BUILDERS FIRSTSOURCE INC.
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As filed with the Securities and Exchange Commission on September 2, 2005.
Registration Statement No. 333-[                    ]


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


Builders FirstSource, Inc.

(Exact name of registrant as specified in its charter)
         
Delaware   5211   52-2084569
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

2001 Bryan Street, Suite 1600

Dallas, Texas 75201
(214) 880-3500
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)


Donald F. McAleenan, Esq.

Senior Vice President and General Counsel
Builders FirstSource, Inc.
2001 Bryan Street, Suite 1600
Dallas, Texas 75201
(214) 880-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)


Copies of all communications to:

Robert B. Pincus, Esq.

Allison L. Amorison, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000


        Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective.


        If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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(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

CALCULATION OF REGISTRATION FEE

                 


Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to Be Offering Price Aggregate Offering Amount of
to Be Registered Registered Per Unit Price Registration Fee

Second Priority Senior Secured Floating Rate Notes due 2012
  $275,000,000   100%(1)   $275,000,000(1)   $32,367.50(1)

Guarantees related to the Second Priority Senior Secured Floating Rate Notes due 2012
  N/A   N/A   N/A   N/A(2)


(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) promulgated under the Securities Act. Pursuant to Rule 457(p) under the Securities Act, the Registrant is offsetting the filing fee of $32,367.50 due in connection with this Registration Statement with $5,837.92 of filing fees previously paid in connection with securities of the Registrant unsold under Registration Number 333-122788, initially filed on Form S-1 on February 14, 2005, which unsold securities are hereby deregistered.
 
(2) No separate consideration is received for the guarantees, and, therefore, no additional fee is required.

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 Section 8(a), may determine.




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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 is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION— DATED SEPTEMBER 2, 2005

PRELIMINARY PROSPECTUS

Offer to Exchange up to $275,000,000 Aggregate Principal Amount of

Second Priority Senior Secured Floating Rate Notes due 2012 (“New Notes”)
for
All of the $275,000,000 Aggregate Principal Amount of Outstanding
Second Priority Senior Secured Floating Rate Notes due 2012 (“Old Notes”)
of
Builders FirstSource, Inc.

This exchange offer will expire at 5:00 p.m.,

New York City time, on           , 2005, unless earlier terminated or extended by us.

Terms of the exchange offer:

We will issue up to $275,000,000 aggregate principal amount of New Notes.
 
We will exchange New Notes for all outstanding Old Notes that are validly tendered and not withdrawn prior to the expiration or termination of the exchange offer.
 
The terms of the New Notes are substantially identical to the terms of the Old Notes, except that the issuance of the New Notes has been registered under the Securities Act and the transfer restrictions, registration rights and certain liquidated damages provisions relating to the Old Notes do not apply to the New Notes.
 
You may withdraw tenders of Old Notes at any time prior to the expiration or termination of the exchange offer.
 
The exchange of Old Notes for New Notes will generally not be a taxable event for U.S. federal income tax purposes.
 
We will not receive any proceeds from the exchange offer.
 
There is no established trading market for the New Notes. We have not applied, and do not currently intend to apply, to list the New Notes on any securities exchange. The New Notes are expected to be eligible for trading in the Private Offerings, Resales, and Trading through Automatic Linkages Market, commonly referred to as the PORTALSM MARKET.

See “Risk factors” beginning on page 15 for a discussion of certain risks you should consider before tendering your Old Notes.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is September      , 2005.


________________________________________________________________________________

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    F-1  
 EX-5.1: FORM OF OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
 EX-12.1: COMPUTATION OF EARNINGS TO FIXED CHARGES
 EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLP
 EX-25.1: FORM T-1
 EX-99.1: FORM OF LETTER OF TRANSMITTAL
 EX-99.2: FORM OF NOTICE OF GUARANTEED DELIVERY
 EX-99.3: FORM OF NOTICE TO BROKERS
 EX-99.4: FORM OF NOTICE TO CLIENTS

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.

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.


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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,” “Management’s 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.

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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 15 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 51 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 category’s contribution to sales in the year ended December 31, 2004.

Sales by Product Category—Year Ended December 31, 2004

Total Sales—$2,058.0 million

(PIE CHART)


* Includes both manufactured and distributed products
 
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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 Lowe’s, 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 1.97 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.

 
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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 51 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 $33.2 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.
 
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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 regional group presidents, has a total of over 160 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.
 
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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 control JLL Building Products, LLC which owns 53% 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. JLL Partners’ 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 June 22, 2005, we completed an initial public offering of 12,250,000 shares of our common stock. Of the shares sold in the offering, 7,500,000 shares were sold by us, and certain selling stockholders sold 4,750,000 shares. The selling stockholders granted the underwriters the option to purchase up to an additional 1,837,500 shares. On July 22, 2005, the underwriters exercised this option in full. We did not receive any proceeds from the shares sold by the selling stockholders and used all of our net proceeds from our initial public offering, together with cash on hand, to repay $135.0 million of our outstanding debt under the senior secured credit facility.

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 shareholder’s equity 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 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. See “Description of other indebtedness” for a summary of the terms of the senior secured credit facility. In addition, on February 11, 2005, we issued $275.0 million aggregate principal amount of second priority senior secured floating rate notes due 2012. 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 senior secured credit facility and the 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.

 
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The exchange offer

On February 11, 2005, we issued and sold $275 million aggregate principal amount of second priority senior secured floating rate notes due 2012 (“Old Notes”) in transactions exempt from the registration requirements of the Securities Act. Simultaneously with these transactions, we entered into a registration rights agreement with the initial purchasers of the Old Notes, in which we agreed to deliver this prospectus to you and to commence this exchange offer. In this exchange offer, you may exchange your outstanding Old Notes for new notes which have substantially the same terms (“New Notes”). You should read the discussion under the headings “The exchange offer” and “Description of new notes” for further information regarding the notes to be issued in the exchange offer.

 
Old Notes $275,000,000 aggregate principal amount of Second Priority Senior Secured Floating Rate Notes due 2012, which we issued on February 11, 2005.
 
New Notes Up to $275,000,000 aggregate principal amount of Second Priority Senior Secured Floating Rate Notes due 2012, which we will issue in the exchange offer under this prospectus and the registration statement of which it forms a part. The terms of the New Notes are substantially identical to those of the Old Notes, except that the issuance of the New Notes has been registered under the Securities Act, and the transfer restrictions, registration rights and certain liquidated damages provisions relating to the Old Notes do not apply to the New Notes.
 
The Exchange Offer We are offering to issue the New Notes in exchange for a like principal amount of the Old Notes to satisfy our obligations under the registration rights agreement we entered into when the Old Notes were sold in transactions exempt from registration under Rule 144A and Regulation S under the Securities Act.
 
This exchange offer is intended to satisfy your rights under the registration rights agreement. Once the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to the Old Notes.
 
Expiration Date; Tenders This exchange offer will expire at 5:00 p.m., New York City time, on           , 2005, unless earlier terminated or extended by us. By tendering your Old Notes, you represent to us:
 
• that any New Notes received in exchange for your Old Notes in the exchange offer are being acquired by you or any other person receiving such New Notes in the ordinary course of your or such other person’s business;
 
• that at the time of the commencement of the exchange offer, you do not, or any other person who will receive New Notes in exchange for your Old Notes does not, have any arrangement or understanding with any person to participate in
 
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the “distribution” (as defined in the Securities Act) of the New Notes in violation of the Securities Act;
 
• that you are not holding Old Notes that have, or are reasonably likely to have, the status of an unsold allotment;
 
• that you are not, or such other person receiving New Notes in exchange for your Old Notes is not, an “affiliate” (as defined in Rule 405 under the Securities Act) of Builders FirstSource, Inc., or if you are, or such other person is, an “affiliate” of Builders FirstSource, Inc., that you or such other person will comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction;
 
• if you are not, or such other person receiving New Notes in exchange for your Old Notes is not, a broker-dealer, that you are not, or such other person is not, engaged in, and you do not, or such other person does not, intend to engage in, the distribution of the New Notes; and
 
• if you are a broker-dealer, that you will receive the New Notes for your own account in exchange for Old Notes that were acquired by you as a result of your market- making or other trading activities and that you will deliver a prospectus in connection with any resale of the New Notes you receive in the exchange offer. For further information regarding resales of the New Notes by participating broker-dealers, see the discussion below under the caption “Plan of distribution.”
 
Withdrawal; Non-Acceptance You may withdraw any Old Notes tendered in the exchange offer at any time prior to 5:00 p.m., New York City time, on           , 2005, unless the exchange offer is earlier terminated. If we extend the exchange offer, you may withdraw Old Notes tendered at any time prior to the expiration date, as extended. If we decide for any reason not to accept any Old Notes for exchange, the Old Notes will be returned to you at our expense promptly after the expiration or termination of the exchange offer. See “The exchange offer— Terms of the Exchange Offer; Period for Tendering Old Notes” and “—Withdrawal Rights.”
 
Resales of New Notes Based on interpretations by the staff of the Securities and Exchange Commission (the “SEC”), as set forth in no-action letters issued to third parties, we believe that the New Notes you receive in the exchange offer may be offered for resale, resold or otherwise transferred without compliance with the registration
 
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and prospectus delivery provisions of the Securities Act. However, you or any other person receiving New Notes in exchange for your Old Notes will not be able to freely transfer the New Notes if:
 
• you are, or such other person receiving New Notes in exchange for your Old Notes is, an “affiliate” (as defined in Rule 405 under the Securities Act) of Builders FirstSource, Inc.;
 
• you are not, or any other person receiving New Notes in exchange for your Old Notes is not, acquiring the New Notes in the exchange offer in the ordinary course of your or such other person’s business; or
 
• you are, or such other person receiving New Notes in exchange for your Old Notes is, participating, intends to participate or has an arrangement or understanding with any person to participate, in the distribution of the New Notes you or such other person will receive in the exchange offer.
 
If you fall within one of the exceptions listed above, or if you are a broker-dealer that receives New Notes for your own account in the exchange offer in exchange for Old Notes that were acquired by you as a result of your market-making or other trading activities, you must comply with the registration and prospectus delivery requirements of the Securities Act or qualify for a registration exemption in connection with any resale transaction involving the New Notes.
 
Conditions to the Exchange Offer The exchange offer is subject to customary conditions, which we may waive. See the discussion below under the caption “The exchange offer— Conditions to the Exchange Offer” for more information regarding conditions to the exchange offer.
 
Procedures for Tendering Old Notes Unless you comply with the procedures described below under the caption “The exchange offer— Guaranteed Delivery Procedures,” you must do one of the following on or prior to the expiration of the exchange offer in order to participate in the exchange offer:
 
• tender your Old Notes by sending certificates representing your Old Notes and a properly completed and duly executed letter of transmittal, with any required signature guarantees and all other documents required by the letter of transmittal, to Wilmington Trust Company, as Exchange Agent, at one of the addresses listed below under the caption “The exchange offer— Exchange Agent”; or
 
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• tender your Old Notes by using the book-entry procedures described below under the caption “The exchange offer— Book Entry Transfer,” and sending a properly completed and duly executed letter of transmittal, with any required signature guarantees and all other documents required by the letter of transmittal, or by transmitting an agent’s message to the Exchange Agent instead of the letter of transmittal, as described below under “The exchange offer— Book Entry Transfer.”
 
Guaranteed Delivery Procedures If you are a registered holder of Old Notes and wish to tender your Old Notes in the exchange offer, but (1) such Old Notes are not immediately available, (2) time will not permit your Old Notes or other required documents to reach the Exchange Agent before the expiration of the exchange offer or (3) the procedure for book-entry transfer cannot be completed on a timely basis, you may tender Old Notes by following the procedures described below under the caption “The exchange offer— Guaranteed Delivery Procedures.”
 
Special Procedures for Beneficial Owners If you are a beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your Old Notes in the exchange offer, you should promptly instruct the registered owner to tender on your behalf. If you wish to tender in the exchange offer on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your Old Notes, either make appropriate arrangements to register ownership of the Old Notes in your name or obtain a properly completed bond power from the person in whose name the Old Notes are registered.
 
U.S. federal tax consequences Your exchange of Old Notes for New Notes pursuant to the exchange offer will generally not be a taxable event for U.S. federal income tax purposes.
 
Use of Proceeds We will not receive any proceeds from the exchange offer.
 
Exchange Agent Wilmington Trust Company is the Exchange Agent for the exchange offer. The address and telephone number of the Exchange Agent can be found below under the caption “The exchange offer— Exchange Agent.”
 
Registration Rights When we issued the Old Notes in February 2005, we entered into a registration rights agreement with the initial purchasers of the Old Notes. Under the terms of the registration rights agreement we agreed to use commercially reasonable efforts to file with the SEC and cause to become effective a registration statement relating to an offer to exchange the Old Notes for New Notes.
 
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The registration rights agreement contains provisions that require us to pay liquidated damages on the Notes in the event that we fail to:
 
• have the registration statement of which this prospectus forms a part declared effective by October 10, 2005,
 
• consummate the exchange offer within 30 business days of the date of this prospectus, or
 
• file a shelf registration statement for the resale of the Old Notes if we cannot effect this exchange offer within the specified time period and in certain other circumstances described in the registration rights agreement.
 
In the event that any of the above occurs, the interest rate on the Old Notes will increase by 0.25% every 90 days, to a maximum of 1.00%, until the failure has been cured. See “Registration rights” for more information regarding the terms of the agreement and these liquidated damages provisions.
 
Consequences of Not Exchanging Old Notes If you do not exchange your Old Notes in the exchange offer, your Old Notes will continue to be subject to the restrictions on transfer described in the legend on the certificate for your Old Notes. In general, you may offer or sell your Old Notes only:
 
• if the sale is registered under the Securities Act;
 
• if they are offered or sold under an exemption from registration under the Securities Act; or
 
• if they are offered or sold in a transaction not subject to the Securities Act and applicable state securities laws.
 
We do not currently intend to register the Old Notes under the Securities Act. If you do not participate in the exchange offer and other holders’ Old Notes are accepted for exchange, the trading market, if any, for the Old Notes would be adversely affected due to a reduction in market liquidity. Under certain circumstances, certain holders of Old Notes (including certain holders who are not permitted to participate in the exchange offer or who do not receive freely tradeable New Notes in the exchange offer) may require us to file and cause to become effective a shelf registration statement which would cover resales of Old Notes by these holders. See “The exchange offer— Consequences of Exchanging or Failing to Exchange Old Notes” and “Registration rights” for more information.
 
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Summary of new notes

The terms of the New Notes are substantially identical to those of the Old Notes, except that the issuance of the New Notes has been registered under the Securities Act and the transfer restrictions, registration rights and certain liquidated damages provisions relating to the Old Notes do not apply to the New Notes.

 
Issuer Builders FirstSource, Inc.
 
Notes Offered $275,000,000 aggregate principal amount of Second Priority Senior Secured Floating Rate Notes due 2012.
 
Maturity The New Notes will mature on February 15, 2012.
 
Interest Interest accrues currently at a rate of 8.04% per year for the quarterly period ending November 15, 2005 and will be reset at the beginning of each quarter thereafter at the applicable LIBOR Rate plus 4.25%. The term “LIBOR Rate” is defined in the “Description of new notes—Certain Definitions” section of this prospectus. Interest will be payable quarterly in arrears on each February 15, May 15, August 15, and November 15, commencing on November 15, 2005.
 
Ranking The New Notes will be our senior secured obligations and will rank equally in right of payment with all of our existing and future senior debt. The New Notes will be effectively junior in right of payment to any of our indebtedness that is secured by first priority liens on the assets securing the New Notes, including our senior secured credit facility, or secured by assets not securing the notes, and will be junior in right of payment to all indebtedness of any future non-guarantor subsidiaries of Builders FirstSource, Inc. The subsidiary guarantees will be the senior secured obligations of our subsidiary guarantors and will rank equal in right of payment with all of our subsidiary guarantors’ existing and future senior debt, but will rank effectively junior in right of payment to the subsidiary guarantees of our senior secured credit facility.
 
Guarantees Our future significant restricted subsidiaries and each of Builders FirstSource Holdings, Inc., Builders FirstSource Financing, Inc., Builders FirstSource Northeast Group, LLC, Builders FirstSource Texas GenPar, LLC, Builders FirstSource MBS, LLC, and their respective subsidiaries will jointly and severally guarantee the New Notes. Under certain circumstances, the guarantees may be released.
 
Collateral The New Notes will be secured by a second priority lien on substantially all of our assets. The subsidiary guarantees will be secured by a second priority lien on substantially all of the assets of our subsidiary guarantors. Our senior secured credit facility and
 
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related subsidiary guarantees will be secured by a first priority lien on the same assets securing the notes and the subsidiary guarantees. The indenture and the security documents relating to the New Notes permit us to incur a significant amount of debt, including obligations secured (including on a first-priority basis) by the collateral, subject to compliance with certain conditions. No appraisal of any collateral has been prepared by us or on our behalf in connection with this offering. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral.
 
Optional Redemption At any time on or after February 15, 2007, we may redeem some or all of the New Notes at the redemption prices as set forth in the “Description of new notes—Optional Redemption” section of this prospectus, plus accrued and unpaid interest, if any.
 
At any time before February 15, 2007, we may redeem the New Notes, in whole or in part, pursuant to a “make whole” call as specified in the “Description of new notes—Optional Redemption” section of this prospectus.
 
At any time before February 15, 2007, we may redeem up to 35% of the aggregate principal amount of the New Notes with the proceeds of certain equity offerings, so long as:
 
• we pay holders of the New Notes a redemption price in an amount equal to par plus the interest rate then in effect, plus accrued and unpaid interest, if any, to the redemption date
 
• at least 65% of the aggregate principal amount of the notes issued under the indenture, including the principal amount of any additional notes issued, remains outstanding immediately after such redemption; and
 
• we redeem the New Notes within 90 days of any such equity offering.
 
Change of Control If we experience a change of control, we may be required to offer to purchase the New Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to the repurchase date. See “Description of new notes—Repurchase at the Option of Holders— Change of Control.”
 
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Certain Covenants The indenture governing the New 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 important exceptions and qualifications that are described under the headings “Description of new notes—Certain Covenants” in this prospectus.
 
Absence of a Public Market The New Notes are a new issue of securities and there is currently no established market for them. Accordingly, we cannot assure you as to the development or liquidity of any market for the New Notes. The initial purchasers have advised us that they currently intend to make a market for the New Notes, as permitted by applicable laws and regulations. However, the initial purchasers are not obligated to do so and each may discontinue any such market making activities at any time without notice. We expect that the New Notes will be eligible for trading in The PORTALSM Market. See “Plan of distribution.”
 
Use of Proceeds We will not receive any proceeds from the issuance of the New Notes offered by this prospectus. We used a portion of the net proceeds from the offering of the Old Notes and a portion of the proceeds from our senior secured credit facility to refinance existing indebtedness, pay a dividend to our stockholders and a cash payment to our option holders and for working capital and general corporate purposes.

For more complete information about the New Notes, see the “Description of new notes” section of this prospectus.

 
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Summary of historical financial information and other data

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 six months ended June 30, 2005 and for the six months ended June 30, 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 statement of such information.

