical for each Participant); and (x) make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Board shall be final and binding on all persons, including but not limited to the Company, any parent or subsidiary of the Company, any Participant (or any person claiming any rights under the Plan from or through any Participant) and any stockholder.
4. Eligibility.
Awards may be granted to selected non-employee directors, officers and other employees, advisors or consultants of the Company or any Parent or Subsidiary of
the Company, in the discretion of the Board. In determining the persons to whom Awards shall be granted and the type of any Award (including the number of shares to be covered by such Award), the Board shall take into account such factors as the Board shall deem relevant in connection with accomplishing the purposes of the Plan.
5. Stock Subject to the Plan.
The maximum number of shares of Stock reserved for the grant of Awards under the Plan shall be 2,200,000, subject to adjustment as provided herein. No more than 2,200,000 shares of Stock may be made subject to Options or SARs granted under the Plan, and no more than 1,100,000 shares of Stock may be made subject to stock-based awards other than Options or SARs (including Restricted Stock and Restricted Stock Units or Other Stock-Based Awards), in either case, subject to adjustment as provided herein. Determinations made in respect of the limitations set forth in the immediately preceding sentence shall be made in a manner consistent with Section 162(m) of the Code. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any shares subject to an Award are forfeited, cancelled, exchanged or surrendered or if an Award terminates or expires without a distribution of shares to the Participant, or if shares of Stock are surrendered or withheld as payment of either the exercise price of an Award and/or withholding taxes in respect of an Award, the shares of Stock with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, withholding, termination or expiration, again be available for Awards under the Plan. Upon the exercise of any Award granted in tandem with any other Award, such related Award shall be cancelled to the extent of the number of shares of Stock as to which the Award is exercised and, notwithstanding the foregoing, such number of shares shall no longer be available for Awards under the Plan.
In the event that the Board shall determine that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, Stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Board shall make such equitable
changes or adjustments as it deems necessary or appropriate to any or all of:
(i) the number and kind of shares of Stock or other property (including cash)
that may thereafter be issued in connection with Awards; (ii) the number and
kind of shares of Stock or other property (including cash) issued or issuable in
respect of outstanding Awards; (iii) the exercise price, grant price or purchase
price relating to any Award; provided, that, with respect to ISOs, such
adjustment shall be made in accordance with Section 424(h) of the Code; and (iv)
the Performance Goals applicable to outstanding Awards. In addition, the Board
may determine that any such equitable adjustment may be accomplished by making a
payment to the Award holder, in the form of cash or other property (including
but not limited to shares of Stock).
6. Terms of Awards.
(a) General. The term of each Award shall be for such period as may be determined by the Board. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or a Parent or Subsidiary of the Company upon the grant, vesting, maturation or exercise of an Award may be made in such forms as the Board shall determine at the date of grant or thereafter, including, without limitation, cash, Stock or other property, and may be made in a single payment or transfer, in installments or on a deferred basis. The Board may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest to be credited with respect to such payments. In addition to the foregoing, the Board may impose on any Award or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Board shall determine.
(b) Terms of Specified Awards. The Board is authorized to grant the Awards described in this Section 6(b), under such terms and conditions as deemed by the Board to be consistent with the purposes of the Plan. Such Awards may be granted with vesting, value and/or and payment contingent upon Performance Goals. Except as otherwise set forth herein or as may be determined by the Board, each Award granted under the Plan shall be evidenced by an Award Agreement containing such terms and conditions applicable to such Award as the Board shall determine at the date of grant or thereafter.
(i) Options. The Board is authorized to grant Options to Participants on the following terms and conditions:
(A) Type of Award. The Award Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO or an NQSO.
(B) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Board, but in no event shall the per share exercise price of any Option be less than the Fair Market Value of a share of Stock on the date of grant of such Option. The exercise price for Stock subject to an Option may be paid in cash or by an exchange of Stock previously owned by the Participant, through a "broker cashless exercise" procedure approved by the Board (to the extent permitted by law) or a combination of the above, in any case in an amount having a combined value equal to such exercise price; provided that the Board may require that any Stock exchanged by the Participant have been owned by the Participant for at least six months as of the date of exercise. An Award Agreement may provide that a Participant may pay all or a portion of the aggregate exercise price by having shares of Stock with a Fair Market Value
on the date of exercise equal to the aggregate exercise price withheld by the Company.
