| BlueLinx Holdings Inc |
| ITEM 1A RISK FACTORS Factors Affecting Future Results Our industry is highly cyclical, and prolonged periods of weak demand or excess supply may reduce our net sales and/or margins, which may reduce our net income |
| The building products distribution industry is subject to cyclical market pressures |
| Prices of building products are determined by overall supply and demand in the market for building products |
| Market prices of building products historically have been volatile and cyclical and we have limited ability to control the timing and amount of pricing changes for building products |
| Demand for building products is driven 7 _________________________________________________________________ [57]Table of Contents mainly by factors outside of our control, such as general economic and political conditions, interest rates, the construction, repair and remodeling and industrial markets, weather and population growth |
| The supply of building products fluctuates based on available manufacturing capacity, and excess capacity in the industry can result in significant declines in market prices for those products |
| Our results in some periods have been affected by market volatility, including a reduction in gross profits due to a decline in the resale value of our structural products inventory |
| All of these factors make it difficult to forecast our operating results |
| Our cash flows and capital resources may be insufficient to make required payments on our substantial indebtedness and future indebtedness |
| As of December 31, 2005, advances outstanding under our revolving credit facility were approximately dlra376 million, borrowing availability was approximately dlra219 million and outstanding letters of credit on the facility were approximately dlra7dtta6 million |
| As of February 17, 2006, borrowing availability under the revolving credit facility was approximately dlra158 million |
| We also have a mortgage loan in the amount of dlra165 million |
| Our substantial debt could have important consequences to you |
| For example, it could: • make it difficult for us to satisfy our debt obligations; • make us more vulnerable to general adverse economic and industry conditions; • limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements; • expose us to interest rate fluctuations because the interest rate on the debt under our revolving credit facility is variable; • require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and • place us at a competitive disadvantage compared to competitors that may have proportionately less debt |
| In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control |
| These factors include, among others: • economic and demand factors affecting the building products distribution industry; • pricing pressures; • increased operating costs; • competitive conditions; and • other operating difficulties |
| 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 material assets or operations, obtain additional capital or restructure our debt |
| Obtaining additional capital or restructuring our debt could be accomplished in part, through new or additional borrowings or placements of debt or equity securities |
| There is no assurance that we could obtain additional capital or restructure our debt on terms acceptable to us or at all |
| In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and 8 _________________________________________________________________ [58]Table of Contents the availability of buyers |
| Accordingly, any such sale may not, among other things, be for a sufficient dollar amount |
| Our obligations under the revolving credit facility are secured by a first priority security interest in all of our operating company’s inventories, receivables and proceeds from those items |
| In addition, our mortgage loan is secured by our real property |
| The foregoing encumbrances may limit our ability to dispose of material assets or operations |
| We also may not be able to restructure our indebtedness on favorable economic terms, if at all |
| We may incur substantial additional indebtedness in the future, including under the revolving credit facility |
| Our incurrence of additional indebtedness would intensify the risks described above |
| The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating its business |
| Our revolving credit facility and mortgage loan contain various restrictive covenants and restrictions, including financial covenants customary for asset-based loans that limit our management’s discretion in operating our business |
| In particular, these instruments limit our ability to, among other things: • incur additional debt; • grant liens on assets; • make investments, including capital expenditures; • sell or acquire assets outside the ordinary course of business; • engage in transactions with affiliates; and • make fundamental business changes |
| If we fail to maintain minimum excess availability of dlra40 million under the revolving credit facility, the revolving credit facility requires us to (i) maintain certain financial ratios and (ii) limit our capital expenditures |
| If we fail to comply with the restrictions in the revolving credit facility, the mortgage loan documents or any other current or future financing agreements, a default may allow the creditors under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds |
| We have a limited operating history as a separate company |
| Accordingly, the Division’s historical financial information may not be representative of our results as a separate company |