All information included in the following tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and related notes, included elsewhere in this prospectus.

                                             
Six months ended
or at June 30, Year ended or at December 31,


2005 2004 2004 2003(1) 2002(1)

(in thousands, except per share amounts)
Restated Restated
Statement of operations data:
                                       
 
Sales
  $ 1,127,942     $ 977,058     $ 2,058,047     $ 1,675,093     $ 1,500,006  
 
Cost of sales
    851,504       761,099       1,574,535       1,300,410       1,155,375  
     
     
     
     
     
 
   
Gross margin
    276,438       215,959       483,512       374,683       344,631  
 
Selling, general and administrative expenses
    206,434       176,048       376,096       327,027       308,060  
 
Stock compensation expense(2)
    36,364       437                    
 
Facility closure costs
                      1,171       750  
     
     
     
     
     
 
   
Income from operations
    33,640       39,474       107,416       46,485       35,821  
 
Other expense, net
                      620       2,220  
 
Interest expense
    31,507       12,464       24,458       11,124       12,055  
     
     
     
     
     
 
   
Income from continuing operations
before income taxes
    2,133       27,010       82,958       34,741       21,546  
 
Income tax expense
    832       10,399       31,480       13,343       8,611  
     
     
     
     
     
 
 
Income from continuing operations
    1,301       16,611       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
                            (19,504 )
     
     
     
     
     
 
 
Net income (loss)
  $ 1,301     $ 16,857     $ 51,581     $ 17,576     $ (9,549 )
     
     
     
     
     
 
 
Income from continuing operations per share—basic(3)
  $ 0.05     $ 0.66     $ 2.05     $ 0.85     $ 0.51  
 
Income from continuing operations per share—diluted(3)
    0.05       0.64       1.93       0.85       0.51  
 
Weighted average shares outstanding—basic(3)
    25,522       25,131       25,135       25,204       25,363  
 
Weighted average shares outstanding—diluted(3)
    27,764       26,104       26,714       25,252       25,411  
Balance sheet data (end of period):
                                       
 
Cash and cash equivalents
  $ 3,959             $ 50,628     $ 5,585     $ 2,248  
 
Total assets
    732,115               697,011       622,128       530,965  
 
Total debt, including current portion
    365,000               313,480       168,533       129,706  
 
Shareholders’ equity
    119,592               210,890       298,933       282,789  
Other financial data:
                                       
 
Depreciation and amortization (excluding discontinued operations)
  $ 9,475     $ 9,639     $ 19,350     $ 20,187     $ 20,745  
 
Capital expenditures (excluding acquisitions)
    15,298       10,465       20,718       15,592       15,061  
 
Ratio of earnings to fixed charges(4)
    1.06 x     2.57 x     3.44 x     2.76 x     2.05 x
 
Special cash dividend per common share
  $ 8.00     $ 5.56     $ 5.56     $     $  

(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 2 to the June 30, 2005 unaudited condensed consolidated financial statements, included elsewhere herein.
 
(4)  For purposes of calculating the ratio of earnings to fixed charges, earnings are defined as income from continuing operations before income taxes plus fixed charges. Fixed charges include interest expense (including amortization of deferred financing costs) and an estimate of operating rental expense, approximately 33%, which management believes is representative of the interest component.
 
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Risk factors

You should carefully consider the risk factors described below as well as all other information contained and incorporated by reference in this prospectus before deciding to tender your Old Notes in the exchange offer.

The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected.

RISKS RELATED TO THE EXCHANGE OFFER

Consequences of not exchanging Old Notes—if you fail to exchange your Old Notes in the exchange offer, they will continue to be subject to transfer restrictions.

If you do not exchange your Old Notes for New Notes in the exchange offer, you will continue to be subject to the restrictions on transfer of your Old Notes described in the legend on your Old Notes. The restrictions on transfer of your Old Notes arise because we issued the Old Notes in transactions exempt from the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the Old Notes if the sale is registered under the Securities Act and applicable state securities laws, or the Old Notes are offered and sold pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register the Old Notes under the Securities Act. To the extent Old Notes are tendered and accepted in the exchange offer, the trading market, if any, for the Old Notes would be adversely affected due to a reduction in market liquidity. See “The exchange offer— Consequences of Exchanging or Failing to Exchange Old Notes.” In addition, if you exchange your Old Notes in the exchange offer for the purpose of participating in a distribution of the New Notes, you may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

Risks involved in exchange procedures—you must carefully follow the required procedures in order to exchange your Old Notes.

The New Notes will be issued in exchange for your Old Notes only if, prior to expiration of the exchange offer, the Exchange Agent has received the certificates representing your Old Notes, together with a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal, or, in the case of a book-entry transfer, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal or an agent’s message instead of the letter of transmittal. Therefore, if you wish to tender your Old Notes, you must carefully follow the required procedures and allow sufficient time to ensure timely delivery. Neither we nor the Exchange Agent has any duty to notify you of defects or irregularities which respect to tenders of Old Notes for exchange. Any holder of Old Notes who tenders in the exchange offer for the purpose of participating in a distribution of the New Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker or dealer that receives New Notes for its own account in exchange for Old Notes that were acquired in market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of the New Notes.


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Risk factors

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.


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Risk factors

The Loss of Any of Our Significant Customers Could Affect Our Financial Health.

Our 10 largest customers generated approximately 26% 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 June 30, 2005, our total indebtedness was $365.0 million. See “Capitalization” for additional information.


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Risk factors

Our substantial debt could have important consequences for you, including:

making it more difficult for us to make payments on the New Notes;
 
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 New Notes and borrowings under the 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 New 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 senior secured credit facility, which provides for up to $110.0 million of revolving credit borrowings, of which $108.8 million remained available as of June 30, 2005. We also have $15.0 million outstanding letters of credit under the 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 senior secured credit facility and the indenture relating to our notes. See “Description of other 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 senior secured credit facility and the indenture governing our 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 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


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Risk factors

and other provisions of the indenture governing our notes and the 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 senior secured credit facility and the indenture governing our 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 senior secured credit facility, the terms of the indenture governing our 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 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 senior secured credit facility and the indenture governing our notes 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


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Risk factors

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 management’s 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-


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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. Moreover, 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. In addition, any shortages of fuel or significant fuel cost increases could seriously disrupt our ability to distribute products to our customers. 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 “Business—Our 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 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 Labor’s 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


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$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 Increases Our Administrative Costs.

As a public company, we 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 have increased. 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 our initial public offering, we became an SEC reporting company. As a reporting company, we are 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 management’s 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 management’s 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


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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 NEW NOTES

If We Default on Our Obligations to Pay Our Indebtedness, We May Not be Able to Make Payments on the New Notes.

Any default under the agreements governing our indebtedness, including a default under our senior secured credit facility that is not waived by the required lenders under the senior secured credit facility, and the remedies sought by the holders of such indebtedness could preclude us from paying principal, premium, and interest on the New Notes and substantially decrease the market value of the New Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in the credit agreement governing our senior secured credit facility and the indenture), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facility and the indenture. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the credit agreement that governs our senior secured credit facility could elect to terminate their commitments thereunder, cease making further loans, and institute foreclosure proceedings against our assets that are pledged as collateral to support our obligations under the credit agreement governing our senior secured credit facility, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facility to avoid being in default. If we breach our covenants under the credit agreement governing our senior secured credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders thereunder. If this occurs, we would be in default under our credit agreement, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

We May Be Unable to Purchase the New Notes upon a Change of Control.

Upon the occurrence of certain “change of control” events, you may require us to purchase your New Notes at 101% of their principal amount, plus accrued and unpaid interest, if any. The terms of our senior secured credit facility will limit our ability to purchase the New Notes in those circumstances, and the terms of the indenture will limit our ability to purchase the New Notes. Any of our future debt agreements may contain similar restrictions and provisions. Accordingly, we may not be able to satisfy our obligations to purchase your New Notes unless we are able to refinance or obtain waivers under the senior secured credit facility and other indebtedness with similar restrictions. In addition, we cannot assure you that we will have the financial resources to purchase your New Notes, particularly if that change of control event triggers a similar repurchase requirement for, or results in the acceleration of, other indebtedness. Our senior secured credit facility will provide that certain change of control events will constitute a default and could result in the acceleration of our indebtedness thereunder.

Fraudulent Conveyance and Similar Laws May Adversely Affect the Validity and Enforceability of the Guarantees.

Although laws differ among various jurisdictions, in general, under fraudulent conveyance laws, a court could subordinate or void any guarantee if it found that:

the guarantee was incurred with actual intent to hinder, delay, or defraud creditors or stockholders of the company; or

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the guarantee was incurred voluntarily and all parties to the guarantee knew or should have known that the transaction would unfairly prejudice other creditors; or
 
the guarantor did not receive fair consideration or reasonably equivalent value for the guarantee and the guarantor was any of the following:

  insolvent or was rendered insolvent because of the guarantee;
 
  engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or
 
  intended to incur, or believed that it would incur, debts beyond its ability to pay at maturity; or the guarantee was held not to be in the best interests or for the corporate benefit of the company. The measure of insolvency for purposes of fraudulent transfer laws varies depending on the law applied.

Generally, however, a guarantor would be considered insolvent if:

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;
 
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
 
it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history, and other factors, we believe that at the time the guarantees of the New Notes will be issued, each guarantor will not be insolvent, will not have unreasonably small capital for the business in which it engages, and (in part because of the payment limitations contained in such guarantees) will not have incurred debts beyond its ability to pay such debts as they mature. In addition, the boards of directors, general partners, or managers, as the case may be, of certain guarantors have passed resolutions confirming that the entry into the guarantee is in the best interest of such guarantor and for its corporate benefit. We can give no assurance, however, that a court would agree with our conclusions in this regard or that such conclusions will be applicable to the guarantors in the future.

If a court voided any guarantee as a result of a fraudulent conveyance or similar laws, or held it unenforceable for any other reason, you would cease to have any claim in respect of such guarantee and would be the creditor of us and the remaining guarantors.

Certain Defenses Available to Us and Any of The Guarantors May Prevent the Enforcement of the Guarantees.

Enforcement of a guarantee against any guarantor would be subject to certain defenses available to guarantors generally and would also be subject to certain defenses available to us regarding enforcement of the New Notes, including, without limitation, the right to force the trustee under the indenture to exercise its remedies prior to commencement of any action on the guarantee. All guarantors will waive, with respect to the New Notes, all such defenses to the extent they may legally do so. See “Description of new notes—Note Guarantees.”

The Noteholders’ Liens on Substantially All or Part of the Collateral Will Be Released if Certain Conditions Are Met.

The liens on part or substantially all of the collateral will be released if the lenders under the senior secured credit facility release their security interest in such collateral (other than in connection with a


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refinancing). In the event that the security interests on substantially all of the collateral are released, the notes will essentially become our unsecured obligations.

Your Ability to Transfer the New Notes May Be Limited by the Absence of an Active Trading Market, and We Cannot Assure You That Any Active Trading Market will Develop for the New Notes.

The New Notes are new issues of securities for which there is no established public market. We do not intend to have any of the New Notes listed on a national securities exchange. The initial purchasers are not obligated to make a market in the New Notes, and they may discontinue their market-making activities at any time without notice. We cannot assure you that an active market for the New Notes will develop or, if developed, that it would continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the New Notes, and such disruptions could adversely affect the prices at which you may sell your New Notes. In addition, subsequent to their initial issuance, the New Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar notes, our performance, and other factors.

If There is a Default, Proceeds from Sales of the Collateral Will Be Applied First to Satisfy Amounts Owed Under Our Senior Secured Credit Facility, and the Value of the Collateral May Not Be Sufficient to Repay the Holders of the New Notes.

We and each guarantor will secure our obligations under the New Notes and related guarantees by a second-priority lien on certain assets that are also pledged on a first priority basis to the lenders under our senior secured credit facility and any other indebtedness which may be issued on a first-priority basis as permitted under the indenture. As a result, upon any foreclosure on the collateral, proceeds will be applied first to repay amounts owed under our senior secured credit facility and any other priority lien debt and only then to satisfy amounts owed to holders of the New Notes. The value of the New Notes in the event of a liquidation will depend on market and economic conditions, the availability of buyers, and similar factors. You should not rely upon the book value of the assets underlying the collateral as a measure of realizable value for such assets. By its nature, some or all the collateral may be illiquid and may have no readily ascertainable market value. Likewise, there is no assurance that the assets underlying the collateral will be saleable or, if saleable, that there will not be substantial delays in its liquidation. Accordingly, there can be no assurance that the proceeds of any sale of the collateral following any acceleration of the maturity of the New Notes would be sufficient to satisfy, or would not be substantially less than, amounts due on the New Notes after satisfying the obligations secured by the first priority liens.

If the proceeds of any sale of the assets underlying the collateral are insufficient to repay all amounts due on the New Notes, the holders of the New Notes (to the extent the New Notes are not repaid from the proceeds of the sale of the collateral) would have only an unsecured claim against our remaining assets, which claim will rank equal in priority to the unsecured claims of any unsatisfied portion of the obligations secured by the first-priority liens and our other unsecured senior indebtedness.

Insolvency and Examinership Laws Could Limit Your Ability to Enforce Your Rights Under the New Notes and the Guarantees.

Any insolvency proceedings with regard to us or any guarantor would most likely be based on and governed by the insolvency laws of the jurisdiction under which the relevant entity is organized. As a result, in the event of insolvency with regard to any of these entities, the claims of holders of the New Notes against us or a guarantor may be subject to the insolvency laws of its jurisdiction of organization. The provisions of such insolvency laws differ substantially from each other including with regard to rights of creditors, priority claims, and procedure and may contain provisions that are unfavorable to holders of


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New Notes. In addition, there can be no assurance as to how the insolvency laws of these jurisdictions will be applied in insolvency proceedings relating to several jurisdictions.

The lenders under the proposed senior credit facility will have first-ranking security over the majority of the tangible and intangible assets of us and the guarantors. In some jurisdictions, after the occurrence of, among other things, an insolvency event, secured lenders have additional rights with respect to insolvency proceedings, including among other things, the right to direct the disposition of any security. As a result, your ability to realize claims against us with respect to your New Notes, if we or any guarantor becomes insolvent, may be limited.

Under applicable insolvency laws, our or any guarantor’s liabilities in respect of the New Notes may, in the event of insolvency or similar proceeding, rank junior to some of our or any guarantor’s debts that are entitled to priority under such law of such jurisdiction. For example, debts entitled to priority may include (a) amounts owed in respect of occupational pension schemes, (b) certain amounts owed to employees, (c) amounts owed to governmental agencies, and (d) expenses of an insolvency practitioner. In addition, in some jurisdictions, the examiner, administrator, or similar party may be legally required to consider the interest of third parties (including, for example, employees) in connection with the proceedings.

In certain cases, under insolvency and examinership, your ability to collect interest accruing on the New Notes in respect of any period after the commencement of liquidation proceedings and your rights under the guarantees may be limited.

The New Notes and the Related Guarantees Will Be Effectively Subordinated to Other Debt.

The notes will effectively rank junior to all amounts owed under our senior secured credit facility and to other indebtedness permitted to be incurred on a first priority basis under the indenture, to the extent of the value of the collateral, because such senior priority indebtedness lenders will have a first-priority lien on the collateral pledged for the benefit of the New Notes. As a result, the lenders under the senior secured credit facility and any other priority lien debt will be paid in full from the proceeds of the collateral pledged to them before holders of New Notes are paid from any remaining proceeds from the second lien collateral. In addition, subject to the restrictions contained in the indenture governing the New Notes, we may incur additional debt that is secured by first priority liens on the collateral or by liens on assets that are not pledged to the holders of the New Notes, all of which would effectively rank senior to the New Notes to the extent of the value of the assets securing such debt.

Rights of Holders of New Notes in the Collateral May Be Adversely Affected by the Failure to Perfect Security Interests in Certain Collateral.

The security interest in the collateral securing the New Notes includes assets, both tangible and intangible, whether now owned or acquired or arising in the future. There can be no assurance that the trustee or the collateral agent under the indenture governing the New Notes will monitor, or that we will inform the trustee or the collateral trustee of, the future acquisition of property and rights that constitute collateral and that the necessary action will be taken to properly perfect the security interest in such after-acquired property.


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Use of proceeds

The exchange offer is intended to satisfy certain obligations under the registration rights agreement we entered into with the Initial Purchasers of the Old Notes. We will not receive any proceeds from the issuance of the New Notes in the exchange offer. In consideration for issuing the New Notes in the exchange offer, we will receive the Old Notes in like principal amount, the form and terms of which are substantially the same as the form and terms of the New Notes (which replace the Old Notes and which represent the same indebtedness). The Old Notes surrendered in exchange for the New Notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the New Notes will not result in any increase or decrease in our indebtedness.

The proceeds of the issuance and sale of the Old Notes were approximately $275.0 million, before deducting fees, discounts and expenses. Such proceeds, together with proceeds from the initial $225.0 million of borrowings under our senior secured credit facility and a portion of our cash on hand, were used to, among other things:

refinance debt;
 
pay a dividend to our stockholders;
 
make a cash payment to holders of our stock options;
 
pay the fees and expenses of the offering of the Old Notes and our senior secured credit facility; and
 
fund working capital and general corporate purposes.

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Capitalization

The following table sets forth our consolidated cash and cash equivalents and capitalization as of June 30, 2005, which reflect the transactions described in “Unaudited pro forma financial data.” You should read this table in conjunction with “Use of proceeds,” “Management’s discussion and analysis of financial condition and results of operations,” “Unaudited pro forma financial data” and our consolidated financial statements, our interim condensed consolidated financial statements, and the notes thereto, each included elsewhere in this prospectus.

             
June 30, 2005

(in millions)
Cash and cash equivalents
  $ 4.0  
     
 
Debt
       
 
Term loan
  $ 90.0  
 
Old Notes
    275.0  
 
Revolving credit facility(1)
     
     
 
   
Total debt
    365.0  
     
 
Shareholders’ equity:
       
 
Preferred stock ($0.01 par value), 10.0 million shares authorized; zero shares issued and outstanding at June 30, 2005
     
 
Common stock ($0.01 par value), 200.0 million shares authorized, 32.7 million issued and outstanding at June 30, 2005
    0.3  
 
Additional paid-in capital
    109.0  
 
Unearned stock compensation
    (0.1 )
 
Retained earnings
    10.8  
 
Accumulated other comprehensive loss
    (0.4 )
     
 
   
Total shareholders’ equity
    119.6  
     
 
   
Total capitalization
  $ 484.6  
     
 


(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.

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Unaudited pro forma financial data

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 facility.
 
We issued $275.0 million of Old Notes.
 
We paid the fees and expenses, aggregating $21.1 million, relating to the Old Notes and the senior secured credit facility.
 
We entered into an interest rate swap agreement designed to fix $100.0 million of our outstanding notes at an effective rate of 8.37%. The interest rate swap agreement is for a three-year term effective July 1, 2005 whereby we will pay a fixed rate of 4.12% and receive a variable rate at 90 day LIBOR.
 
We entered into an interest rate swap agreement designed to fix $100.0 million of our outstanding notes at an effective rate of 8.27%. The interest rate swap agreement is for a three-year term effective June 10, 2005 whereby we will pay a fixed rate of 4.02% and receive a variable rate at 90 day LIBOR.