(C) Term and Exercisability of Options. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Board may determine, as reflected in the Award Agreement; provided, that the Board shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. An Option may be exercised to the extent of any or all full shares of Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Board or its designated agent.
(D) Termination of Employment. An Option may not be exercised unless: (1) the Participant is then a director of, in the employ of, or providing services to, the Company or a Parent or Subsidiary of the Company; and (2) the Participant has remained continuously so employed, or continuously maintained such relationship, since the date of grant of the Option; provided, that the Award Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations of employment or service, to a date not later than the expiration date of such Option.
(E) Other Provisions. Options may be subject to such other conditions including, but not limited to, restrictions on transferability of the shares acquired upon exercise of such Options, as the Board may prescribe in its discretion or as may be required by applicable law.
(ii) SARs. The Board is authorized to grant SARs to Participants on the following terms and conditions:
(A) In General. Unless the Board determines otherwise, an SAR (1) granted in tandem with an NQSO may be granted at the time of grant of the related NQSO or at any time thereafter or (2) granted in tandem with an ISO may only be granted at the time of grant of the related ISO. An SAR granted in tandem with an Option shall be exercisable only to the extent the underlying Option is exercisable. Payment of an SAR may made in cash, Stock or property as specified in the Award or determined by the Board.
(B) Right Conferred. An SAR shall confer on the Participant a right to receive an amount with respect to each
share subject thereto, upon exercise thereof, equal to the excess of
(1) the Fair Market Value of one share of Stock on the date of
exercise over (2) the grant price of the SAR (which in the case of
an SAR granted in tandem with an Option shall be equal to the
exercise price of the underlying Option, and which in the case of
any other SAR shall be such price as the Board may determine), and
may be paid with or without interest, as determined by the Board,
where the date of exercise is earlier than the date on which payment
in respect of the SAR is made.
(C) Term and Exercisability of SARs. SARs shall be exercisable over the exercise period (which shall not exceed the lesser of ten years from the date of grant or, in the case of a tandem SAR, the expiration of its related Award), at such times and upon such conditions as the Board may determine, as reflected in the Award Agreement; provided, that the Board shall have the authority to accelerate the exercisability of any outstanding SAR at such time and under such circumstances as it, in its sole discretion, deems appropriate. An SAR may be exercised to the extent of any or all full shares of Stock as to which the SAR (or, in the case of a tandem SAR, its related Award) has become exercisable, by giving written notice of such exercise to the Board or its designated agent.
(D) Termination of Employment. An SAR may not be exercised unless: (1) the Participant is then a director of, in the employ of, or providing services to, the Company or a Parent or Subsidiary of the Company; and (2) the Participant has remained continuously so employed, or continuously maintained such relationship, since the date of grant of the SAR; provided, that the Award Agreement may contain provisions extending the exercisability of SAR, in the event of specified terminations of employment or service, to a date not later than the expiration date of such SAR (or, in the case of a tandem SAR, its related Award).
(E) Other Provisions. SARs may be subject to such other conditions including, but not limited to, restrictions on transferability of the shares acquired upon exercise of such SARs, as the Board may prescribe in its discretion or as may be required by applicable law.
(iii) Restricted Stock. The Board is authorized to grant Restricted Stock to Participants on the following terms and conditions:
(A) Issuance and Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Board may impose at the date of grant or
thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Board may determine. The Board may place restrictions on Restricted Stock that shall lapse, in whole or in part, only upon the attainment of Performance Goals. Unless otherwise determined by the Board, a Participant granted Restricted Stock shall have all of the rights of a stockholder including, without limitation, the right to vote Restricted Stock and the right to receive dividends thereon.
(B) Forfeiture. Upon termination of employment with or service to the Company during the applicable restriction period, Restricted Stock and any accrued but unpaid dividends that are then subject to restrictions shall be forfeited; provided, that the Board may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Board may in other cases waive in whole or in part the forfeiture of Restricted Stock.