| On May 7, 2004, we and our operating company acquired the real estate and operating assets of the Division, respectively |
| Therefore, our operating history as a separate company is limited |
| Our business strategy as an independent entity may not be successful on a long-term basis |
| The historical financial information of the Division included in this filing may not necessarily reflect what our results of operations, financial condition and cash flows would have been had we been a separate, independent entity pursuing our own strategies during the periods presented |
| We depend upon a single supplier, Georgia-Pacific, for a significant percentage of our products and have significant purchase commitments under our Supply Agreement with Georgia-Pacific |
| Georgia-Pacific is our largest supplier, accounting for approximately 28prca and approximately 27prca of our purchases during fiscal 2005 and fiscal 2004, respectively |
| Concurrent with the acquisition, we entered into a Master Purchase, Supply & Distribution Agreement with Georgia-Pacific, which is referred to as the Supply Agreement |
| The Supply Agreement has a five-year initial term and remains continuously in effect thereafter unless it is terminated |
| Termination of the Supply Agreement requires two years’ notice, exercisable after year four |
| It may be terminated, including before year five, by Georgia-Pacific upon a 9 _________________________________________________________________ [59]Table of Contents material breach of the agreement by us |
| If Georgia-Pacific does not renew the Supply Agreement or if it discontinues sales of a product, we would experience a product shortage unless and until we obtain a replacement supplier |
| We may not be able to obtain replacement products on favorable economic terms, if at all |
| An inability to replace products on favorable economic terms would adversely impact our net sales and our costs, which in turn could impact our gross profit, net income and cash flows |
| We believe that the economic terms of the Supply Agreement are beneficial to us since they provide us with certain discounts off standard industry pricing indices, certain cash discounts and favorable payment terms |
| While we also believe these terms benefit Georgia-Pacific, Georgia-Pacific could, if it chose, terminate the Supply Agreement as early as May 7, 2010 |
| If it did so and we could not obtain comparable terms from Georgia-Pacific or another vendor thereafter, our operating performance could be impaired by an interruption in the delivery of products and/or an increase in cost to us from sourcing comparable products from other suppliers |
| Under the Supply Agreement, we have substantial minimum purchase volume commitments with respect to a number of products supplied to us |
| Based on 2005 average market prices, our purchase obligations under this agreement are dlra1dtta2 billion for each of the next three years |
| These products account for a majority of our purchases from Georgia-Pacific |
| If we fail or refuse to purchase any products that we are obligated to purchase pursuant to the Supply Agreement, Georgia-Pacific has the right to sell products to third parties and, for certain products, terminate our exclusivity, which could reduce our net sales due to the unavailability of products or our gross profit if we are required to pay higher product prices to other suppliers |
| A reduction in our net sales or gross profit may also reduce our net income and cash flows |
| Our industry is highly fragmented and competitive |
| If we are unable to compete effectively, our net sales and net income will be reduced |
| The building products distribution industry is highly fragmented and competitive and the barriers to entry for local competitors are relatively low |
| Some of our competitors are part of larger companies and therefore have access to greater financial and other resources than us |
| In addition, certain product manufacturers sell and distribute their products directly to customers |
| Additional manufacturers of products distributed by us may elect to sell and distribute directly to end-users in the future or enter into exclusive supply 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 net sales and net income will be reduced |
| Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows |
| Part of our growth strategy includes pursuing acquisitions |
| Any integration process may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including but not limited to: • the loss of key customers of the acquired company; • the incurrence of unexpected expenses and working capital requirements; • a failure of our due diligence process to identify significant issues or contingencies; • difficulties assimilating the operations and personnel of the acquired company; • difficulties effectively integrating the acquired technologies with our current technologies; • our inability to retain key personnel of acquired entities; • failure to maintain the quality of customer service; 10 _________________________________________________________________ [60]Table of Contents • our inability to achieve the financial and strategic goals for the acquired and combined businesses; and • difficulty in maintaining internal controls, procedures and policies |
| Any of the foregoing obstacles, or a combination of them, could increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows |
| We have completed one acquisition, to date, of the assets of California-based hardwood lumber company Lane Stanton Vance (“LSV”), formerly a unit of privately-held Hampton Distribution Companies |