Initial public offering:

We issued 7,500,000 shares of common stock in our initial public offering (“IPO”).
 
We repaid $110.0 million of indebtedness with the net proceeds of our IPO.
 
We paid the fees and expenses related to our IPO.

The unaudited pro forma condensed consolidated statement of operations for the six-month period ended June 30, 2005 has been derived from our unaudited condensed consolidated financial statements for the six-month period ended June 30, 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 six months ended June 30, 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), 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 and approximately $3.0 million of nonrecurring charges associated with the write-off of debt issue costs related to the repayment of indebtedness under our senior secured credit facility with proceeds from our initial public offering. 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, “Management’s 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 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.


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Unaudited pro forma financial data

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                             
For the Six Months Ended June 30, 2005

Pro forma Pro forma Pro forma
debt before IPO IPO
Historical adjustments adjustments adjustments Pro forma

(in thousands, except per share amounts)
Sales
  $ 1,127,942     $     $ 1,127,942     $     $ 1,127,942  
Cost of sales
    851,504             851,504             851,504  
     
     
     
     
     
 
 
Gross margin
    276,438             276,438             276,438  
Selling, general and administrative expenses
    206,434               206,434             206,434  
Stock compensation expense
    36,364       (36,364 )(a)                  
     
     
     
     
     
 
   
Income from operations
    33,640       36,364       70,004             70,004  
Other expense, net
                             
Interest expense
    31,507       (9,592 )(b)     21,915       (2,899 )(d)     15,822  
                              (200 )(e)        
                              (2,994 )(f)        
     
     
     
     
     
 
   
Income from continuing operations before income taxes
    2,133       45,956       48,089       6,093       54,182  
Income tax expense
    832       17,463 (c)     18,295       2,315 (c)     20,610  
     
     
     
     
     
 
   
Income from continuing operations
  $ 1,301     $ 28,493       29,794       3,778       33,572  
     
     
     
     
     
 
Income from continuing operations per share—basic
  $ 0.05                             $ 1.03  
     
                             
 
Income from continuing operations per share—diluted
  $ 0.05                             $ 0.96  
     
                             
 
Weighted average shares outstanding—basic
    25,522                               32,649 (g)
     
                             
 
Weighted average shares outstanding—diluted
    27,764                               34,915 (g)
     
                             
 

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Unaudited pro forma financial data

                                             
For the Year Ended December 31, 2004

Pro forma Pro forma
debt before IPO Pro forma IPO
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             1,547,535             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       14,808 (b)     39,266       (5,797 )(d)     33,069  
     
     
     
     
     
 
                              (400 )(e)        
                             
         
   
Income from continuing operations before income taxes
    82,958       (14,808 )     68,150       6,197       74,347  
Income tax expense
    31,480       (5,612 )(c)     25,868       2,349 (c)     28,217  
     
     
     
     
     
 
   
Income from continuing operations
  $ 51,478     $ (9,196 )   $ 42,282     $ 3,848     $ 46,130  
     
     
     
     
     
 
Income from continuing operations per share—basic
  $ 2.05                             $ 1.41  
     
                             
 
Income from continuing operations per share—diluted
  $ 1.93                             $ 1.33  
     
                             
 
Weighted average shares outstanding—basic
    25,135                               32,635 (g)
     
                             
 
Weighted average shares outstanding—diluted
    26,714                               34,807 (g)
     
                             
 

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Unaudited pro forma financial data

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 for debt issued in connection with the debt financing (closed February 11, 2005), as presented in the following table.
                 
Six months ended Year ended
June 30, 2005 December 31, 2004
(in thousands)

Historical interest expense
  $ 31,507     $ 24,458  
Incremental interest expense resulting from the Old Notes
    3,226       21,905  
Incremental interest expense resulting from borrowings under the senior secured credit facility
    1,002       12,820  
Interest expense resulting from borrowings under the prior credit facilities
    (2,559 )     (19,148 )
Financing costs incurred and expensed 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
    29,051       40,035  
     
     
 
Incremental amortization of deferred financing costs associated with the Old Notes
    208       1,666  
Incremental amortization of deferred financing costs associated with the 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
  $ 21,915     $ 39,266  
     
     
 

The pro forma results of operations reflect interest expense related to outstanding borrowings on the new senior secured credit facility of $225.0 million term loan and the Old Notes of $275.0 million. The assumed interest rates are as follows: 5.27% (LIBOR plus 2.5%) for the term loan; 7.02% (LIBOR plus 4.25%) for $75.0 million of the Old Notes; 8.37% (fixed swap rate of 4.12% plus 4.25%) for $100.0 million of the Old Notes; and 8.27% (fixed swap rate of 4.02% plus 4.25%) for $100.0 million of the Old 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 senior secured credit facility and Old Notes, interest expense would change by approximately $0.2 million for the six month period ended June 30, 2005 and $0.4 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%.

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(d) Represents a reduction in interest expense related to the repayment of indebtedness (utilizing proceeds from our initial public offering) 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 (as discussed in (d) above).

(f) Represents a non-recurring write-off of deferred financing costs associated with the repayment of indebtedness under our senior secured credit facility, which was recognized in our historical results of operations for the six months ended June 30, 2005. A related non-recurring write-off of deferred financing costs associated with the repayment was not reflected in the pro forma consolidated statement of operations for the year ended December 31, 2004.

(g) Pro forma basic and diluted weighted average shares outstanding were estimated as follows:
                 
Six months ended Year ended
June 30, 2005 December 31, 2004

Weighted average shares outstanding—basic
    25,522       25,135  
Common shares issued in the initial public offering
    7,127       7,500  
     
     
 
Pro forma basic weighted average shares outstanding
    32,649       32,635  
Incremental shares for stock options
    2,242       1,579  
Incremental shares for stock options based on the initial public offering price of $16.00
    24       593  
     
     
 
Pro forma diluted weighted average shares outstanding
    34,915       34,807  
     
     
 

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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 six months ended June 30, 2005 and for the six months ended June 30, 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 statement of such information.

All information included in the following tables should be read in conjunction with “Management’s 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.

                                                             
Six months ended
or at June 30, 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
  $ 1,127,942     $ 977,058     $ 2,058,047     $ 1,675,093     $ 1,500,006     $ 1,513,545     $ 1,513,086  
 
Cost of sales
    851,504       761,099       1,574,535       1,300,410       1,155,375       1,149,957       1,141,808  
     
     
     
     
     
     
     
 
   
Gross margin
    276,438       215,959       483,512       374,683       344,631       363,588       371,278  
 
Selling, general and administrative expenses
    206,434       176,048       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 from operations
    33,640       39,474       107,416       46,485       35,821       30,870       61,932  
 
Other expense, net
                      620       2,220       4,067       3,567  
 
Interest expense
    31,507       12,464       24,458       11,124       12,055       20,581       30,891  
     
     
     
     
     
     
     
 
   
Income from continuing operations before income taxes
    2,133       27,010       82,958       34,741       21,546       6,222       27,474  
 
Income tax expense
    832       10,399       31,480       13,343       8,611       2,560       11,482  
     
     
     
     
     
     
     
 
 
Income from continuing operations
    1,301       16,611       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)
  $ 1,301     $ 16,857     $ 51,581     $ 17,576     $ (9,549 )   $ 1,542     $ 16,284  
     
     
     
     
     
     
     
 
Income from continuing operations
per share—basic(3)
  $ 0.05     $ 0.66     $ 2.05     $ 0.85     $ 0.51     $ 0.14     $ 0.72  
Income from continuing operations
per share—diluted(3)
  $ 0.05     $ 0.64     $ 1.93     $ 0.85     $ 0.51     $ 0.14     $ 0.71  
Weighted average shares outstanding—basic(3)     25,522       25,131       25,135       25,204       25,363       25,532       22,268  
Weighted average shares outstanding—diluted(3)     27,764       26,104       26,714       25,252       25,411       25,682       22,432  
Balance sheet data (end of period):                                                        
 
Cash and cash equivalents
  $ 3,959             $ 50,628     $ 5,585     $ 2,248     $ 3,309     $ 2,346  
 
Total assets
    732,115               697,011       622,128       530,965       564,204       634,939  
 
Total debt, including current portion
    365,000               313,480       168,533       129,706       154,010       223,829  
 
Shareholders’ equity
    119,592               210,890       298,933       282,789       293,035       293,916  
Other financial data:
                                                       
 
Depreciation and amortization (excluding discontinued operations)
  $ 9,475     $ 9,639     $ 19,350     $ 20,187     $ 20,745     $ 25,232     $ 21,652  
 
Capital expenditures (excluding acquisitions)
    15,298       10,465       20,718       15,592       15,061       22,491       23,123  
 
Ratio of earnings to fixed charges(4)
    1.06 x     2.57 x     3.44 x     2.76 x     2.05 x     1.22 x     1.74 x
 
Special cash dividend per common share
  $ 8.00     $ 5.56     $ 5.56     $     $     $     $  

(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 2 to the June 30, 2005 unaudited condensed consolidated financial statements, included elsewhere herein.
 
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings are defined as income from continuing operations before income taxes plus fixed charges. Fixed charges include interest expense (including amortization of deferred financing costs) and an estimate of operating rental expense, approximately 33%, which management believes is representative of the interest component.

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Management’s discussion and analysis of financial condition
and results of operations

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 and 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 results of operations are primarily dependent on 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 1.97 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.


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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 is affected 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 senior secured credit facility, our Old 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 senior secured credit facility and the New Notes. The deferred financing costs were reduced by $3.5 million related to repayments of our term loan with proceeds from our initial public offering as well as cash generated from operations.

Selling, General and Administrative Expense. In June 2005, we completed our initial public offering of our common stock. We will incur certain incremental costs and expenses as a result of being a public company, including costs associated with our periodic reporting requirements and compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

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


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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 Management’s 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 company’s 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 customer’s 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 vendor’s 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


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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 asset’s 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


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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 June 22, 2005, we completed an initial public offering of 12,250,000 shares of our common stock. Of the shares sold in the offering, 7,500,000 shares were sold by us, and certain selling stockholders sold 4,750,000 shares. The selling stockholders granted the underwriters the option to purchase up to an additional 1,837,500 shares. On July 22, 2005, the underwriters exercised this option in full. We did not receive any proceeds from the shares sold by the selling stockholders and used all of our net proceeds from our initial public offering, together with cash on hand, to repay $135.0 million of our outstanding debt under the senior secured credit facility.

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.

On February 11, 2005, we entered into a $350.0 million senior secured credit facility with a syndicate of banks. The 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. See “Description of other indebtedness” for a summary of the terms of the senior secured credit facility. In addition, on February 11, 2005, we issued $275.0 million aggregate principal amount of the Old Notes. With the proceeds from these transactions, we repaid existing


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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 senior secured credit facility and the Old Notes.

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 six months ended June 30, 2005 and 2004 and the years ended December 31, 2004, 2003, and 2002 and our financial condition as of June 30, 2005 and December 31, 2004 and 2003.

The following table sets forth, for the years ended December 31, 2004, 2003 and 2002 and the six months ended June 30, 2005 and 2004 the percentage relationship to sales of certain costs, expenses and income items:

                                           
Six months
ended June 30, 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
    75.5 %     77.9 %     76.5 %     77.6 %     77.0 %
     
     
     
     
     
 
Gross margin
    24.5 %     22.1 %     23.5 %     22.4 %     23.0 %
 
Selling, general and administrative expenses
    18.3 %     18.0 %     18.3 %     19.5 %     20.6 %
 
Stock compensation expense
    3.2 %     0.1 %     0.0 %     0.0 %     0.0 %
 
Facility closure costs
    0.0 %     0.0 %     0.0 %     0.1 %     0.0 %
     
     
     
     
     
 
Income from operations
    3.0 %     4.0 %     5.2 %     2.8 %     2.4 %
Interest expense
    2.8 %     1.3 %     1.2 %     0.7 %     0.8 %
Other expense, net
    0.0 %     0.0 %     0.0 %     0.0 %     0.1 %
Income tax expense
    0.1 %     1.1 %     1.5 %     0.8 %     0.6 %
(Income) Loss from discontinued operations, net of tax
    0.0 %     0.0 %     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
    0.1 %     1.7 %     2.5 %     1.0 %     (0.6 )%
     
     
     
     
     
 
 
Six Months Ended June 30, 2005 Compared with the Six Months Ended June 30, 2004

During the six months ended June 30, 2005 sales grew for all product categories, as compared to the same period in 2004, and our gross margin improved, particularly for our prefabricated components and lumber & lumber sheet goods product categories. Market share gains and favorable homebuilding activity in our geographic markets were the primary contributors to our sales growth. The growth in gross margin was significantly offset by a $36.4 million (including applicable payroll taxes) special cash payment paid to stock option holders in February 2005, as well as higher selling, general and administrative expenses and interest expense. Selling, general and administrative expenses increased due to increased salaries and benefits largely resulting from higher sales commissions and increased headcount. Higher fuel costs and professional services fees also contributed to the increase in selling, general and administrative expenses.

Sales. Sales for the six months ended June 30, 2005 were $1,127.9 million, a 15.4% increase over sales of $977.1 million for the six months ended June 30, 2004. Market share gains and favorable homebuilding activity in our geographic markets were the primary contributors to our sales growth and, to a lesser extent, a slight increase in market prices for lumber and lumber sheet goods during the six


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months ended June 30, 2005. Our sales management initiatives, including incentive and training programs, allowed us 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 for prefabricated components reflects our successful strategy of diversifying into more value-added product sales.

The following table shows sales classified by major product category (dollars in millions):

                                           
Six Months Ended June 30,

2005 2004


Sales % of Sales Sales % of Sales % Growth

Prefabricated components
  $ 234.4       20.8 %   $ 174.8       17.9 %     34.1 %
Windows & doors
    209.2       18.5 %     184.2       18.8 %     13.6 %
Lumber & lumber sheet goods
    423.8       37.6 %     396.7       40.6 %     6.8 %
Millwork
    95.7       8.5 %     82.9       8.5 %     15.4 %
Other building products & services
    164.8       14.6 %     138.5       14.2 %     19.0 %
     
     
     
     
     
 
 
Total sales
  $ 1,127.9       100.0 %   $ 977.1       100.0 %     15.4 %
     
     
     
     
     
 

Sales of prefabricated components increased $59.6 million to $234.4 million for the six months ended June 30, 2005. This was largely attributable to the increase in truss and panel sales of $45.6 million resulting from increased usage of prefabricated components by production homebuilders.

Sales of windows & doors increased $25.0 million to $209.2 million for the six months ended June 30, 2005. This was attributable to a $14.7 million increase in sales of pre-assembled door units and a $10.3 million increase in sales of assembled and distributed window products.

Sales of lumber & lumber sheet goods increased $27.2 million to $423.8 million for the six months ended June 30, 2005. This increase was largely attributable to unit volume increases of approximately $24.0 million and favorable pricing of approximately $3.1 million, respectively. Favorable market prices for lumber during the first quarter 2005 were partially offset as lumber market prices softened during the second quarter 2005.

Sales of millwork products increased $12.8 million to $95.7 million for the six months ended June 30, 2005. Sales of interior trim and moldings increased $7.2 million, largely as a result of new sales management programs and increased capacity.

Sales of other building products & services increased $26.3 million to $164.8 million for the six months ended June 30, 2005. This increase was largely attributable to a $5.3 million increase in installation services and increases in sales for gypsum, hardware, roofing and insulation products of $5.2 million, $4.6 million, $3.8 million and $2.7 million, respectively.

Gross Margin. Gross margin was $276.4 million for the six months ended June 30, 2005, an increase of $60.5 million, or 28.0%. The gross margin percentage increased from 22.1% for the six months ended June 30, 2004 to 24.5% for the six months ended June 30, 2005. The gross margin percentage improved for all product categories except windows & doors, where margins on manufactured windows fell slightly as we expanded our capacity. The majority of the gross margin increase was related to our prefabricated components and lumber & lumber sheet goods product categories, which improved from 26.5% to 28.8% and 16.1% to 19.9%, respectively. Overall, higher sales levels, lower raw material costs and efficiency gains drove the improvement in gross margin percentage.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $206.4 million for the six months ended June 30, 2005, an increase of $30.4 million, or 17.3%. The increase was primarily due to an $20.4 million increase in salaries and benefits expense, largely resulting from a $7.5 million increase in commission expense and a 5.6% increase in headcount, related to sales and gross margin growth. In addition, handling and delivery expenses increased $5.4 million, primarily


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for fuel costs, and professional services fees increased $2.1 million, primarily related to being a public company.

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 six months ended June 30, 2004, we paid approximately $0.4 million to certain option holders whose exercise price could not be adjusted for the February 2004 special dividend.

Interest Expense. Interest expense was $31.5 million for the six months ended June 30, 2005, an increase of $19.0 million. The increase was primarily attributable to charges associated with our initial public offering and recapitalization. These charges are summarized below (in thousands):

                 
Six Months Ended
June 30,

2005 2004

Write-off of unamortized deferred debt issuance costs
  $ 10,293     $ 2,182  
Financing costs incurred in conjunction with the February 2005 refinancing
    2,425        
Termination penalty resulting from prepayment of term loan under prior credit facility
    1,700        
     
     
 
    $ 14,418     $ 2,182  
     
     
 

In addition, higher average debt levels and average interest rates during the six months ended June 30, 2005 resulted in interest expense increasing by approximately $4.9 million and $1.6 million, respectively.

Provision for Income Taxes. The effective combined federal and state tax rate was 39.0% and 38.5% for the six months ended June 30, 2005 and 2004, respectively. The increase in the effective tax rate was primarily because of an increase in 2005 expenses not deductible for state tax purposes.

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 million 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.


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The following table shows sales classified by major product category (in millions):

                                         
Year Ended

2004 2003


Sales % of Sales Sales % of Sales % Growth





Prefabricated Components
  $ 385.9       18.8 %   $ 303.4       18.1 %     27.2 %
Windows & Doors
    391.2       19.0 %     354.6       21.2 %     10.3 %
Lumber & Lumber Sheet Goods
    815.3       39.6 %     593.7       35.4 %     37.3 %
Millwork
    175.9       8.5 %     158.7       9.5 %     10.8 %
Other Building Products & Services
    289.7       14.1 %     264.7       15.8 %     9.4 %
     
     
     
     
     
 
Total
  $ 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


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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.


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The following table shows sales by major product category (millions):

                                         
Year Ended

2003 2002


Sales % of Sales Sales % of Sales % Growth

Prefabricated Components
  $ 303.4       18.1 %   $ 257.3       17.2 %     17.9 %
Windows & Doors
    354.6       21.2 %     325.2       21.7 %     9.0  
Lumber & Lumber Sheet Goods
    593.7       35.4 %     515.4       34.3 %     15.2  
Millwork
    158.7       9.5 %     151.1       10.1 %     5.0  
Other Building Products & Services
    264.7       15.8 %     251.0       16.7 %     5.5  
     
     
     
     
     
 
Total
  $ 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.


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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 Old Notes and the 2005 Agreement, 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. In addition, we completed an initial public offering in June 2005 and used the net proceeds, together with cash on hand, to repay a portion of our term loan.