(C) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Board shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, such certificates shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate.
(D) Dividends. Dividends paid on Restricted Stock shall be either paid at the dividend payment date, or deferred for payment to such date as determined by the Board, in cash or in shares of Stock having a Fair Market Value equal to the amount of such dividends. Unless otherwise determined by the Board, Stock distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.
(iv) Restricted Stock Units. The Board is authorized to grant Restricted Stock Units to Participants, subject to the following terms and conditions:
(A) Award and Restrictions. Delivery of Stock or cash, as determined by the Board, will occur upon expiration of the period specified for Restricted Stock Units by the Board during
which forfeiture conditions apply, or such later date as the Board shall determine. The Board may place restrictions on Restricted Stock Units that shall lapse, in whole or in part, only upon the attainment of Performance Goals.
(B) Forfeiture. Upon termination of employment with or service to the Company prior to the vesting of a Restricted Stock Unit, or upon failure to satisfy any other conditions precedent to the delivery of Stock or cash to which such Restricted Stock Units relate, all Restricted Stock Units and any accrued but unpaid dividend equivalents that are then subject to deferral or restriction shall be forfeited; provided, that the Board may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock Units will be waived in whole or in part in the event of termination resulting from specified causes, and the Board may in other cases waive in whole or in part the forfeiture of Restricted Stock Units.
(C) Dividend Equivalents. The Board may in its discretion determine whether Restricted Stock Units may be credited with dividend equivalents at such time as dividends, whether in the form of cash, Stock or other property, are paid with respect to the Stock. Any such dividend equivalents shall be credited in the form of additional Restricted Stock Units and shall subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock Unit with respect to which such dividend equivalent was credited.
(v) Other Stock-Based Awards. The Board is authorized to grant Awards to Participants in the form of Other Stock-Based Awards, as deemed by the Board to be consistent with the purposes of the Plan. Awards granted pursuant to this paragraph may be granted with vesting, value and/or payment contingent upon Performance Goals. The Board shall determine the terms and conditions of such Awards at the date of grant or thereafter.
7. Change in Control Provisions.
Unless otherwise determined by the Board and evidenced in an Award Agreement, in the event of a Change of Control:
(a) any Award carrying a right to exercise that was not previously vested and exercisable shall become fully vested and exercisable; and
(b) the restrictions, deferral limitations, payment conditions and forfeiture conditions applicable to any other Award granted under the Plan shall lapse
and such Awards shall be deemed fully vested, and any performance conditions imposed with respect to Awards shall be deemed to be fully achieved.
8. General Provisions.
(a) Nontransferability. Unless otherwise provided in an Award Agreement, Awards shall not be transferable by a Participant except by will or the laws of descent and distribution and shall be exercisable during the lifetime of a Participant only by such Participant or his guardian or legal representative.
(b) No Right to Continued Employment, etc. Nothing in the Plan or in any Award, any Award Agreement or other agreement entered into pursuant hereto shall confer upon any Participant the right to continue in the employ of, or to continue as a director of, or to continue to provide services to, the Company or any Parent or Subsidiary of the Company or to be entitled to any remuneration or benefits not set forth in the Plan or such Award Agreement or other agreement or to interfere with or limit in any way the right of the Company or any such Parent or Subsidiary to terminate such Participant's employment or director or independent contractor relationship.
(c) Taxes. The Company or any Parent or Subsidiary of the Company is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any other payment to a Participant, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Board may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. The Board may provide in the Award Agreement that in the event that a Participant is required to pay any amount to be withheld in connection with the issuance of shares of Stock in settlement or exercise of an Award, the Participant may satisfy such obligation (in whole or in part) by electing to have the Company withhold a portion of the shares of Stock to be received upon settlement or exercise of such Award that is equal to the minimum amount required to be withheld.
(d) Stockholder Approval; Amendment and Termination.
(i) The Plan shall take effect upon its adoption by the Board but the Plan (and any grants of Awards made prior to the stockholder approval mentioned herein) shall be subject to the requisite approval of the stockholders of the Company.