| We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all |
| In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies |
| Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations |
| A significant percentage of our employees are unionized |
| Wage increases or work stoppages by our unionized employees may reduce our results of operations |
| As of February 15, 2006, approximately 1cmam200 of our employees were represented by various labor unions |
| As of February 15, 2006, we had approximately 49 collective bargaining agreements, of which eight, covering 240 total employees, are up for renewal in 2006 |
| We may become subject to material cost increases, or additional work rules imposed by agreements with labor unions |
| The foregoing could increase our selling, general and administrative expenses in absolute terms and/or as a percentage of net sales |
| In addition, work stoppages or other labor disturbances may occur in the future, which could adversely impact our net sales and/or selling, general and administrative expenses |
| All of these factors could negatively impact our net income and cash flows |
| Federal and state transportation regulations could impose substantial costs on us which would reduce our net income |
| We use our own fleet of over 900 trucks and over 1cmam200 trailers to service customers throughout the United States |
| The US Department of Transportation, or DOT, regulates our operations in domestic interstate commerce |
| We are subject to safety requirements governing interstate operations prescribed by the DOT Vehicle dimensions and driver hours of service also remain subject to both federal and state regulation |
| More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service would increase our costs, which, if we are unable to pass these cost increases on to our customers, would reduce our gross margins, increase our selling, general and administrative expenses and reduce our net income |
| Environmental laws impose risks and costs on us |
| Our operations are subject to federal, state, provincial and local laws, rules and regulations governing the protection of the environment, including, but not limited to, those regulating discharges into the air and water, the use, handling and disposal of hazardous or toxic substances, the management of wastes, the cleanup of contamination and the control of noise and odors |
| We have made, and will continue to make, expenditures to comply with these requirements |
| While we believe, based upon current information, that we are in substantial compliance with all applicable environmental laws, rules and regulations, we could be subject to potentially significant fines or penalties for any failure to comply |
| Moreover, under certain environmental laws, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of at real property, may be held liable for the cost to investigate or clean up such real property and for related damages to natural resources |
| We may be subject to liability, including liability for investigation and cleanup costs, if contamination is discovered at one of our current or former warehouse facilities, or at a landfill or other location where we have disposed of, or 11 _________________________________________________________________ [61]Table of Contents arranged for the disposal of, wastes |
| Georgia-Pacific has agreed to indemnify us against any claim arising from environmental conditions that existed prior to May 7, 2004 |
| We also carry environmental insurance |
| However, any remediation costs not related to conditions existing prior to May 7, 2004 may not be covered by indemnification |
| In addition, certain remediation costs may not be covered by insurance |
| In addition, we could be subject to claims brought pursuant to applicable laws, rules or regulations for property damage or personal injury resulting from the environmental impact of our operations |
| Increasingly stringent environmental requirements, more aggressive enforcement actions, the discovery of unknown conditions or the bringing of future claims may cause our expenditures for environmental matters to increase, and we may incur material costs associated with these matters |
| Anti-terrorism measures may harm our business by impeding our ability to deliver products on a timely and cost-effective basis |
| In the event of future terrorist attacks or threats on the United States, federal, state and local authorities could implement various security measures, including checkpoints and travel restrictions on large trucks |
| Our customers typically need quick delivery and rely on our on-time delivery capabilities |
| If security measures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers, or may incur increased expenses to do so |
| We may incur substantial costs relating to Georgia-Pacific’s product liability related claims |
| Georgia-Pacific is a defendant in suits brought in various courts around the nation by plaintiffs who allege that they have suffered personal injury as a result of exposure to products containing asbestos |
| These suits allege a variety of lung and other diseases based on alleged exposure to products previously manufactured by Georgia-Pacific |