Consolidated cash flows

Operating activities. Cash flows provided by operating activities was $23.4 million for the six months ended June 30, 2005 compared to $34.4 million for the six months ended June 30, 2004. The decrease in cash flows provided by operating activities was primarily driven by a $36.4 million (including applicable payroll taxes) special cash dividend payment made to stock option holders during the first quarter of 2005. These payments were recorded as stock compensation expense and significantly offset our otherwise improved profitability for the six months ended June 30, 2005. Other net uses of cash were related to changes in working capital.

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


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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 resulted primarily from the expiration of our accounts receivable securitization agreement in August 2003. The increase in accrued liabilities was caused by increased compensation, including bonuses, and sales and income tax accruals that 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 resulted primarily from the expiration of our accounts receivable securitization agreement in August 2003. The net decrease in accounts payable and accrued liabilities was primarily caused by the timing of payments off-set in part by increased compensation and sales tax accruals that were a direct result of the Company’s increased performance from the prior year. The increase in inventory levels was a direct result of the Company’s building inventory levels to support higher sales in addition to the Company’s taking advantage of declining lumber prices near the end of the year in 2003.

Investing activities. During the six months ended June 30, 2005 and 2004, cash flows used for investing activities were $13.4 million and $9.7 million, respectively. Capital expenditures increased approximately $4.8 million to $15.3 million for the six months ended June 30, 2005 from $10.5 million for the six months ended June 30, 2004 primarily due to purchasing machinery and equipment to support increased capacity at both existing and new facilities. Proceeds from the sale of property, plant and equipment increased $1.1 million from $0.8 million for the six months ended June 30, 2004 to $1.9 million for the six months ended June 30, 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 $56.7 million for the six months ended June 30, 2005 compared to $25.1 million for the six months ended June 30, 2004. Significant financing transactions during the six months ended June 30, 2005 and 2004 included the following:

•  In February 2004, we entered into a senior secured credit agreement (the “2004 Agreement”) and received proceeds of $315.0 million. We used the proceeds, together with cash on hand, to pay a special

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dividend to our stockholders of approximately $139.6 million, to pay transaction costs associated with the 2004 Agreement of $11.0 million and to retire the existing debt facility of $168.3 million.
 
•  In February 2005, we recapitalized the Company by entering into a senior secured credit agreement (the “2005 Agreement”) and issuing the Old Notes. We received gross proceeds of $225.0 million and $275.0 million from these two transactions, respectively. We used the proceeds, together with cash on hand, to retire $313.3 million of the 2004 Agreement, to pay a special cash dividend of $201.2 million to stockholders, to make a special cash payment of $36.4 million to stock option holders, and to pay $21.1 million of expenses related to the refinancing.
 
•  In June 2005, we completed our initial public offering and received net proceeds of $110.7 million. At June 30, 2005, approximately $1.8 million of estimated unpaid transaction costs were included in accrued liabilities. We used the net proceeds from our initial public offering and cash generated from operations to repay $135.0 million of our term loan under the 2005 Agreement.

Book overdrafts increased $3.4 million during the six months ended June 30, 2005 compared to a decrease of $22.1 million during the six months ended June 30, 2004, reflecting 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 the 2005 Agreement, which was initially 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 available at any time during the six-and-a-half year term.

In June 2005, we completed our initial public offering and used the net proceeds as well as cash generated from operations to repay $135.0 million of the term loan. This repayment permanently reduced the borrowing capacity under the 2005 Agreement. At June 30, 2005, the available borrowing capacity of the revolver totaled $108.8 million after being reduced by outstanding letters of credit under the revolver of approximately $1.2 million. We also had $15.0 million outstanding letters of credit under the pre-funded letter of credit facility.

On August 11, 2005, we repaid $20.0 million of our term loan, and on September 1, 2005, we repaid another $5.0 million. These repayments permanently reduced our borrowing capacity under the 2005


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Agreement. In conjunction with the repayments, we wrote-off $0.5 million of associated debt issuance costs, which will be included as a component of interest expense in our condensed consolidated statement of operations for the three months ended September 30, 2005.

Interest rates on loans under the 2005 Agreement are based on the base rate of interest determined by the administrative agent rate or LIBOR (plus a margin, based on leverage ratios, which is 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 revolver. The weighted-average interest rate at June 30, 2005 for borrowings under the 2005 Agreement was 5.66%.

The 2005 Agreement is guaranteed by all of our subsidiaries and collateralized by (i) a pledge of the common stock of all 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 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. We can be required to make mandatory prepayments of amounts outstanding under the 2005 Agreement based on certain asset sales and casualty events, issuance of debt and the results of an excess cash flow calculation.

On February 11, 2005, we issued $275.0 million in aggregate principal amount of the Old Notes. Interest accrues on the Old Notes at a rate of LIBOR plus 4.25% and is payable quarterly in arrears beginning May 15, 2005. The LIBOR rate is reset at the beginning of each quarterly period. The Old 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 Old 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, 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.

We entered into two interest rate swap agreements in order to obtain a fixed rate with respect to $200.0 million of our outstanding floating rate debt and thereby reduce our exposure to interest rate volatility. In April 2005, we entered into a swap agreement to fix $100.0 million of our outstanding Old Notes at an effective interest rate of 8.37%, including applicable margin. The interest rate swap agreement is for three years starting July 1, 2005 whereby we will pay a fixed rate of 4.12% and receive a variable rate at 90 day LIBOR. In June 2005, we entered into another interest rate swap agreement to fix $100.0 million of our outstanding Old Notes at an effective interest rate of 8.27%, including applicable margin. The interest rate swap agreement is for three years starting June 10, 2005 whereby we will pay a fixed rate of 4.02% and receive a variable rate at 90 day LIBOR.

The interest rate swaps qualify as fully effective, cash-flow hedging instruments. Therefore, the gain or loss of the qualifying cash flow hedges are reported in other comprehensive income (loss) and reclassified into earnings in the same period in which the hedge transactions affect earnings. At June 30, 2005, the fair value of the interest rate swaps was a liability of $0.6 million. The weighted-average interest rate at June 30, 2005 for the Old Notes was 7.78%.

Proceeds from the 2005 Agreement and the issuance of the Old Notes were used, in addition to cash and cash equivalents on hand at the refinancing date, to retire the 2004 Agreement. The proceeds were also used to pay a cash dividend to stockholders of $201.2 million, to 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, to pay fees and expenses of $21.1 million related to the refinancing, and to


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make a $1.7 million early termination payment related to the prepayment of the Tranche B term loan under the 2004 Agreement.

Long-term debt consists of the following:

                   
June 30, December 31,
2005 2004
(In thousands)

Term loan
  $ 90,000     $  
Old Notes
    275,000        
Tranche A term loan
          228,275  
Tranche B term loan
          85,000  
Other notes
          205  
     
     
 
      365,000       313,480  
Less current portion of long-term debt
          1,688  
     
     
 
 
Total long-term debt
  $ 365,000     $ 311,792  
     
     
 

Based on our ability to generate cash flows from operations and our borrowing capacity under the revolver, we believe we will have sufficient capital to meet our anticipated short-term needs, including our capital expenditures, acquisition strategies and our debt obligations for the foreseeable future.

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 the corresponding periods. We believe this trend will continue given our existing facilities, our acquisition plans and our product portfolio and anticipated market conditions going forward. For the six months ended June 30, 2005 and 2004, capital expenditures totaled $15.3 million and $10.5 million, respectively. The increase was primarily due to purchasing machinery and equipment to support increased capacity at both existing and new facilities. 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.


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DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes the contractual obligations of the Company as of December 31, 2004 (in thousands):

                                                 
Payments Due by Period
Less
than 1 – 3 4 5 After 5
Contractual Obligations Total 1 Year Years Years Years Years

Long-Term Debt(1)
  $ 365,000     $     $ 2,279     $ 911     $ 911     $ 360,899  
Operating Leases
    172,664       31,072       65,018       16,449       11,476       48,649  
Interest on Long-Term Debt(1)(2)
    200,647       31,799       86,936       27,508       26,948       27,456  
     
     
     
     
     
     
 
Total Contractual Cash Obligations
  $ 738,311     $ 62,871     $ 154,233     $ 44,868     $ 39,335     $ 437,004  
     
     
     
     
     
     
 


(1) These future maturities of Long-Term Debt and the related interest obligations reflect the refinancing of our credit agreement, the issuance of $275.0 million of Old Notes on February 11, 2005 and a $135.0 million payment of our term loan with proceeds from our initial public offering, together with cash on hand.
 
(2) Interest based on LIBOR rate of 3.50% at June 30, 2005. Interest on long-term debt reflects two interest rate swap agreements effective June 10, 2005 and July 1, 2005. Actual interest may vary based on LIBOR fluctuations.

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

We experience changes in interest expense when market interest rates change. Changes in our debt could also increase these risks. Based on debt outstanding at June 30, 2005, a 25 basis point increase in interest rates would result in approximately $0.4 million of additional interest expense annually. We do utilize interest rate swap contracts to fix interest rates on our outstanding long-term debt balances.

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 that we deliver. Short-term changes in the


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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 our operating income.

QUARTERLY RESULTS AND SEASONALITY

The Company’s first and fourth quarters historically have been, and are expected to continue to be, adversely affected by weather patterns in some of the Company’s 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 May 2005, the FASB issued SFAS 154, Accounting for Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements for reporting a voluntary change in accounting principle unless it is impracticable. This statement also distinguishes between retrospective application and restatement. It redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. SFAS 154 is effective for the Company as of January 1, 2006 and is not expected to have a material impact on the Company’s consolidated financial statements.

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 Company’s 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 staff’s 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


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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


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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.


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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 Lowe’s, 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 industry’s 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 1.97 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

BAR GRAPH

SOURCE:    U.S. Census, Homeownership Alliance

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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 home ownership 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.

(Bar Graph)

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.

(Bar Graph)

SOURCE: U.S. Census Bureau

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.


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Market Share of the Top 10 Homebuilders

BAR GRAPH

SOURCES: Production Homebuilders’ Public Filings; National Association of Realtors

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.


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Industry overview and trends

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

BAR GRAPH

SOURCE:    The Freedonia Group

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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 51 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.


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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 51 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


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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 $33.2 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 regional group presidents, has a total of over 160 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 regional group presidents who average over 30 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


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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 51 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.


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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 Category—Year Ended December 31, 2004

Total Sales—$2,058.0 million

(PIE CHART)


*    Includes both manufactured and distributed products

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.


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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 homebuilder’s 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 26% 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.


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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


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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 builder’s 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 house’s 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 plant’s 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.


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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 Lowe’s, 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.


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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 customer’s order can be tracked at each stage of the process and billing can be customized to reduce a customer’s 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 51 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. We plan to further consolidate our operations by combining the Central and Southeast operating groups. We expect to complete this consolidation by the end of 2006.


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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 Company’s distribution and manufacturing operations:

                 
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  

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Facility Location Address General Character Leased or Owned




Maryland                
Frederick   3302 Ballenger Creek Pike   Millwork Shop     O  
    295 Bailes Lane Rd.   Panel Plant     L  
Hagerstown   914 S. Burhans Blvd.   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; 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; Millwork Shop; 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  

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Facility Location Address General Character Leased or Owned




Charleston   4450 Arco Ln.   Millwork Shop; Distribution Center     L  
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  

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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  

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.


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Management

DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to our directors and executive officers, as of the date hereof, is set forth below:

             
Name Age Position

Floyd F. Sherman
    66     President, Chief Executive Officer, and Class III Director
Kevin P. O’Meara
    40     Senior Vice President and Chief Operating Officer
Charles L. Horn
    45     Senior Vice President and Chief Financial Officer
Donald F. McAleenan
    50     Senior Vice President and General Counsel
Frederick B. Schenkel
    55     Vice President, Manufacturing
Paul S. Levy
    57     Class III Director, Chairman of the Board
Alexander R. Castaldi
    55     Class II Director
Ramsey A. Frank
    44     Class II Director
Brett N. Milgrim
    36     Class I Director
Robert C. Griffin
    57     Class I Director

Our board of directors consists of six members elected annually by our stockholders. Our amended and restated certificate of incorporation and our amended and restated by-laws provide that our board of directors be divided into three classes, each of whose members serve for a staggered three-year term. Each Class I director will hold office until the 2006 annual meeting of our stockholders and until his successor has been duly elected and qualified. Each Class II director will hold office until the 2007 annual meeting of our stockholders and until his successor has been duly elected and qualified. Each Class III director will hold office until the 2008 annual meeting of our stockholders and until his successor has been duly elected and qualified. 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 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. O’Meara, Chief Operating Officer. Mr. O’Meara is a co-founder of BFS. At the inception of BFS, he served as the Chief Financial Officer. Mr. O’Meara was promoted to his current position in May 2000. Prior to co-founding BFS, Mr. O’Meara 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. O’Meara 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.


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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 and Central 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. Mr. Tolly also became President of the Central Group in 2005. 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 Lowe’s 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.

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,


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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 became a director upon completion of our initial public 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 serves on the board of directors of Commercial Vehicle Group, Inc.

Board Composition

Mr. Griffin became an independent director upon the completion of our initial public offering. Our board consists of Mr. Griffin and Messrs. Sherman, Levy, Castaldi, Frank, and Milgrim. Immediately prior to the consummation of our initial public offering, we adopted our amended and restated certificate of incorporation and our amended and restated by-laws, which 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 our initial public offering, and, within one year of the consummation of our initial public 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. We currently intend that a majority of the members of our board of directors will continue to be associated with JLL Partners for so long as JLL Building Products, LLC owns more than 50% of our outstanding shares.

Board Committees

Upon completion of our initial public offering, our board of directors appointed an audit committee, the composition of which complies with the requirements of The Nasdaq National Market and the Sarbanes-Oxley Act of 2002. Messrs. Castaldi, Griffin, and Milgrim have been appointed to serve as the initial members of our audit committee. 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. Independent directors receive the following compensation: (a) an annual cash retainer of $20,000; (b) a grant under the 2005 Equity Incentive Plan of restricted shares of common stock with a value at the time of issuance of approximately $20,000 per year for each year of service as a director; (c) a fee of $1,000 per day for each meeting of the board of directors (or committee thereof) attended; and (d) an annual cash retainer of $5,000 for each committee on which they serve. 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.


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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)

Floyd F. Sherman
    2004     $ 600,000     $ 1,107,036              
  President and Chief Executive Officer                                        
Kevin P. O’Meara
    2004     $ 360,000     $ 848,444       56,592     $ 3,769  
  Senior Vice President and Chief Operating Officer                                        
Charles L. Horn
    2004     $ 330,000     $ 927,740       111,783     $ 4,925  
  Senior Vice President and Chief Financial Officer                                        
Donald F. McAleenan
    2004     $ 320,000     $ 754,172       57,577     $ 6,500  
  Senior Vice President and General Counsel                                        
Frederick B. Schenkel
    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)

Floyd F. Sherman
                             
Kevin P. O’Meara
    56,592       3.7 %   $ 3.15       February 27, 2014     $ 28,296  
Charles L. Horn
    111,783       7.4 %   $ 3.15       February 27, 2014     $ 55,892  
Donald F. McAleenan
    57,577       3.8 %   $ 3.15       February 27, 2014     $ 28,789  
Frederick B. Schenkel
    5,000       0.3 %   $ 3.15       February 27, 2014     $ 2,500  

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(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

and Fiscal Year-end Option Values
                                 
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

Floyd F. Sherman
                851,814/ 283,939     $ 10,945,810/ $3,648,616  
Kevin P. O’Meara
                350,158/ 132,341     $ 4,499,530/ $1,700,582  
Charles L. Horn
                181,292/ 143,707     $ 2,329,602/ $1,846,635  
Donald F. McAleenan
                293,534/ 118,965     $ 3,771,912/ $1,528,700  
Frederick B. Schenkel
                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. O’Meara, 425,907; Mr. Horn, 213,216; Mr. McAleenan, 354,922; and Mr. Schenkel, 25,000.

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Executive compensation

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 our President and Chief Executive Officer, Mr. O’Meara 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. Sherman’s agreement

Mr. Sherman’s 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. Sherman’s 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. Sherman’s 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. Sherman’s 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. O’Meara, 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 executive’s base salary. Pursuant to the employment agreements, this target bonus percentage will not be less than 100% of the executive’s base salary.

Under each of these employment agreements, in the event that (a) the executive’s 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 executive’s 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 executive’s 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


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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, which is included as an exhibit to the registration statement of which this prospectus is a part and incorporated herein by reference.

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 Company’s 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.

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 is included as an exhibit to the registration statement of which this prospectus is a part and incorporated herein by reference.

Our equity incentive plan affords an incentive to eligible persons to increase their efforts on behalf of the Company and its subsidiaries and to promote the Company’s success. The 2005 Equity Incentive Plan provides 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 is 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 committee’s authorities under


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the plan is limited by the Board’s 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), and an “outside director” within the meaning of Section 162(m) of the Code. Our board of directors has 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 are final and binding on all persons.

Shares Available under the Plan. An aggregate of 2.2 million shares of our common stock have 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 determines 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 participant’s service with us. Payment of the exercise price of a stock


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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 are 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 are 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 contains terms concerning the termination of the award of restricted stock or restricted stock units following termination of the participant’s service with us.

Other Stock-Based Awards. The plan also provides for other stock-based awards, the form and terms of which are 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 provides 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 expires 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 is included as an exhibit to the registration statement of which this prospectus is a part and incorporated herein by reference.

We have adopted a management incentive plan that provides for the payment of annual bonuses to those of our executive officers who are selected for participation in the plan. The plan is 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 committee’s authorities under the plan is limited by the Board’s authority to make all final determinations with respect to the plan and any awards


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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 has 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 are final and binding on all persons.

Our board of directors determines 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 are 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 participant’s 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 participant’s consent.


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Security ownership of certain beneficial owners and management

The following table sets forth certain information regarding the beneficial ownership, as of July 31, 2005, of: (i) our common stock by each person known to us to hold greater than 5% of the total number of outstanding shares; and (ii) our common stock by each current director or executive officer and of all the current directors and executive officers as a group. The number of shares beneficially owned by each person or group as of July 31, 2005 includes shares of common stock that such person or group had the right to acquire on or within 60 days after July 31, 2005, including upon the exercise of options. All such information is estimated and subject to change. Each outstanding share of common stock entitles its holder to one vote on all matters submitted to a vote of our stockholders.

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

Percentage
Ownership
Shares of of Shares of
Common Common
Name and Address of Beneficial Owner(1) Stock(2) Stock(3)(4)

JLL Building Products, LLC(5)
    17,305,103       53.0 %
Floyd F. Sherman(6)
    1,135,753       3.4 %
Kevin P. O’Meara(7)
    479,636       1.4 %
Charles L. Horn(8)
    242,346       *  
Donald F. McAleenan(9)
    408,815       1.2 %
Frederick B. Schenkel(10)
    27,033       *  
Paul S. Levy(5)(11)
    17,305,103       53.0 %
Alexander R. Castaldi(5)(11)
    17,305,103       53.0 %
Ramsey A. Frank(5)(11)
    17,305,103       53.0 %
Brett N. Milgrim(5)(11)
    17,305,103       53.0 %
Robert C. Griffin
    3,750       *  
Directors and executive officers of the Company as a group
    19,602,436       56.3 %


 *   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 July 31, 2005 includes shares of common stock that such person or group had the right to acquire on or within 60 days after July 31, 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 32,661,461 shares of common stock outstanding

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Security ownership of certain beneficial owners and management

on July 31, 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 July 31, 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 1,135,753 shares of common stock issuable upon exercise of options exercisable within 60 days of July 31, 2005 under the Company’s 1998 Stock Incentive Plan, as amended.
 