(ii) The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Section 162(m) or any other law, regulation or stock
exchange requirement shall not be effective unless approved by the requisite vote of stockholders. The plan administrator may at any time and from time to time alter, amend, suspend or terminate an outstanding Award in whole or in part. Notwithstanding the foregoing sentence of this clause (ii), no alteration or amendment to or suspension or termination of the Plan or any Award shall affect adversely any of the rights of any Participant, without such Participant's consent, under any Award theretofore granted under the Plan.
(e) Expiration of Plan. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall expire on the tenth anniversary of the Effective Date. No Awards shall be granted under the Plan after such expiration date. The expiration of the Plan shall not affect adversely any of the rights of any Participant, without such Participant's consent, under any Award theretofore granted.
(f) Deferrals. The Board shall have the authority to establish such procedures and programs that it deems appropriate to provide Participants with the ability to defer receipt of cash, Stock or other property payable with respect to Awards granted under the Plan.
(g) No Rights to Awards; No Stockholder Rights. No Participant shall have any claim to be granted any Award under the Plan. There is no obligation for uniformity of treatment among Participants. Except as provided specifically herein, a Participant or a transferee of an Award shall have no rights as a stockholder with respect to any shares covered by the Award until the date of the issuance of a stock certificate to him for such shares.
(h) Unfunded Status of Awards. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Board shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(j) Regulations and Other Approvals.
(i) The obligation of the Company to sell or deliver Stock with respect to any Award granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Board.
(ii) Each Award is subject to the requirement that, if at any time the Board determines, in its absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Stock, no such Award shall be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Board.
(iii) In the event that the disposition of Stock acquired pursuant to the Plan is not covered by a then-current registration statement under the Securities Act and is not otherwise exempt from such registration, such Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Board may require a Participant receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to represent to the Company in writing that the Stock acquired by such Participant is acquired for investment only and not with a view to distribution.
(iv) The Board may require a Participant receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to enter into a stockholder agreement or "lock-up" agreement in such form as the Board shall determine is necessary or desirable to further the Company's interests.
(k) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware without giving effect to the conflict of laws principles thereof.
Exhibit 10.15
AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment to the Employment Agreement (this "Amendment"), dated as of June 1, 2005, is made by and between Builders FirstSource, Inc., a Delaware corporation (the "Company") and Floyd Sherman (the "Executive").
WHEREAS, the Company and the Executive have entered into the Employment Agreement, dated as of September 1, 2001 (the "Employment Agreement"); and
WHEREAS, the parties desire to make certain amendments to the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual agreements, covenants, representations and warranties set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Employment Agreement.
2. The Employment Agreement is hereby amended by deleting Section 3 in its entirety and replacing Section 3 with the following:
"3. Position. During the Term, Executive shall serve as President and CEO of the Company, supervising the conduct of the business and affairs of the Company and performing such other duties as the Company Board shall determine."
3. Limited Effect. This Amendment is limited precisely as written and shall not be deemed to be an amendment to any other term or condition of the Employment Agreement or any of the documents referred to therein. Wherever the Employment Agreement is referred to in the Employment Agreement or in any other agreements, documents, instruments, or certificates, such reference shall be to the Employment Agreement as amended hereby. Except as expressly amended hereby, the terms and conditions of the Employment Agreement shall continue in full force and effect.
4. Counterparts. This Amendment may be executed in one or more counterparts, and by different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement and may be executed in the original but transmitted by facsimile to all parties with the same force and effect as if an original, executed copy thereof had been delivered to all parties.
5. Governing Law. This Amendment will be governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflicts of law principles.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written.
BUILDERS FIRSTSOURCE, INC.
By: /s/ Donald F. McAleenan ---------------------------- Name: Donald F. McAleenan Title: Senior Vice President |
EXECUTIVE
/s/ Floyd Sherman ----------------- Floyd Sherman |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 27, 2005, except for Note 22, which is as of May 24, 2005, relating to the consolidated financial statements of Builders FirstSource, Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts", "Summary of Historical Financial Information and Other Data" and "Selected Historical Consolidated Financial Information" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP Dallas, Texas June 3, 2005 |