| Although the terms of the asset purchase agreement provide that Georgia-Pacific will indemnify us against all obligations and liabilities arising out of, relating to or otherwise in any way in respect of any product liability claims (including, without limitation, claims, obligations or liabilities relating to the presence or alleged presence of asbestos-containing materials) with respect to products purchased, sold, marketed, stored, delivered, distributed or transported by Georgia-Pacific and its affiliates, including the Division prior to the acquisition, we believe it is possible that circumstances may arise under which asbestos-related claims against Georgia-Pacific could cause us to incur substantial costs |
| For example, in the event that Georgia-Pacific is financially unable to respond to an asbestos product liability claim, plaintiffs’ lawyers may, in order to obtain recovery, attempt to sue us, in our capacity as owner of assets sold by Georgia-Pacific, despite the fact that the assets sold to us did not contain asbestos |
| Asbestos litigation has, over the years, proved unpredictable, as the aggressive and well-financed asbestos plaintiffs’ bar has been creative, and often successful, in bringing claims based on novel legal theories and on expansive interpretations of existing legal theories |
| These claims have included claims against companies that did not manufacture asbestos products |
| Although we believe, based on our understanding of the law as currently interpreted, that we should not be held liable for any of Georgia-Pacific’s asbestos-related claims, and, to the contrary, that we would prevail on summary judgment on any such claims, there is nevertheless a possibility that new theories could be developed, or that the application of existing theories could be expanded, in a manner that would result in liability for us |
| Any such liability could ultimately be borne by us if Georgia-Pacific is unable to fulfill its indemnity obligation under the asset purchase agreement with us |
| Affiliates of Cerberus control us and may have conflicts of interest with other stockholders in the future |
| Funds and accounts managed by Cerberus or its affiliated management companies, which are referred to collectively as the controlling stockholder, collectively own approximately 60prca of our common stock |
| As a result, the controlling stockholder will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for 12 _________________________________________________________________ [62]Table of Contents approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions |
| Five of our ten directors are either employees of or advisors to Cerberus |
| The controlling stockholder also has sufficient voting power to amend our organizational documents |
| The interests of the controlling stockholder may not coincide with the interests of other holders of our common stock |
| Additionally, the controlling stockholder is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us |
| The controlling stockholder may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us |
| So long as the controlling stockholder continues to own a significant amount of the outstanding shares of our common stock, it will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions |
| In addition, because we are a controlled company within the meaning of the New York Stock Exchange rules, we are exempt from the NYSE requirements that our board be composed of a majority of independent directors, and that our compensation and nominating/corporate governance committees be composed entirely of independent directors |
| Even if Cerberus no longer controls us in the future, certain provisions of our charter documents and agreements and Delaware law could discourage, delay or prevent a merger or acquisition at a premium price |
| Our Amended and Restated Certificate of Incorporation and Bylaws contain provisions that: • permit us to issue, without any further vote or action by the stockholders, up to 30 million shares of preferred stock in one or more series and, with respect to each series, to fix the number of shares constituting the series and the designation of the series, the voting powers (if any) of the shares of such series, and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series; and • limit the stockholders’ ability to call special meetings |
| These provisions may discourage, delay or prevent a merger or acquisition at a premium price |
| In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, which also imposes certain restrictions on mergers and other business combinations between us and any holder of 15prca or more of our common stock |
| Further, certain of our incentive plans provide for vesting of stock options and/or payments to be made to our employees in connection with a change of control, which could discourage, delay or prevent a merger or acquisition at a premium price |
| We intend to pay dividends on our common stock but may change our dividend policy; the instruments governing our indebtedness contain various covenants that may limit our ability to pay dividends |
| We intend to continue to pay dividends on our common stock at the quarterly rate of dlra0dtta125 per share |
| Our board of directors may, in its discretion, modify or repeal its dividend policy |
| Future dividends, if any, with respect to shares of our common stock will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant |
| Accordingly, we may not be able to pay dividends in any given amount in the future, or at all |
| Our revolving credit facility limits distributions by our operating company to us, which, in turn, may limit our ability to pay dividends to holders of our common stock |
| See Notes to Financial Statements — Note 8 Revolving Credit Facility for more information on limits on our ability to pay dividends |