(7)  Includes 435,339 shares of common stock issuable upon exercise of options exercisable within 60 days of July 31, 2005 under the Company’s 1998 Stock Incentive Plan, as amended.
 
(8)  Includes 229,846 shares of common stock issuable upon exercise of options exercisable within 60 days of July 31, 2005 under the Company’s 1998 Stock Incentive Plan, as amended.
 
(9)  Includes 364,518 shares of common stock issuable upon exercise of options exercisable within 60 days of July 31, 2005 under the Company’s 1998 Stock Incentive Plan, as amended.

(10)  Includes 16,033 shares of common stock issuable upon exercise of options exercisable within 60 days of July 31, 2005 under the Company’s 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.

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Certain related party transactions

In February 2005, with a portion of the net proceeds of our offering of the Old Notes and our 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, our majority stockholder, 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.

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.


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Description of other 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 are included as exhibits to the registration statement filed in connection with this offering of which this prospectus forms a part and incorporated herein by reference, 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 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 senior secured credit facility initially consisted of:

a senior secured term loan facility of $225.0 million (the “Term Loan Facility”),
 
a senior secured revolving credit facility of $110.0 million (the “Revolving Credit Facility”), and
 
a 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.

As of September 1, 2005, we have repaid $160.0 million of the term loan, permanently reducing our borrowing capacity under the senior secured credit facility and eliminating our required installment payments until September 2006.

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 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.


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Description of other indebtedness

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 Branch’s internal deposit rate, and such lenders will receive UBS AG, Stamford Branch’s internal deposit rate on the amounts in the Credit-Linked Deposit Account.

Guarantees. All of the obligations under the 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 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 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 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 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 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.


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The exchange offer

Terms of the Exchange Offer; Period for Tendering Old Notes

On February 11, 2005, we issued an aggregate principal amount of $275,000,000 of Old Notes in an offering under Rule 144A and Regulation S of the Securities Act that was not registered under the Securities Act. We sold the Old Notes to UBS Securities LLC and Deutsche Bank Securities Inc. (the “Initial Purchasers”) under a Purchase Agreement, dated February 8, 2005, among us, the guarantors party thereto, and the Initial Purchasers. When we sold the Old Notes to the Initial Purchasers, we also entered into a registration rights agreement with the Initial Purchasers in which we agreed to exchange all the issued and outstanding Old Notes for a like principal amount of New Notes. The form and terms of the New Notes are identical to those of the Old Notes except that the issuance of the New Notes has been registered under the Securities Act and the transfer restrictions, registration rights and certain liquidated damages provisions relating to the Old Notes do not apply to the New Notes.

This prospectus and the enclosed letter of transmittal constitute an offer to exchange New Notes for all the issued and outstanding Old Notes. This exchange offer is being extended to all holders of the Old Notes. As of the date of this prospectus, $275,000,000 aggregate principal amount of the Old Notes are outstanding. This prospectus and the letter of transmittal are first being sent on or about                     , 2005 to all holders of Old Notes known to us. Subject to the terms and conditions set forth in this prospectus and the enclosed letter of transmittal, we will accept for exchange all Old Notes that are properly tendered on or prior to the Expiration Date and not withdrawn as permitted below. See “—Conditions to the Exchange Offer.” As used in this prospectus, the term “Expiration Date” means 5:00 p.m., New York City time, on                     , 2005. However, if we, in our sole discretion, extend the period of time during which the exchange offer is open, the term “Expiration Date” will mean the latest time and date to which we extend the exchange offer.

The exchange offer will be open for not less than 30 days after the date notice of the exchange offer is mailed to holders. We expressly reserve the right, at any time and from time to time, in our sole discretion, to extend the period of time during which the exchange offer is open, and thereby delay acceptance for exchange of any Old Notes. If we elect to extend the period of time during which the exchange offer is open, we will give you oral or written notice of the extension and delay, as described below. During any extension of the exchange offer, all Old Notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. We will return to you, at our expense, any Old Notes not accepted for exchange as promptly as practicable after the expiration or termination of the exchange offer. In the case of an extension, we will issue a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date.

We expressly reserve the right to amend or terminate the exchange offer, and not accept for exchange any Old Notes that were not previously accepted for exchange if any of the conditions described below under the caption “—Conditions to the Exchange Offer” are not satisfied. We will give you oral or written notice of any amendment, termination or non-acceptance as promptly as practicable.

Following completion of the exchange offer, we may, in our sole discretion, commence one or more additional exchange offers to those holders of Old Notes who do not exchange their Old Notes for New Notes in this exchange offer. The terms of these additional exchange offers may differ from those applicable to this exchange offer. We may use this prospectus, as amended or supplemented from time to time, in connection with any additional exchange offers. These additional exchange offers may take place from time to time until all outstanding Old Notes have been exchanged for New Notes, subject to the terms and conditions contained in the prospectus and the letter of transmittal we will distribute in connection with these additional exchange offers.


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Procedures for Tendering Old Notes

Old Notes tendered in the exchange offer must be in denominations of principal amount of $1,000 and any integral multiple thereof.

When you tender your Old Notes, and we accept your Old Notes, this will constitute a binding agreement between us and you, subject to the terms and conditions set forth in this prospectus and the enclosed letter of transmittal. Unless you comply with the procedures described below under the caption “—Guaranteed Delivery Procedures,” you must do one of the following on or prior to the Expiration Date to participate in the exchange offer:

•  tender your Old Notes by sending certificates representing your Old Notes and a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal, to Wilmington Trust Company, as Exchange Agent, at one of the addresses listed below under the caption “—Exchange Agent”; or
 
•  tender your Old Notes by using the book-entry procedures described below, and sending a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal or by transmitting an agent’s message to the Exchange Agent instead of the letter of transmittal.

The term “agent’s message” means a message, transmitted to The Depository Trust Company (“DTC”) and received by the Exchange Agent and forming a part of the book-entry transfer, that states that DTC has received an express acknowledgment from you that you have received and have agreed to be bound by the letter of transmittal. If you use this procedure, we may enforce the letter of transmittal against you.

The method of delivery of certificates for Old Notes, letters of transmittal, agent’s messages and all other required documents is at your election. If you deliver your Old Notes by mail, we recommend registered mail, properly insured, with return receipt requested. In all cases, you should allow sufficient time to assure timely receipt by the Exchange Agent prior to the Expiration Date. Do not send certificates for Old Notes, letters of transmittal or agent’s messages directly to us.

If you are a beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender, you should promptly instruct the registered owner to tender on your behalf.

Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless you are either (1) a holder of Old Notes and have not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal or (2) you are exchanging Old Notes for the account of an Eligible Guarantor Institution. An “Eligible Guarantor Institution” means any of the following that is a participant in the Securities Transfer Agents Medallion Program, the Stock Exchanges Medallion Program or the New York Stock Exchange Medallion Program:

•  Banks (as defined in Section 3(a) of the Federal Deposit Insurance Act);
 
•  Brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers and government securities brokers (as defined in the Exchange Act);
 
•  Credit unions (as defined in Section 19(b)(1)(A) of the Federal Reserve Act);
 
•  National securities exchanges, registered securities associations and clearing agencies (as these terms are defined in the Exchange Act); and
 
•  Savings associations (as defined in Section 3(b) of the Federal Deposit Insurance Act).

If signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, the guarantor must be an Eligible Guarantor Institution. If you plan to sign the letter of transmittal but the


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Old Notes are not registered in your name, you must have the Old Notes endorsed by the registered holder of the Old Notes and that signature must be guaranteed by an Eligible Guarantor Institution. You may also send a separate instrument of transfer or exchange signed by the registered holder of the Old Notes and guaranteed by an Eligible Guarantor Institution, but that instrument must be satisfactory to us in our sole discretion.

All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Old Notes tendered for exchange will be determined by us in our sole discretion. Our determination will be final and binding on all parties. We reserve the absolute right to reject any and all tenders of Old Notes improperly tendered or to not accept any Old Notes, the acceptance of which might be unlawful as determined by us or our counsel. We also reserve the absolute right to waive any defects or irregularities or conditions of the exchange offer as to any Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the exchange offer). Our interpretation of the terms and conditions of the exchange offer as to any particular Old Notes either before or after the Expiration Date (including the terms and conditions of the letter of transmittal and the accompanying instructions) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within a reasonable period of time, as determined by us. Neither we, the Exchange Agent nor any other person has any duty to give notification of any defect or irregularity with respect to any tender of Old Notes for exchange, nor will we have any liability for failure to give such notification.

If a person or persons other than the registered holder or holders of Old Notes sign the letter of transmittal, certificates for the Old Notes must be endorsed or accompanied by appropriate bond powers, signed exactly as the name or names of the registered holder or holders that appear on the certificates for the Old Notes and all other documents the Company may require in accordance with the restrictions on transfer applicable to the Old Notes. Signatures on certificates or bond powers must be guaranteed by an Eligible Guarantor Institution.

If you are a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or act in a similar fiduciary or representative capacity and wish to sign the letter of transmittal or any certificates for Old Notes or bond powers, you must indicate your status when signing. If you are acting in any of these capacities, you must submit proper evidence satisfactory to us of your authority to so act unless we waive this requirement.

By tendering your Old Notes, you represent to us, among other things that:

•  any New Notes received in exchange for your Old Notes in the exchange offer are being acquired by you or any other person receiving such New Notes in the ordinary course of your or such other person’s business;
 
•  at the time of the commencement of the exchange offer, you do not, or any other person who will receive New Notes in exchange for your Old Notes does not, have any arrangement or understanding with any person to participate in the “distribution” (as defined in the Securities Act) of the New Notes in violation of the Securities Act;
 
•  you are not holding Old Notes that have, or are reasonably likely to have, the status of an unsold allotment;
 
•  you are not, or such other person receiving New Notes in exchange for your Old Notes is not, an “affiliate” (as defined in Rule 405 under the Securities Act) of the Company, or if you are, or such other person is, an affiliate of the Company, you or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable;

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•  if you are not, or such other person receiving New Notes in exchange for your Old Notes is not, a broker-dealer, you are not, or such other person is not, engaged in, and you do not, or such other person does not, intend to engage in, a distribution of the New Notes;
 
•  if you are a participating broker-dealer, you will receive the New Notes for your own account in exchange for Old Notes that were acquired by you as a result of your market-making or other trading activities and that you will deliver a prospectus in connection with any resale of the New Notes you receive in the exchange offer. See “Plan of distribution.” The SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to resales of the New Notes (other than a resale of an unsold allotment from the original sale of the Old Notes) by delivering this prospectus to prospective purchasers; and
 
•  you have full power and authority to transfer the Old Notes in exchange for New Notes and the Company will acquire good and unencumbered title thereto, free and clear of any liens, restrictions, charges, or encumbrances and not subject to any adverse claims.

Acceptance of Old Notes for Exchange; Delivery of New Notes

Upon satisfaction or waiver of all of the conditions to the exchange offer, we will accept, promptly after the Expiration Date, all Old Notes properly tendered and will issue the New Notes promptly after acceptance of the Old Notes. See “—Conditions to the Exchange Offer.” For purposes of the exchange offer, we will be deemed to have accepted properly tendered Old Notes for exchange when, as and if we have given oral or written notice of acceptance to the Exchange Agent, with written confirmation of any oral notice to be given promptly thereafter.

In all cases, the issuance of New Notes in exchange for Old Notes will be made only after the Exchange Agent timely receives either certificates for the Old Notes or book-entry transfer of the Old Notes into the Exchange Agent’s account at DTC, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal or, in the case of a book-entry transfer, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal or an agent’s message instead of the letter of transmittal. If for any reason we do not accept any tendered Old Notes or if Old Notes are submitted for a greater principal amount than the holder desires to exchange, we will return the unaccepted or non-exchanged Old Notes without expense to the registered tendering holder. In the case of Old Notes tendered by book-entry transfer into the Exchange Agent’s account at DTC by using the book-entry procedures described below, the unaccepted or non-exchanged Old Notes will be credited to an account maintained with DTC. Any Old Notes to be returned to the holder will be returned as promptly as practicable after the expiration or termination of the exchange offer.

For each Old Note accepted for exchange in the exchange offer, the holder of the Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note. Interest on the New Note will accrue from the last interest payment date on which interest was paid on the Old Note surrendered in exchange therefor. If (a) the exchange offer registration statement is not declared effective on or prior to October 10, 2005, or the shelf registration statement is not filed by the date that is 30 days after such filing obligation arises; (b) the exchange offer is not consummated on or prior to the 30th business day following the date on which the exchange offer registration statement is declared effective; or (c) the shelf registration statement is declared effective but thereafter ceases to be effective or usable, except if the shelf registration ceases to be effective or usable as specifically permitted by the registration rights agreement (each such event referred to in clauses (a) through (c), a “Registration Default”), liquidated damages in the form of additional cash interest will accrue on the principal amount of the affected Old Notes and New Notes (in addition to the stated interest on the Old Notes) from and including the date on which any Registration Default occurs, but excluding the earlier of the date on


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which all Registration Defaults have been cured or the date on which all the Old Notes and New Notes otherwise become freely transferable by holders other than affiliates of the Company without further registration under the Securities Act. Liquidated damages will accrue at a rate of 0.25% per annum for the first 90-day period immediately following the occurrence of such Registration Default and will increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event will such rate exceed 1.00% per annum. Any amounts of liquidated damages payable due to the occurrence of a Registration Default will be paid to holders to whom regular interest is payable on each February 15th, May 15th, August 15th, and November 15th with respect to Old Notes that are registrable securities.

Book-Entry Transfer

Within two business days after the date of this prospectus, the Exchange Agent will establish an account at DTC for the Old Notes tendered in the exchange offer. Once established, any financial institution that is a participant in DTC’s systems may make book-entry delivery of Old Notes by causing DTC to transfer the Old Notes into the Exchange Agent’s account at DTC in accordance with DTC’s procedures for transfer. Although delivery of Old Notes may be effected through book-entry transfer at DTC, a properly completed and duly executed letter of transmittal or facsimile of the letter of transmittal, with any required signature guarantees, or an agent’s message instead of a letter of transmittal, and any other required documents, must be transmitted to and received by the Exchange Agent on or prior to the Expiration Date at one of the addresses listed below under the caption “—Exchange Agent.” If you cannot comply with these procedures, you may be able to use the guaranteed delivery procedures described below.

Guaranteed Delivery Procedures

If you are a registered holder of the Old Notes and desire to tender your Old Notes, but (1) the certificates for Old Notes are not immediately available, (2) time will not permit your certificates for Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or (3) the procedure for book-entry transfer cannot be completed on a timely basis, you may effect a tender if:

•  the tender is made through an Eligible Guarantor Institution;
 
•  on or prior to the Expiration Date, the Exchange Agent receives from such Eligible Guarantor Institution a properly completed and duly executed letter of transmittal or a facsimile of the letter of transmittal, with any required signature guarantees, or an agent’s message in lieu thereof, and a notice of guaranteed delivery setting forth your name and address and the amount of Old Notes you are tendering, stating that the tender is being made by notice of guaranteed delivery. These documents may be sent by overnight courier, registered or certified mail, facsimile transmission or hand delivery to the addresses set forth below under “—Exchange Agent”. If you elect to use this procedure, you must guarantee that within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery, the certificates for all tendered Old Notes, in proper form for transfer, or a book-entry transfer, as the case may be, and any other documents required by the letter of transmittal will be received by the Exchange Agent from such Eligible Guarantor Institution; and
 
•  the Exchange Agent receives the certificates for all tendered Old Notes, in proper form for transfer, or a book-entry transfer, as the case may be, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery.

Withdrawal Rights

You may withdraw tenders of Old Notes at any time prior to the Expiration Date.

For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent prior to the Expiration Date at one of the addresses listed below under the caption “—Exchange Agent.”


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Any notice of withdrawal must specify the name of the person who tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including the principal amount of the Old Notes), and (where certificates for Old Notes have been transmitted) specify the name in which the Old Notes are registered, if different from that of the withdrawing holder. If certificates for Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of the certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn. The signatures on a notice of withdrawal must be guaranteed by an Eligible Guarantor Institution unless the holder is an Eligible Guarantor Institution. If Old Notes have been tendered using the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Old Notes and otherwise comply with the procedures of this facility. All questions as to the validity, form and eligibility (including time of receipt) of notices of withdrawal will be determined by us. Our determination will be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any Old Notes that have been tendered for exchange but that are not exchanged for any reason will be returned to the registered holder without cost to that holder as soon as practicable after withdrawal, non-acceptance of tender or termination of the exchange offer. In the case of Old Notes tendered by book-entry transfer into the Exchange Agent’s account at DTC by using the book-entry transfer procedures described above, the Old Notes will be credited to an account maintained with DTC for the Old Notes. Properly withdrawn Old Notes may be retendered at any time prior to the Expiration Date by following one of the procedures described above under “—Procedures for Tendering Old Notes.”

Conditions to the Exchange Offer

Notwithstanding any other provision of this exchange offer, we will not be required to accept any Old Notes for exchange or to issue any New Notes in exchange for Old Notes, and we may terminate or amend the exchange offer, if at any time before the acceptance of the Old Notes for exchange or the exchange of New Notes for Old Notes:

•  the exchange offer violates any applicable law or any applicable interpretation of the staff of the SEC;
 
•  an action or proceeding is pending or threatened in any court or by any governmental agency that might materially impair the ability of the Company and the guarantors to proceed with the exchange offer, or a material adverse development shall have occurred in any existing action or proceeding with respect to the Company and the guarantors; or
 
•  we do not receive any governmental approval we deem necessary for the completion of the exchange offer.

These conditions are for our benefit only, and we may assert them regardless of the circumstances giving rise to any condition. We may also waive any condition in whole or in part at any time in our sole discretion. Our failure at any time to exercise any of the foregoing rights will not constitute a waiver of that right, and each right is an ongoing right that we may assert at any time.

Exchange Agent

We have appointed Wilmington Trust Company as the Exchange Agent for the exchange offer. All completed letters of transmittal and all other required documents should be directed to the Exchange Agent at one of the addresses listed below and all agent’s messages should be directed to the Exchange Agent at its DTC account. Questions and requests for assistance, requests for additional copies of this


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prospectus or the letter of transmittal and requests for notices of guaranteed delivery should be directed to the Exchange Agent at one of the following addresses:

Delivery To: Wilmington Trust Company, Exchange Agent

By Hand and Overnight Courier:

Wilmington Trust Company

Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-1615
Attn: Alisha Clendaniel

By Registered or Certified Mail:

Wilmington Trust Company

Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-1615
Attn: Alisha Clendaniel

By Facsimile:

(Eligible Guarantor Institutions Only)

302-636-4139

To Confirm by Telephone or for Information Call:

302-636-6470

Delivery of a letter of transmittal to an address other than the address listed above, transmission of instructions by facsimile other than as set forth above or transmission of an agent’s message other than to the Exchange Agent at its DTC account is not valid delivery of the letter of transmittal or agent’s message.

Fees and Expenses

The principal solicitation is being made by mail by the Exchange Agent. Additional solicitation may be made by telephone, facsimile or in person by our officers and regular employees and by persons so engaged by the Exchange Agent.

We will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith and pay other registration expenses, including fees and expenses of the trustee under the indenture, filing fees, blue sky fees and printing and distribution expenses. We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer.

Accounting Treatment

We will record the New Notes at the same carrying value as the Old Notes, as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. The expenses of the exchange offer will be amortized over the term of the New Notes.

Transfer Taxes

You will not be obligated to pay any transfer taxes in connection with the tender of Old Notes in the exchange offer unless you instruct us to register New Notes in the name of, or request that Old Notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder. In those cases, you will be responsible for the payment of any applicable transfer tax. If


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satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such holder.

Consequences of Exchanging or Failing to Exchange Old Notes

If you do not exchange your Old Notes for New Notes in the exchange offer, your Old Notes will continue to be subject to the restrictions on transfer of the Old Notes described in the legend on your certificates. These transfer restrictions are required because the Old Notes were issued in transactions exempt from the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register the Old Notes under the Securities Act. See “Registration rights.” Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties, we believe that the New Notes you receive in the exchange offer may be offered for resale, resold or otherwise transferred without compliance with the registration and prospectus delivery provisions of the Securities Act. However, you will not be able to freely transfer the New Notes if (1) you are, or any other person receiving New Notes in exchange for your Old Notes is, an “affiliate” (as defined in Rule 405 under the Securities Act) of the Company, (2) you are not, or any other person receiving New Notes in exchange for your Old Notes is not, acquiring the New Notes in the exchange offer in the ordinary course of your or such other person’s business or (3) you are, or such other person receiving New Notes in exchange for your Old Notes is, participating, intend to participate or have an arrangement or understanding with any person to participate in the distribution of the New Notes you or such other person will receive in the exchange offer. We do not intend to request the SEC to consider, and the SEC has not considered, the exchange offer in the context of a similar no-action letter. As a result, we cannot guarantee that the staff of the SEC would make a similar determination with respect to the exchange offer as in the circumstances described in the no-action letters discussed above. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If you are, or any other person receiving New Notes in exchange for your Old Notes is, an affiliate of the Company, are engaged in or intend to engage in a distribution of the New Notes or have any arrangement or understanding with respect to the distribution of the New Notes you or such other person will receive in the exchange offer, you or such other person (1) may not rely on the applicable interpretations of the staff of the SEC and (2) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction involving the New Notes. If you are a broker-dealer, you receive New Notes for your own account and you acquired the Old Notes as a result of your market-making activities or other trading activities, you must acknowledge that you will deliver a prospectus in connection with any resale of the New Notes. See “Plan of distribution.” In addition, to comply with state securities laws, you may not offer or sell the New Notes in any state unless they have been registered or qualified for sale in that state or an exemption from registration or qualification is available and is complied with. The offer and sale of the New Notes to “qualified institutional buyers” (as defined in Rule 144A of the Securities Act) is generally exempt from registration or qualification under state securities laws. We do not plan to register or qualify the sale of the New Notes in any state in which an exemption from registration or qualification is required and not available.


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Description of new notes

You can find the definitions of certain terms used in this description under the subheading “Certain Definitions.” In this description, the word “Issuer” refers only to Builders FirstSource, Inc. and not to any of its subsidiaries.

The Issuer will issue the New Notes under an indenture among itself, the Guarantors and Wilmington Trust Company, as trustee. This is the same indenture under which the Old Notes were issued. The terms of the New Notes will include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended. The security documents referred to below under the heading “— Security” defines the terms of the pledges that will secure the New Notes.

The following description is a summary of the material provisions of the indenture and the security documents. It does not restate those agreements in their entirety. We urge you to read the indenture and the security documents because they, and not this description, define your rights as holders of the New Notes. Copies of the indenture and the security documents are available as set forth below under “— Additional Information.” Certain defined terms used in this description but not defined below under “— Certain Definitions” have the meanings assigned to them in the indenture.

The registered holder of a New Note will be treated as the owner of it for all purposes. Only registered holders will have rights under the indenture.

Brief Description of the New Notes and the Note Guarantees

The terms of the New Notes are substantially identical to the terms of the outstanding Old Notes, except that the transfer restrictions, registration rights and certain liquidated damages provisions relating to the Old Notes do not apply to the New Notes.

The Notes

The New Notes:

will be general obligations of the Issuer;
 
will be secured on a second priority basis, equally and ratably with all obligations of the Issuer under any future Parity Lien Debt, by Liens on all of the assets of the Issuer other than the Excluded Assets, subject to the Liens securing the Issuer’s obligations under the Credit Agreement and any other Priority Lien Debt and other Permitted Prior Liens;
 
will be effectively junior, to the extent of the value of the Collateral, to the Issuer’s obligations under the Credit Agreement and any other Priority Lien Debt, which will be secured on a first priority basis by the same assets of the Issuer that secure the notes;
 
will be effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of the Issuer subject to those Permitted Prior Liens;
 
will be pari passu in right of payment with all other senior Indebtedness of the Issuer, including Indebtedness under the Credit Agreement;
 
will be senior in right of payment to any future subordinated Indebtedness of the Issuer, if any; and
 
will be guaranteed by the Guarantors.

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The Note Guarantees

Each guarantee of the notes:

will be general obligations of each Guarantor;
 
will be secured on a second priority basis, equally and ratably with all obligations of that Guarantor under any other future Parity Lien Debt, by Liens on all of the assets of that Guarantor other than the Excluded Assets, subject to the Liens securing that Guarantor’s guarantee of the Credit Agreement obligations and any other Priority Lien Debt and obligations related to other Permitted Prior Liens;
 
will be effectively junior, to the extent of the value of the Collateral, to that Guarantor’s guarantee of the Credit Agreement and any other Priority Lien Debt, which will be secured on a first priority basis by the same assets of that Guarantor that secure the notes;
 
will be effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of that Guarantor subject to those Permitted Prior Liens;
 
will be pari passu in right of payment with all other senior Indebtedness of that Guarantor, including its guarantee of Indebtedness under the Credit Agreement; and
 
will be senior in right of payment to any future subordinated Indebtedness of that Guarantor, if any.

As of the date of the indenture, all of our Subsidiaries were Restricted Subsidiaries. However, so long as we satisfy the conditions described in the definition of “Unrestricted Subsidiary,” we will be permitted to designate current or future Subsidiaries as “Unrestricted” Subsidiaries that are not subject to the restrictive covenants included in the indenture.

Pursuant to the indenture, the Issuer will be permitted to designate additional Indebtedness as Priority Lien Debt, subject to the Priority Lien Cap. The Issuer also will be permitted to incur additional Indebtedness as Parity Lien Debt subject to the covenants described below under “Covenants — Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and “Covenants — Liens.” As of June 30, 2005, the Issuer had $90.0 million of Priority Lien Debt and $275.0 million of Parity Lien Debt outstanding. Since June 30, 2005, we have repaid $25.0 million of our term loan, reducing the Priority Lien Debt outstanding.

Principal, Maturity and Interest

The Issuer will issue $275.0 million in aggregate principal amount of notes in this offering. The Issuer may issue additional notes under the indenture from time to time after this offering. Any issuance of additional notes is subject to all of the covenants in the indenture, including the covenant described below under the heading “— Certain Covenants — Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock.” The notes and any additional notes subsequently issued under the indenture will be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. The Issuer will issue notes in denominations of $1,000 and integral multiples of $1,000. The notes will mature on February 15, 2012.

Interest on the notes will accrue at a rate equal to the LIBOR Rate plus 4.25%. The LIBOR Rate will be reset quarterly. The LIBOR Rate for the current quarterly period ending on November 15, 2005 will be 8.04%. Interest on the New Notes will be payable quarterly in arrears on February 15, May 15, August 15 and November 15, commencing on November 15, 2005. The Issuer will make each interest payment to the holders of record on the February 1, May 1, August 1 and November 1 immediately preceding the next interest payment date. Interest on overdue principal and interest will accrue at a rate that is 1% higher than the then applicable interest rate on the notes.

Interest on the notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year


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comprised of twelve 30-day months. In no event will the interest rate on the notes be higher than the maximum rate permitted by law, if any.

Methods of Receiving Payments on the New Notes

If a holder of New Notes has given wire transfer instructions to the Issuer, the Issuer will pay all principal, interest and premium on that holder’s New Notes in accordance with those instructions. All other payments on the New Notes will be made at the office or agency of the paying agent and registrar unless the Issuer elects to make interest payments by check mailed to the noteholders at their address set forth in the register of holders.

Paying Agent and Registrar for the New Notes

The trustee will initially act as paying agent and registrar. The Issuer may change the paying agent or registrar without prior notice to the holders of the New Notes, and the Issuer or any of its Subsidiaries may act as paying agent or registrar.

Transfer and Exchange

A holder may transfer or exchange New Notes in accordance with the provisions of the indenture. The registrar and the trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents in connection with a transfer of New Notes. Holders will be required to pay all taxes due on transfer. The Issuer will not be required to transfer or exchange any New Note selected for redemption. Also, the Issuer will not be required to transfer or exchange any New Note for a period of 15 days before a selection of New Notes to be redeemed.

Note Guarantees

The New Notes will be guaranteed by each of the Issuer’s current and future Domestic Restricted Subsidiaries. These Note Guarantees will be joint and several obligations of the Guarantors. The obligations of each Guarantor under its Note Guarantee will be limited as necessary to try to prevent that Note Guarantee from being unenforceable under applicable law. See “Risk factors— Fraudulent Conveyance and Similar Laws May Adversely Affect the Validity and Enforceability of the Guarantees.” A Guarantor may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another Person, other than the Issuer or another Guarantor, unless:

  (1) immediately after giving effect to that transaction, no Default or Event of Default exists; and

     (2)     either:

  (a) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger assumes all the obligations of that Guarantor under the indenture, its Note Guarantee and the registration rights agreement pursuant to a supplemental indenture and appropriate security documents satisfactory to the trustee; or
 
  (b) the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the indenture.

The Note Guarantee of a Guarantor will be released:

  (1) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such transaction) the Issuer or a Restricted Subsidiary of the Issuer, if the sale or other disposition does not violate the “Asset Sale” provisions of the indenture;

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  (2) in connection with any sale or other disposition of all of the Capital Stock of that Guarantor (or of that Guarantor’s direct or indirect parent company) to a Person that is not (either before or after giving effect to such transaction) the Issuer or a Restricted Subsidiary of the Issuer, if the sale or other disposition does not violate the “Asset Sale” provisions of the indenture;
 
  (3) if the Issuer designates any Restricted Subsidiary that is a Guarantor to be an Unrestricted Subsidiary in accordance with the applicable provisions of the indenture; or
 
  (4) upon legal defeasance or satisfaction and discharge of the indenture as provided below under the headings “—Legal Defeasance and Covenant Defeasance” and “—Satisfaction and Discharge.”

See “—Repurchase at the Option of Holders— Asset Sales.”

Security

The obligations of the Issuer with respect to the New Notes, the obligations of the Guarantors under the Note Guarantees, all other Parity Lien Obligations and the performance of all other obligations of the Issuer, the Guarantors and the Issuer’s other Restricted Subsidiaries under the Note Documents will be secured equally and ratably by second priority Liens in the Collateral granted to the collateral trustee for the benefit of the holders of the Parity Lien Obligations. These Liens will be junior in priority to the Liens securing Priority Lien Obligations and to all other Permitted Prior Liens. The Liens securing Priority Lien Obligations will also be granted to the collateral trustee for the benefit of the holders of the Priority Lien Obligations. The Collateral comprises all of the assets of the Issuer and the other Pledgors, other than the Excluded Assets.

Collateral Trust Agreement

On the date of the indenture, the Issuer and the other Pledgors entered into a collateral trust agreement with the collateral trustee and each other Secured Debt Representative. The collateral trust agreement sets forth the terms on which the collateral trustee will receive, hold, administer, maintain, enforce and distribute the proceeds of all Liens upon any property of the Issuer or any other Pledgor at any time held by it, in trust for the benefit of the present and future holders of the Secured Obligations.

Collateral Trustee

UBS AG, Stamford Branch has been appointed to serve as the collateral trustee for the benefit of the holders of all Parity Lien Obligations outstanding from time to time, including the notes, and UBS AG, Stamford Branch has also been appointed to serve as collateral trustee for the benefit of the holders of all Priority Lien Obligations outstanding from time to time.

The collateral trustee will hold (directly or through co-trustees or agents), and will be entitled to enforce, all Liens on the Collateral created by the security documents.

Except as provided in the collateral trust agreement or as directed by an Act of Required Debtholders in accordance with the collateral trust agreement, the collateral trustee will not be obligated:

  (1) to act upon directions purported to be delivered to it by any Person;
 
  (2) to foreclose upon or otherwise enforce any Lien; or
 
  (3) to take any other action whatsoever with regard to any or all of the security documents, the Liens created thereby or the Collateral.

The Issuer will deliver to each Secured Debt Representative copies of all security documents delivered to the collateral trustee.


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Enforcement of Liens

If the collateral trustee at any time receives written notice that any event has occurred that constitutes a default under any Secured Debt Document entitling the collateral trustee to foreclose upon, collect or otherwise enforce its Liens thereunder, it will promptly deliver written notice thereof to each Secured Debt Representative. Thereafter, the collateral trustee may await direction by an Act of Required Debtholders and will act, or decline to act, as directed by an Act of Required Debtholders, in the exercise and enforcement of the collateral trustee’s interests, rights, powers and remedies in respect of the Collateral or under the security documents or applicable law and, following the initiation of such exercise of remedies, the collateral trustee will act, or decline to act, with respect to the manner of such exercise of remedies as directed by an Act of Required Debtholders. Unless it has been directed to the contrary by an Act of Required Debtholders, the collateral trustee in any event may (but will not be obligated to) take or refrain from taking such action with respect to any default under any Secured Debt Document as it may deem advisable and in the best interest of the holders of Secured Obligations.

Restrictions on Enforcement of Parity Liens

Until the Discharge of Priority Lien Obligations, the holders of loans made under the Credit Agreement and other Priority Lien Obligations will have, subject to the exceptions set forth below in clauses (1) through (4) and the provisions described below under the heading “—Provisions of the Indenture Relating to Security— Relative Rights,” and subject to the rights of the holders of Permitted Prior Liens, the exclusive right to authorize and direct the collateral trustee with respect to the security documents and the Collateral including, without limitation, the exclusive right to authorize or direct the collateral trustee to enforce, collect or realize on any Collateral or exercise any other right or remedy with respect to the Collateral and neither the trustee nor the holders of notes or other Parity Lien Obligations may authorize or direct the collateral trustee with respect to such matters. Notwithstanding the foregoing, the trustee and the holders of notes (together with any other holder of a Parity Lien Obligation) may, subject to the rights of the holders of other Permitted Prior Liens, direct the collateral trustee:

  (1) without any condition or restriction whatsoever, at any time after the Discharge of Priority Lien Obligations;
 
  (2) as necessary to redeem any Collateral in a creditor’s redemption permitted by law or to deliver any notice or demand necessary to enforce (subject to the prior Discharge of Priority Lien Obligations) any right to claim, take or receive proceeds of Collateral remaining after the Discharge of Priority Lien Obligations in the event of foreclosure or other enforcement of any Permitted Prior Lien;
 
  (3) as necessary to perfect or establish the priority (subject to Priority Liens and other Permitted Prior Liens) of the Parity Liens upon any Collateral; provided that, the trustee and the holders of Parity Lien Obligations may not require the collateral trustee to take any action to perfect any Collateral through possession or control other than the collateral trustee agreeing pursuant to the collateral trust agreement that the collateral trustee, as agent for the benefit of the holders of Priority Lien Obligations, agrees to act as agent for the benefit of the holders of Parity Lien Obligations; or
 
  (4) as necessary to create, prove, preserve or protect (but not enforce) the Parity Liens upon any Collateral.

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Subject to the provisions described below under the heading “—Provisions of the Indenture Relating to Security— Relative Rights,” until the Discharge of Priority Lien Obligations, none of the holders of notes or other Parity Lien Obligations or any Parity Lien Representative will:

  (1) request judicial relief, in an insolvency or liquidation proceeding or in any other court, that would hinder, delay, limit or prohibit the lawful exercise or enforcement of any right or remedy otherwise available to the holders of Priority Lien Obligations in respect of the Priority Liens or that would limit, invalidate, avoid or set aside any Priority Lien or subordinate the Priority Liens to the Parity Liens or grant the Parity Liens equal ranking to the Priority Liens;
 
  (2) oppose or otherwise contest any motion for relief from the automatic stay or from any injunction against foreclosure or enforcement of Priority Liens made by any holder of Priority Lien Obligations or any Priority Lien Representative in any insolvency or liquidation proceedings;
 
  (3) oppose or otherwise contest any lawful exercise by any holder of Priority Lien Obligations or any Priority Lien Representative of the right to credit bid Priority Lien Debt at any sale in foreclosure of Priority Liens;
 
  (4) oppose or otherwise contest any other request for judicial relief made in any court by any holder of Priority Lien Obligations or any Priority Lien Representative relating to the lawful enforcement of any Priority Lien; or
 
  (5) challenge the validity, enforceability, perfection or priority of the Priority Liens.

Notwithstanding the foregoing, both before and during an insolvency or liquidation proceeding, the holders of notes and other Parity Lien Obligations and the Parity Lien Representatives may take any actions and exercise any and all rights that would be available to a holder of unsecured claims, including, without limitation, the commencement of an insolvency or liquidation proceeding against the Issuer or any other Pledgor in accordance with applicable law; provided that, by accepting a note, each holder of notes will agree not to take any of the actions prohibited under clauses (1) through (5) of the preceding paragraph or oppose or contest any order that it has agreed not to oppose or contest under the provisions described below under the heading “—Insolvency or Liquidation Proceedings.”

At any time prior to the Discharge of Priority Lien Obligations and after (a) the commencement of any insolvency or liquidation proceeding in respect of the Issuer or any other Pledgor or (b) the collateral trustee and each Parity Lien Representative have received written notice from any Priority Lien Representative at the direction of an Act of Required Debtholders stating that (i) any Series of Priority Lien Debt has become due and payable in full (whether at maturity, upon acceleration or otherwise) or (ii) the holders of Priority Liens securing one or more Series of Priority Lien Debt have become entitled under any Priority Lien Documents to and have stated the intent to enforce any or all of the Priority Liens by reason of a default under such Priority Lien Documents, no payment of money (or the equivalent of money) will be made from the proceeds of Collateral by the Issuer or any other Pledgor to the collateral trustee (in its capacity as agent for the holders of Parity Lien Obligations), any Parity Lien Representative, any holder of notes or any other holder of Parity Lien Obligations (including, without limitation, payments and prepayments made for application to Parity Lien Obligations and all other payments and deposits made pursuant to any provision of the indenture, the notes, the Guarantees or any other Parity Lien Document).

Subject to the provisions described below under the heading “—Provisions of the Indenture Relating to Security— Relative Rights,” all proceeds of Collateral received by the collateral trustee (in its capacity as agent for the holders of Parity Lien Obligations), any Parity Lien Representative, any holder of notes or other Parity Lien Obligations in violation of the immediately preceding paragraph will be held by the collateral trustee (in its capacity as agent for the holders of Parity Lien Obligations), the applicable Parity Lien Representative or the applicable holder of Parity Lien Obligations for the account of the holders of


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Priority Liens and remitted to any Priority Lien Representative upon demand by such Priority Lien Representative. The Parity Liens will remain attached to and, subject to the provisions described under the heading “—Provisions of the Indenture Relating to Security— Ranking of Parity Liens,” enforceable against all proceeds so held or remitted. All proceeds of Collateral received by the collateral trustee (in its capacity as agent for the holders of Parity Lien Obligations), any Parity Lien Representative or any holder of notes or other Parity Lien Obligations not in violation of the immediately preceding paragraph will be received by the collateral trustee (in its capacity as agent for the holders of Parity Lien Obligations), such Parity Lien Representative or such holder of Parity Lien Obligations free from the Priority Liens and all other Liens except the Parity Liens.

Waiver of Right of Marshalling

The collateral trust agreement will provide that, prior to the Discharge of Priority Lien Obligations, the holders of notes and other Parity Lien Obligations, each Parity Lien Representative and the collateral trustee (in its capacity as agent for the holders of Parity Lien Obligations) may not assert or enforce any right of marshalling accorded to a junior lienholder, as against the holders of Priority Liens (in their capacity as priority lienholders). Following the Discharge of Priority Lien Obligations, the holders of Parity Lien Obligations and any Parity Lien Representative may assert their right under the Uniform Commercial Code or otherwise to any proceeds remaining following a sale or other disposition of Collateral by, or on behalf of, the holders of Priority Lien Obligations.

Insolvency or Liquidation Proceedings

If in any insolvency or liquidation proceeding and prior to the Discharge of Priority Lien Obligations, the holders of Priority Lien Obligations by an Act of Required Debtholders consent to any order:

  (1) for use of cash collateral;
 
  (2) approving a debtor-in-possession financing secured by a Lien that is senior to or on a parity with all Priority Liens upon any property of the estate in such insolvency or liquidation proceeding;
 
  (3) granting any relief on account of Priority Lien Obligations as adequate protection (or its equivalent) for the benefit of the holders of Priority Lien Obligations in the collateral subject to Priority Liens; or
 
  (4) relating to a sale of assets of the Issuer or any other Pledgor that provides, to the extent the assets sold are to be free and clear of Liens, that all Priority Liens and Parity Liens will attach to the proceeds of the sale;

then, the holders of notes and other Parity Lien Obligations, in their capacity as holders of secured claims, and each Parity Lien Representative will not oppose or otherwise contest the entry of such order, so long as none of the holders of Priority Lien Obligations or any Priority Lien Representative in any respect opposes or otherwise contests any request made by the holders of notes or other Parity Lien Obligations or a Parity Lien Representative for the grant to the collateral trustee, for the benefit of the holders of notes and other Parity Lien Obligations, of a junior Lien upon any property on which a Lien is (or is to be) granted under such order to secure the Priority Lien Obligations, co-extensive in all respects with, but subordinated (as set forth herein under the heading “—Provisions of the Indenture Relating to Security— Ranking of Parity Liens”) to, such Lien and all Priority Liens on such property.

Notwithstanding the foregoing, both before and during an insolvency or liquidation proceeding, the holders of notes and other Parity Lien Obligations and the Parity Lien Representatives may take any actions and exercise any and all rights that would be available to a holder of unsecured claims, including, without limitation, the commencement of insolvency or liquidation proceedings against the Issuer or any other Pledgor in accordance with applicable law; provided that, by accepting a note, each holder of notes


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will agree not to take any of the actions prohibited under clauses (1) through (5) of the second paragraph of the provisions described above under the heading “—Restrictions on Enforcement of Parity Liens” or oppose or contest any order that it has agreed not to oppose or contest under clauses (1) through (4) of the preceding paragraph.

The holders of notes or other Parity Lien Obligations or any Parity Lien Representative will not file or prosecute in any insolvency or liquidation proceeding any motion for adequate protection (or any comparable request for relief) based upon their interest in the Collateral under the Parity Liens, except that:

  (1) they may freely seek and obtain relief: (a) granting a junior Lien co-extensive in all respects with, but subordinated (as set forth herein under the heading “—Provisions of the Indenture Relating to Security— Ranking of Parity Liens”) to, all Liens granted in the insolvency or liquidation proceeding to, or for the benefit of, the holders of Priority Lien Obligations; or (b) in connection with the confirmation of any plan of reorganization or similar dispositive restructuring plan; and
 
  (2) they may freely seek and obtain any relief upon a motion for adequate protection (or any comparable relief), without any condition or restriction whatsoever, at any time after the Discharge of Priority Lien Obligations.

Order of Application

The collateral trust agreement will provide that if any Collateral is sold or otherwise realized upon by the collateral trustee in connection with any foreclosure, collection or other enforcement of Liens granted to the collateral trustee in the security documents, the proceeds received by the collateral trustee from such foreclosure, collection or other enforcement will be distributed by the collateral trustee in the following order of application:

FIRST, to the payment of all amounts payable under the collateral trust agreement on account of the collateral trustee’s and the indenture trustee’s fees and any reasonable legal fees, costs and expenses or other liabilities of any kind incurred by the collateral trustee, the indenture trustee or any co-trustee or agent of the collateral trustee in connection with any security document;

SECOND, to the repayment of Indebtedness and other Obligations, other than Secured Debt, secured by a Permitted Prior Lien on the Collateral sold or realized upon;

THIRD, to the respective Priority Lien Representatives for application to the payment of all outstanding Priority Lien Debt and any other Priority Lien Obligations that are then due and payable in such order as may be provided in the Priority Lien Documents (and if not so provided therein, shall be payable pro rata) in an amount sufficient to pay in full in cash all outstanding Priority Lien Debt and all other Priority Lien Obligations that are then due and payable (including all interest accrued thereon after the commencement of any insolvency or liquidation proceeding at the rate, including any applicable post-default rate, specified in the Priority Lien Documents, even if such interest is not enforceable, allowable or allowed as a claim in such proceeding, and including the discharge, cash collateralization (at the lower of (1) 105% of the aggregate undrawn amount and (2) the percentage of the aggregate undrawn amount required for release of Liens under the terms of the applicable Priority Lien Document) of all outstanding letters of credit constituting Priority Lien Debt) or collateralization with a letter of credit in form and substance, and from a financial institution, satisfactory to the respective Priority Lien Representatives (such letter of credit to have a face amount equal to the lower of (1) 105% of the aggregate undrawn amount and (2) the percentage of the aggregate undrawn amount required for release of Liens under the terms of the applicable Priority Lien Document);

FOURTH, to the respective Parity Lien Representatives for application to the payment of all outstanding Parity Lien Debt and any other Parity Lien Obligations that are then due and payable in such order as may


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be provided in the Parity Lien Documents (and if not so provided therein, shall be payable pro rata) in an amount sufficient to pay in full in cash all outstanding Parity Lien Debt and all other Parity Lien Obligations that are then due and payable (including, to the extent legally permitted, all interest accrued thereon after the commencement of any insolvency or liquidation proceeding at the rate, including any applicable post-default rate, specified in the Parity Lien Documents, even if such interest is not enforceable, allowable or allowed as a claim in such proceeding, and including the discharge, cash collateralization (at the lower of (1) 105% of the aggregate undrawn amount and (2) the percentage of the aggregate undrawn amount required for release of Liens under the terms of the applicable Parity Lien Document) of all outstanding letters of credit, if any, constituting Parity Lien Debt) or collateralization with a letter of credit in form and substance, and from a financial institution, satisfactory to the respective Parity Lien Representatives (such letter of credit to have a face amount equal to the lower of (1) 105% of the aggregate undrawn amount and (2) the percentage of the aggregate undrawn amount required for release of Liens under the terms of the applicable Parity Lien Document); and

FIFTH, any surplus remaining after the payment in full in cash of the amounts described in the preceding clauses will be paid to the Issuer or the applicable Pledgor, as the case may be, its successors or assigns, or as a court of competent jurisdiction may direct.

If any Parity Lien Representative or any holder of a Parity Lien Obligation collects or receives any proceeds of such foreclosure, collection or other enforcement that should have been applied to the payment of the Priority Lien Obligations in accordance with the paragraph above, whether after the commencement of an insolvency or liquidation proceeding or otherwise, such Parity Lien Representative or such holder of a Parity Lien Obligation, as the case may be, will forthwith deliver the same to the collateral trustee, for the account of the holders of the Priority Lien Obligations and other Obligations secured by a Permitted Prior Lien, to be applied in accordance with the provisions set forth above under this heading “—Order of Application.” Until so delivered, such proceeds will be held by that Parity Lien Representative or that holder of a Parity Lien Obligation, as the case may be, for the benefit of the holders of the Priority Lien Obligations and other Obligations secured by a Permitted Prior Lien.

The provisions set forth above under this heading “—Order of Application” are intended for the benefit of, and will be enforceable as a third party beneficiary by, each present and future holder of Secured Obligations, each present and future Secured Debt Representative, and the collateral trustee as holder of Priority Liens and Parity Liens. The Secured Debt Representative of each future Series of Secured Debt will be required to deliver a Lien Sharing and Priority Confirmation to the collateral trustee and each other Secured Debt Representative at the time of incurrence of such Series of Secured Debt.

Release of Liens on Collateral

The collateral trust agreement will provide that the collateral trustee’s Liens on the Collateral will be released:

  (1) in whole, upon (a) payment in full and discharge of all outstanding Secured Debt and all other Secured Obligations that are outstanding, due and payable at the time all of the Secured Debt is paid in full and discharged and (b) termination or expiration of all commitments to extend credit under all Secured Debt Documents and the cancellation or termination, cash collateralization (at the lower of (1) 105% of the aggregate undrawn amount and (2) the percentage of the aggregate undrawn amount required for release of Liens under the terms of the applicable Secured Debt Documents) or collateralization with a letter of credit in form and substance, and from a financial institution, satisfactory to the respective Secured Debt Representatives (such letter of credit to have a face amount equal to the lower of (1) 105% of the aggregate undrawn amount and (2) the percentage of the aggregate undrawn amount required for release of Liens under the

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  terms of the applicable Secured Debt Document) of all outstanding letters of credit issued pursuant to any Secured Debt Documents;
 
  (2) as to any Collateral that is sold, transferred or otherwise disposed of by the Issuer or any other Pledgor to a Person that is not (either before or after such sale, transfer or disposition) the Issuer or any Guarantor in a transaction or other circumstance that complies with the “Asset Sale” provisions of the indenture and is permitted by all of the other Secured Debt Documents, at the time of such sale, transfer or other disposition or to the extent of the interest sold, transferred or otherwise disposed of; provided that the collateral trustee’s Liens upon the Collateral will not be released if the sale or disposition is subject to the covenant described below under the heading “—Certain Covenants— Merger, Consolidation or Sale of Assets;”
 
  (3) as to a release of less than all or substantially all of the Collateral, if consent to the release of all Priority Liens on such Collateral has been given by an Act of Required Debtholders; and
 
  (4) as to a release of all or substantially all of the Collateral, if (a) consent to the release of that Collateral has been given by the requisite percentage or number of holders of each Series of Secured Debt at the time outstanding as provided for in the applicable Secured Debt Documents, and (b) the Issuer has delivered an officers’ certificate to the collateral trustee certifying that all such necessary consents have been obtained.

The security documents provide that the Liens securing the Secured Debt will extend to the proceeds of any sale of Collateral. As a result, the collateral trustee’s Liens will apply to the proceeds of any such Collateral received in connection with any sale or other disposition of assets described in the preceding paragraph.

Release of Liens in Respect of Notes

The indenture and the collateral trust agreement will provide that the collateral trustee’s Parity Liens upon the Collateral will no longer secure the notes outstanding under the indenture or any other Obligations under the indenture, and the right of the holders of the notes and such Obligations to the benefits and proceeds of the collateral trustee’s Parity Liens on the Collateral will terminate and be discharged:

  (1) upon satisfaction and discharge of the indenture as set forth under the heading “—Satisfaction and Discharge;”
 
  (2) upon a Legal Defeasance or Covenant Defeasance of the notes as set forth under the heading “—Legal Defeasance and Covenant Defeasance;”
 
  (3) upon payment in full and discharge of all notes outstanding under the indenture and all Obligations that are outstanding, due and payable under the indenture at the time the notes are paid in full and discharged; or
 
  (4) in whole or in part, with the consent of the holders of the requisite percentage of notes in accordance with the provisions described below under the heading “Amendment, Supplement and Waiver.”

Amendment of Security Documents

The collateral trust agreement will provide that no amendment or supplement to the provisions of any security document will be effective without the approval of the collateral trustee acting as directed by an Act of Required Debtholders, except that:

  (1) any amendment or supplement that has the effect solely of adding or maintaining Collateral, securing additional Secured Debt that was otherwise permitted by the terms of the Secured Debt

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  Documents to be secured by the Collateral or preserving, perfecting or establishing the priority of the Liens thereon or the rights of the collateral trustee therein will become effective when executed and delivered by the Issuer or any other applicable Pledgor party thereto and the collateral trustee;
 
  (2) no amendment or supplement that reduces, impairs or adversely affects the right of any holder of Secured Obligations:

  (a) to vote its outstanding Secured Debt as to any matter described as subject to an Act of Required Debtholders or direction by the Required Parity Lien Debtholders (or amends the provisions of this clause (2) or the definition of “Act of Required Debtholders” or “Required Parity Lien Debtholders”),
 
  (b) to share in the order of application described above under “—Order of Application” in the proceeds of enforcement of or realization on any Collateral, or

  (c) to require that Liens securing Secured Obligations be released only as set forth in the provisions described above under the heading “—Release of Liens on Collateral,”

  will become effective without the consent of the requisite percentage or number of holders of each Series of Secured Debt so affected under the applicable Secured Debt Document; and

  (3) no amendment or supplement that imposes any obligation upon the collateral trustee or any Secured Debt Representative or adversely affects the rights of the collateral trustee or any Secured Debt Representative, respectively, in its individual capacity as such will become effective without the consent of the collateral trustee or such Secured Debt Representative, respectively.

Any amendment or supplement to the provisions of the security documents that releases Collateral will be effective only in accordance with the requirements set forth in the applicable Secured Debt Document referenced above under the heading “—Release of Liens on Collateral.” Any amendment or supplement that results in the collateral trustee’s Liens upon the Collateral no longer securing the notes and the other Obligations under the indenture may only be effected in accordance with the provisions described above under the heading “—Release of Liens in Respect of Notes.”

The collateral trust agreement will provide that, notwithstanding anything to the contrary under the heading “—Amendment of Security Documents,” but subject to clauses (2) and (3) above:

  (1) any mortgage or other security document that secures Parity Lien Obligations (but not Priority Lien Obligations) may be amended or supplemented with the approval of the collateral trustee acting as directed in writing by the Required Parity Lien Debtholders, unless such amendment or supplement would not be permitted under the terms of the collateral trust agreement or the other Priority Lien Documents; and
 
  (2) any amendment or waiver of, or any consent under, any provision of the collateral trust agreement or any other security document that secures Priority Lien Obligations will apply automatically to any comparable provision of any comparable Parity Lien Document without the consent of or notice to any holder of Parity Lien Obligations and without any action by the Issuer or any other Pledgor or any holder of notes or other Parity Lien Obligations.

Voting

In connection with any matter under the collateral trust agreement requiring a vote of holders of Secured Debt, each Series of Secured Debt will cast its votes in accordance with the Secured Debt Documents governing such Series of Secured Debt. The amount of Secured Debt to be voted by a Series of Secured Debt will equal (1) the aggregate principal amount of Secured Debt held by such Series of Secured Debt


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(including outstanding letters of credit whether or not then available or drawn), plus (2) other than in connection with an exercise of remedies, the aggregate unfunded commitments to extend credit which, when funded, would constitute Indebtedness of such Series of Secured Debt. Following and in accordance with the outcome of the applicable vote under its Secured Debt Documents, the Secured Debt Representative of each Series of Secured Debt will vote the total amount of Secured Debt under that Series as a block in respect of any vote under the collateral trust agreement.

Provisions of the Indenture Relating to Security

Equal and Ratable Sharing of Collateral by Holders of Parity Lien Debt

The indenture will provide that, notwithstanding:

  (1) anything to the contrary contained in the security documents;
 
  (2) the time of incurrence of any Series of Parity Lien Debt;
 
  (3) the order or method of attachment or perfection of any Liens securing any Series of Parity Lien Debt;
 
  (4) the time or order of filing or recording of financing statements, mortgages or other documents filed or recorded to perfect any Lien upon any Collateral;
 
  (5) the time of taking possession or control over any Collateral;
 
  (6) that any Parity Lien may not have been perfected or may be or have become subordinated, by equitable subordination or otherwise, to any other Lien; or
 
  (7) the rules for determining priority under any law governing relative priorities of Liens:

  (a) all Parity Liens granted at any time by the Issuer or any other Pledgor will secure, equally and ratably, all present and future Parity Lien Obligations; and
 
  (b) all proceeds of all Parity Liens granted at any time by the Issuer or any other Pledgor will be allocated and distributed equally and ratably on account of the Parity Lien Debt and other Parity Lien Obligations.

This section is intended for the benefit of, and will be enforceable as a third party beneficiary by, each present and future holder of Parity Lien Obligations, each present and future Parity Lien Representative and the collateral trustee as holder of Parity Liens. The Parity Lien Representative of each future Series of Parity Lien Debt will be required to deliver a Lien Sharing and Priority Confirmation to the collateral trustee and the trustee at the time of incurrence of such Series of Parity Lien Debt.

Ranking of Parity Liens

The indenture will provide that, notwithstanding:

  (1) anything to the contrary contained in the security documents;
 
  (2) the time of incurrence of any Series of Secured Debt;
 
  (3) the order or method of attachment or perfection of any Liens securing any Series of Secured Debt;
 
  (4) the time or order of filing or recording of financing statements, mortgages or other documents filed or recorded to perfect any Lien upon any Collateral;
 
  (5) the time of taking possession or control over any Collateral;

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  (6) that any Priority Lien may not have been perfected or may be or have become subordinated, by equitable subordination or otherwise, to any other Lien; or
 
  (7) the rules for determining priority under any law governing relative priorities of Liens,

all Parity Liens at any time granted by the Issuer or any other Pledgor will be subject and subordinate to all Priority Liens securing (i) Priority Lien Debt up to the Priority Lien Cap and (ii) all other Obligations in respect of Priority Lien Debt.

The provisions under the heading “—Ranking of Parity Liens” are intended for the benefit of, and will be enforceable as a third party beneficiary by, each present and future holder of Priority Lien Obligations, each present and future Priority Lien Representatives and the collateral trustee as holder of Priority Liens. No other Person will be entitled to rely on, have the benefit of or enforce those provisions. The Parity Lien Representative of each future Series of Parity Lien Debt will be required to deliver a Lien Sharing and Priority Confirmation to the collateral trustee and each Priority Lien Representative at the time of incurrence of such Series of Parity Lien Debt.

In addition, the provisions under the heading “—Ranking of Parity Liens” are intended solely to set forth the relative ranking, as Liens, of the Liens securing Parity Lien Debt as against the Priority Liens. Neither the notes nor any other Parity Lien Obligations nor the exercise or enforcement of any right or remedy for the payment or collection thereof are intended to be, or will ever be by reason of the foregoing provision, in any respect subordinated, deferred, postponed, restricted or prejudiced.

Relative Rights

Nothing in the Note Documents will:

  (1) impair, as between the Issuer and the holders of the notes, the obligation of the Issuer to pay principal of, premium and interest on the notes in accordance with their terms or any other obligation of the Issuer or any other Pledgor;
 
  (2) affect the relative rights of holders of notes as against any other creditors of the Issuer or any other Pledgor (other than holders of Priority Liens, Permitted Prior Liens or other Parity Liens);
 
  (3) restrict the right of any holder of notes to sue for payments that are then due and owing (but not enforce any judgment in respect thereof against any Collateral to the extent specifically prohibited by the provisions described above under the headings “—Collateral Trust Agreement— Restrictions on Enforcement of Parity Liens” or “—Collateral Trust Agreement— Insolvency and Liquidation Proceedings”);
 
  (4) restrict or prevent any holder of notes or other Parity Lien Obligations, the collateral trustee or any Parity Lien Representative from exercising any of its rights or remedies upon a Default or Event of Default not specifically restricted or prohibited by (a) “—Collateral Trust Agreement— Restrictions on Enforcement of Parity Liens” or (b) “—Collateral Trust Agreement— Insolvency and Liquidation Proceedings”; or
 
  (5) restrict or prevent any holder of notes or other Parity Lien Obligations, the collateral trustee or any Parity Lien Representative from taking any lawful action in an insolvency or liquidation proceeding not specifically restricted or prohibited by (a) “—Collateral Trust Agreement— Restrictions on Enforcement of Parity Liens” or (b) “—Collateral Trust Agreement— Insolvency and Liquidation Proceedings.”

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Compliance with Trust Indenture Act

The indenture will provide that the Issuer will comply with the provisions of TIA § 314.

To the extent applicable, the Issuer will cause TIA §313(b), relating to reports, and TIA § 314(d), relating to the release of property or securities subject to the Lien of the security documents, to be complied with. Any certificate or opinion required by TIA § 314(d) may be made by an officer of the Issuer except in cases where TIA § 314(d) requires that such certificate or opinion be made by an independent Person, which Person will be an independent engineer, appraiser or other expert selected by or reasonably satisfactory to the trustee. Notwithstanding anything to the contrary in this paragraph, the Issuer will not be required to comply with all or any portion of TIA § 314(d) if it determines, in good faith based on advice of counsel, that under the terms of TIA § 314(d) and/or any interpretation or guidance as to the meaning thereof of the SEC and its staff, including “no action” letters or exemptive orders, all or any portion of TIA § 314(d) is inapplicable to one or a series of released Collateral.

Further Assurances; Insurance

The indenture and the security documents will provide that the Issuer and each of the other Pledgors will do or cause to be done all acts and things that may be required, or that the collateral trustee from time to time may reasonably request, to assure and confirm that the collateral trustee holds, for the benefit of the holders of Secured Obligations, duly created and enforceable and perfected Liens upon the Collateral (including any property or assets that are acquired or otherwise become Collateral after the notes are issued), in each case, as contemplated by, and with the Lien priority required under, the Secured Debt Documents.

Upon the reasonable request of the collateral trustee or any Secured Debt Representative at any time and from time to time, the Issuer and each of the other Pledgors will promptly execute, acknowledge and deliver such security documents, instruments, certificates, notices and other documents, and take such other actions as shall be reasonably required, or that the collateral trustee may reasonably request, to create, perfect, protect, assure or enforce the Liens and benefits intended to be conferred, in each case as contemplated by the Secured Debt Documents for the benefit of the holders of Secured Obligations.

At any time when no Priority Lien Documents are in effect, the Issuer and the other Pledgors will:

  (1) keep their properties adequately insured at all times by financially sound and reputable insurers;
 
  (2) maintain such other insurance, to such extent and against such risks (and with such deductibles, retentions and exclusions), including fire and other risks insured against by extended coverage and coverage for acts of terrorism, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by them;
 
  (3) maintain such other insurance as may be required by law;
 
  (4) maintain title insurance on all real property Collateral insuring the collateral trustee’s Lien on that property, subject only to Permitted Prior Liens and other exceptions to title reasonably approved by the collateral trustee; provided that title insurance need only be maintained on any particular parcel of real property if and to the extent title insurance is maintained in respect of Priority Liens on that property; and
 
  (5) maintain such other insurance as may be required by the security documents.

Upon the request of the collateral trustee, the Issuer and the other Pledgors will furnish to the collateral trustee full information as to their property and liability insurance carriers. The collateral trustee, as agent


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for the holders of Secured Obligations, as a class, will be named as additional insured on all insurance policies of the Issuer and the other Pledgors and the collateral trustee will be named as loss payee, with 30 days’ notice of cancellation or, if provided to the Issuer, notice of material change, on all property and casualty insurance policies of the Issuer and the other Pledgors.

Optional Redemption

At any time prior to February 15, 2007, the Issuer may on any one or more occasions redeem up to 35% of the aggregate principal amount of notes issued under the indenture (including any additional notes issued after the date of the indenture) at a redemption price of 100% of the principal amount thereof, plus a premium equal to 100% of the principal amount of the notes multiplied by the sum of the LIBOR Rate in effect on the date of such redemption notice plus 4.25%, plus accrued and unpaid interest, to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided that:

  (1) at least 65% of the aggregate principal amount of notes originally issued under the indenture (excluding notes held by the Issuer and its Subsidiaries) remains outstanding immediately after the occurrence of such redemption; and
 
  (2) the redemption occurs within 90 days of the date of the closing of such Equity Offering.

On or after February 15, 2007, the Issuer may redeem all or a part of the notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, on the notes redeemed, to the applicable redemption date, if redeemed during the twelve-month period beginning on February 15 of the years indicated below, subject to the rights of holders of notes on the relevant record date to receive interest on the relevant interest payment date:

         
Year Percentage

2007
    102%  
2008
    101%  
2009 and thereafter
    100%  

Unless the Issuer defaults in the payment of the redemption price, interest will cease to accrue on the notes or portions thereof called for redemption on the applicable redemption date.

At any time prior to February 15, 2007, the Issuer may also redeem all or a part of the notes, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each holder’s registered address, at a redemption price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest, to the date of redemption (the “Redemption Date”), subject to the rights of holders of notes on the relevant record date to receive interest due on the relevant interest payment date.

Mandatory Redemption

The Issuer is not required to make mandatory redemption or sinking fund payments with respect to the notes.

Repurchase at the Option of Holders

Change of Control

If a Change of Control occurs, each holder of notes will have the right to require the Issuer to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of that holder’s notes pursuant to a Change of Control Offer on the terms set forth in the indenture. In the Change of Control Offer, the Issuer


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will offer a Change of Control Payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest, on the notes repurchased to the date of purchase, subject to the rights of holders of notes on the relevant record date to receive interest due on the relevant interest payment date. Within ten days following any Change of Control, the Issuer will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the Change of Control Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the indenture, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Change of Control provisions of the indenture by virtue of such compliance.

On the Change of Control Payment Date, the Issuer will, to the extent lawful:

  (1) accept for payment all notes or portions of notes properly tendered pursuant to the Change of Control Offer;
 
  (2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all notes or portions of notes properly tendered; and
 
  (3) deliver or cause to be delivered to the trustee the notes properly accepted together with an officers’ certificate stating the aggregate principal amount of notes or portions of notes being purchased by the Issuer.

The paying agent will promptly mail to each holder of notes properly tendered the Change of Control Payment for such notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new note equal in principal amount to any unpurchased portion of the notes surrendered, if any. The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.

The provisions described above that require the Issuer to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of the indenture are applicable. Except as described above with respect to a Change of Control, the indenture does not contain provisions that permit the holders of the notes to require that the Issuer repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction.

The Issuer will not be required to make a Change of Control Offer upon a Change of Control if (1) a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by the Issuer and purchases all notes properly tendered and not withdrawn under the Change of Control Offer, or (2) notice of redemption has been given pursuant to the indenture as described above under the heading “—Optional Redemption,” unless and until there is a default in payment of the applicable redemption price.

The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of “all or substantially all” of the properties or assets of the Issuer and its Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require the Issuer to repurchase its notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Issuer and its Subsidiaries taken as a whole to another Person or group may be uncertain.


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Asset Sales

The Issuer will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:

  (1) the Issuer (or the Restricted Subsidiary, as the case may be) receives consideration at the time of the Asset Sale at least equal to the Fair Market Value of the assets or Equity Interests issued or sold or otherwise disposed of; and
 
  (2) at least 75% of the consideration received in the Asset Sale by the Issuer or such Restricted Subsidiary is in the form of cash or Cash Equivalents. For purposes of this provision, each of the following will be deemed to be cash:

  (a) any liabilities, as shown on the Issuer’s most recent consolidated balance sheet, of the Issuer or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the notes or any Note Guarantee) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Issuer or such Restricted Subsidiary from further liability;
 
  (b) any securities, notes or other obligations received by the Issuer or any such Restricted Subsidiary from such transferee that are within 180 days, converted by the Issuer or such Restricted Subsidiary into cash or Cash Equivalents, to the extent of the cash received in that conversion; and

  (c) any stock or assets of the kind referred to in clauses (2) or (4) of the next paragraph of this covenant.

Within 365 days after the receipt of any Net Proceeds from an Asset Sale or a Casualty Event, the Issuer (or the applicable Restricted Subsidiary, as the case may be) may apply such Net Proceeds:

  (1) to repay Priority Lien Debt and, if such Priority Lien Debt is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto;
 
  (2) to acquire all or substantially all of the assets of, or any Capital Stock of, a Person engaged in a Permitted Business, if, after giving effect to any such acquisition of Capital Stock, the Permitted Business is or becomes a Restricted Subsidiary of the Issuer;
 
  (3) to make a capital expenditure; or
 
  (4) to acquire other assets that are not classified as current assets under GAAP and that are used or useful in a Permitted Business;

provided, that the application of any Net Proceeds from an Asset Sale that constitutes a Sale of Collateral or from a Casualty Event, in accordance with clauses (2) through (4) of this paragraph shall be used to purchase, acquire or improve assets that would constitute Collateral; and provided, further, that the requirements of clauses (2) through (4) of this paragraph shall be deemed to be satisfied if a binding agreement committing to make the acquisitions or expenditures referenced in such clauses is entered into by the Issuer or its Restricted Subsidiaries within 365 days after receipt of any Net Proceeds and such Net Proceeds are applied in accordance with such agreement; provided, however, that if the Net Proceeds to be applied pursuant to such agreement are not applied within 180 days of the date of such agreement, such Net Proceeds shall be considered Excess Proceeds.

Any Net Proceeds from Asset Sales that are not applied or invested as provided in the second paragraph of this covenant will constitute “Excess Proceeds.” When the aggregate amount of Excess Proceeds exceeds $15.0 million, within five days thereof, the Issuer will make an Asset Sale Offer to all holders of notes and all holders of other Parity Lien Debt containing provisions similar to those set forth in the indenture with


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respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of notes and such other Parity Lien Debt that may be purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of the principal amount plus accrued and unpaid interest to the date of purchase (or, in respect of such Parity Lien Debt, such lesser price, if only, as may be provided for by the terms of such Parity Lien Debt), and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, the Issuer may use those Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of notes and other Parity Lien Debt tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select the notes and such other Parity Lien Debt to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero.

The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sale provisions of the indenture, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Asset Sale provisions of the indenture by virtue of such compliance.

The agreements governing the Issuer’s other Indebtedness contain, and future agreements may contain, prohibitions of certain events, including events that would constitute a Change of Control or an Asset Sale and including repurchases of or other prepayments in respect of the notes. The exercise by the holders of notes of their right to require the Issuer to repurchase the notes upon a Change of Control or an Asset Sale could cause a default under these other agreements, even if the Change of Control or Asset Sale itself does not, due to the financial effect of such repurchases on the Issuer. In the event a Change of Control or Asset Sale occurs at a time when the Issuer is prohibited from purchasing notes, the Issuer could seek the consent of its senior lenders to the purchase of notes or could attempt to refinance the borrowings that contain such prohibition. If the Issuer does not obtain a consent or repay those borrowings, the Issuer will remain prohibited from purchasing notes. In that case, the Issuer’s failure to purchase tendered notes would constitute an Event of Default under the indenture which could, in turn, constitute a default under the other indebtedness. Finally, the Issuer’s ability to pay cash to the holders of notes upon a repurchase may be limited by the Issuer’s then existing financial resources. See “Risk factors — We May Be Unable to Purchase the Notes Upon a Change of Control.”

Selection and Notice

If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption on a pro rata basis unless otherwise required by law or applicable stock exchange requirements.

No notes of $1,000 or less can be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the notes or a satisfaction and discharge of the indenture. Notices of redemption may not be conditional.

If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount of that note that is to be redeemed. A new note in principal amount equal to the unredeemed portion of the original note will be issued in the name of the holder of notes upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of notes called for redemption.


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Certain Covenants

Restricted Payments

The Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:

  (1) declare or pay any dividend or make any other payment or distribution on account of the Issuer’s or any of its Restricted Subsidiaries’ Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Issuer or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Issuer’s or any of its Restricted Subsidiaries’ Equity Interests in their capacity as such (other than dividends, payments or distributions payable in Equity Interests (other than Disqualified Stock) of the Issuer and other than dividends or distributions payable to the Issuer or a Restricted Subsidiary of the Issuer);
 
  (2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Issuer) any Equity Interests of the Issuer or any direct or indirect parent of the Issuer;
 
  (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of the Issuer or any Guarantor that is contractually subordinated to the notes or to any Note Guarantee (excluding any intercompany Indebtedness between or among the Issuer and any of its Restricted Subsidiaries), except a payment of interest or principal at the Stated Maturity thereof; or
 
  (4) make any Restricted Investment

(all such payments and other actions set forth in these clauses (1) through (4) above being collectively referred to as “Restricted Payments”),

unless, at the time of and after giving effect to such Restricted Payment:

  (1) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment;
 
  (2) the Issuer would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the heading “—Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”; and
 
  (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Issuer and its Restricted Subsidiaries since the date of the indenture (excluding Restricted Payments permitted by clauses (2), (3), (4), (6), (8), (9), (10), (11) and (13), and excluding Restricted Payments attributable to proceeds of key-man life insurance, with respect to clause (5), of the next succeeding paragraph), is less than the sum, without duplication, of:

  (a) 50% of the Consolidated Net Income of the Issuer for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the indenture to the end of the Issuer’s most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus
 
  (b) 100% of the aggregate net cash proceeds received by the Issuer since the date of the indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Issuer (other than Disqualified Stock) or from the issue or sale of convertible

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  or exchangeable Disqualified Stock or convertible or exchangeable debt securities of the Issuer that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of the Issuer); plus

  (c) to the extent that any Restricted Investment that was made after the date of the indenture is sold for cash or otherwise liquidated or repaid for cash, the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any); plus

  (d) to the extent that any Unrestricted Subsidiary of the Issuer designated as such after the date of the indenture is redesignated as a Restricted Subsidiary after the date of the indenture, the Fair Market Value of the Issuer’s Investment in such Subsidiary as of the date of such redesignation; plus

  (e) 100% of any dividends received by the Issuer or a Wholly-Owned Restricted Subsidiary of the Issuer that is a Guarantor after the date of the indenture from an Unrestricted Subsidiary of the Issuer, to the extent that such dividends were not otherwise included in the Consolidated Net Income of the Issuer for such period.

With respect to (a) any payments made pursuant to clauses (2), (3), (4), (5) (other than with respect to cash proceeds of key-man life insurance policies) (7) and (12) below, so long as no Default or Event of Default has occurred and is continuing or would be caused by such payments, and (b) any payments made pursuant to clauses (1), (5) (with the cash proceeds of key-man life insurance policies), (6), (8), (9), (10), (11) and (13) below, regardless of whether any Default or Event of Default has occurred and is continuing or would be caused by such payment, the preceding provisions will not prohibit:

  (1) the payment of any dividend or the consummation of any irrevocable redemption within 60 days after the date of declaration of the dividend or giving of the redemption notice, as the case may be, if at the date of declaration or notice, the dividend or redemption payment would have complied with the provisions of the indenture;
 
  (2) the making of any Restricted Payment in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Issuer) of, Equity Interests of the Issuer (other than Disqualified Stock) or from the substantially concurrent contribution of common equity capital to the Issuer; provided that the amount of any such net cash proceeds that are utilized for any such Restricted Payment will be excluded from clause (3)(b) of the preceding paragraph;
 
  (3) the repurchase, redemption, defeasance or other acquisition or retirement for value of Indebtedness of the Issuer or any Guarantor that is contractually subordinated to the notes or to any Note Guarantee with the net cash proceeds from a substantially concurrent incurrence of Permitted Refinancing Indebtedness;
 
  (4) the payment of any dividend (or, in the case of any partnership or limited liability company, any similar distribution) by a Restricted Subsidiary of the Issuer to the holders of its Equity Interests on a pro rata basis;
 
  (5) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Issuer or any Restricted Subsidiary of the Issuer held by any current or former officer, director or employee of the Issuer or any of its Restricted Subsidiaries pursuant to any equity subscription agreement, stock option agreement, shareholders’ agreement or similar agreement or otherwise approved by the Board of Directors; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests in any fiscal year may not exceed the sum of (i) $3.0 million and (ii) the cash proceeds of key-man life insurance policies

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  received in such year by the Issuer and its Restricted Subsidiaries (it being understood, however, that unused amounts permitted to be paid pursuant to this proviso from any fiscal year are available to be carried over to the subsequent fiscal year); provided, further, that the aggregate amount spent pursuant to this clause (5) in any fiscal year in which unused amounts from a prior fiscal year have been carried forward may not exceed the sum of (x) $6.0 million and (y) the unused cash proceeds of such key-man life insurance policies;

    (6) the repurchase of Equity Interests deemed to occur upon the exercise of stock options to the extent such Equity Interests represent a portion of the exercise price of those stock options;
 
    (7) the declaration and payment of regularly scheduled or accrued dividends to holders of any class or series of common Disqualified Stock of the Issuer or any Restricted Subsidiary of the Issuer issued on or after the date of the indenture in accordance with the Fixed Charge Coverage Ratio test described below under the heading “—Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”;
 
    (8) the declaration and payment of regularly scheduled or accrued dividends to holders of any class or series of preferred Disqualified Stock of the Issuer or any Restricted Subsidiary of the Issuer issued on or after the date of the indenture in accordance with the Fixed Charge Coverage Ratio test described below under the heading “—Incurrence of Indebtedness and Issuance of Disqualified Stock