UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
September 19, 2002
------------------------------------------------
Date of Report (Date of earliest event reported)
HEADWATERS INCORPORATED
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-27808 87-0547337
- ---------------------------- ------------ ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
11778 South Election Road, Suite 210
Draper, UT 84020
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(801) 984-9400
--------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report.)
Certain statements in this Report constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. As such,
actual results may vary materially from such expectations. For a discussion of
certain factors that could cause actual results to differ from expectations,
please see the information set forth under the caption entitled "Forward-Looking
Statements" in PART I, ITEM 2 of Headwaters' Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002. There can be no assurance that Headwaters'
results of operations will not be adversely affected by such factors. Headwaters
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinion only as of the date hereof.
Item 2. Acquisition of Industrial Services Group, Inc.
As described in Exhibit 99, attached hereto, Headwaters acquired 100% of the
common stock of Industrial Services Group, Inc. and redeemed all of its
outstanding preferred stock. Headwaters paid $32.7 million in cash and issued
2.1 million shares of common stock as consideration. Concurrently, Headwaters
retired the outstanding indebtedness of ISG using a new $155 million five-year
senior secured debt facility, $20 million of newly issued subordinated debt,
which included $10 million of ISG management-financed debt, and cash on hand.
The former ISG stockholders have certain registration rights with respect to
resales of the shares of Headwaters common stock issued to them. Headwaters also
has available a $20 million senior debt revolver that was not drawn at closing
but which is available for general corporate purposes.
Item 7. Financial Statements and Exhibits
(a) The following unaudited consolidated financial statements of
Industrial Services Group, Inc. and Subsidiaries are included
herein:
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Three and Six Months Ended June 30, 2002
and 2001
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Note 1: Audited financial statements for Industrial Services
Group, Inc. and Subsidiaries as of December 31, 2001 and 2000
and for each of the three years in the period ended
December 31, 2001 were included with Headwaters' Report on
Form 8-K filed July 18, 2002.
Note 2: Industrial Services Group, Inc. is not an SEC
registrant. ISG Resources, Inc., a wholly-owned subsidiary of
Industrial Services Group, Inc., was an SEC registrant prior
to the acquisition of ISG Services Group, Inc. by Headwaters
on September 19, 2002. As an SEC registrant, ISG Resources,
Inc. has made various filings in accordance with the rules and
regulations of the SEC. The consolidated financial statements
of Industrial Services Group, Inc. included in this Form 8-K
include the operations of ISG Resources, Inc. and Industrial
Services Group, Inc. debt and are therefore not comparable to
the consolidated financial statements of ISG Resources, Inc.
included in previous ISG Resources, Inc. SEC filings.
2
(b) The following unaudited pro forma financial information for
Headwaters Incorporated is included herein:
Introduction to Pro Forma Financial Information
Pro Forma Condensed Combined Balance Sheet as of June 30, 2002
Pro Forma Condensed Combined Statement of Income for the Year
Ended September 30, 2001
Pro Forma Condensed Combined Statement of Income for the Nine
Months Ended June 30, 2002
Notes to Pro Forma Condensed Combined Financial Information
(c) The following exhibits are included herein:
10.75** Agreement and Plan of Merger between Headwaters and
Industrial Services Group, Inc. dated July 15, 2002
10.75.1** Form of Registration Rights Agreement between
Headwaters and the Stockholders of Industrial
Services Group, to be dated as of Closing
10.75.2 First Amendment to Agreement and Plan of Merger and
Equityholder Agreements among Headwaters, Industrial
Services Group, Inc. and Equityholders of Industrial
Services Group, Inc. dated September 19, 2002
10.76 Senior Credit Agreement for $175,000,000 among
Headwaters and various lenders dated
September 19, 2002
10.77 Loan Agreement for $20,000,000 between Headwaters
and Allied Capital Corporation dated
September 19, 2002
10.77.1 Participation Agreement among Allied Capital
Corporation, Headwaters and other Participants dated
September 19, 2002
99 Press release announcing acquisition of Industrial
Services Group, Inc.
** Previously filed with Headwaters' Form 8-K filed
July 18, 2002.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEADWATERS INCORPORATED
-----------------------------
Registrant
Date: October 4, 2002 /s/ Kirk A. Benson
-----------------------------
Kirk A. Benson
Chief Executive Officer and
Principal Executive Officer
4
Industrial Services Group, Inc.
Consolidated Financial Statements
For the period ended June 30, 2002
F-1
Industrial Services Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, December 31,
2002 (Unaudited) 2001
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 10,928,663 $ 17,724,156
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$555,000 and $440,000, respectively 35,597,861 25,302,639
Retainage receivable 235,749 257,989
Other receivables 1,156,622 692,828
Deferred tax assets 696,974 630,178
Income tax receivable 704,721 720,234
Inventories 8,660,241 8,528,976
Other current assets 1,564,275 1,604,691
------------- -------------
Total current assets 59,545,106 55,461,691
Property, plant and equipment, net of accumulated depreciation of
$20,894,818 and $18,126,675, respectively 40,074,278 38,118,552
Intangible assets, net 80,580,597 83,329,546
Goodwill 73,848,153 73,848,153
Debt issuance costs, net 3,385,691 3,855,350
Other assets 123,596 93,706
------------- -------------
Total assets $ 257,557,421 $ 254,706,998
============= =============
F-2
Industrial Services Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, December 31,
2002 (Unaudited) 2001
------------- -------------
Liabilities and shareholders' equity (deficit) Current liabilities:
Accounts payable $ 18,206,472 $ 14,287,253
Accrued liabilities:
Payroll 1,549,933 2,775,553
Interest 3,196,935 3,570,486
Other 2,488,458 1,924,450
Other current liabilities 1,840,395 1,951,850
------------- -------------
Total current liabilities 27,282,193 24,509,592
Long-term debt 163,573,900 164,643,900
Deferred tax liability 35,204,335 35,726,641
CMP note 15,180,704 13,676,310
Debt discount (1,430,827) (1,966,086)
Laidlaw note - 24,807,465
Other liabilities 340,652 766,004
------------- -------------
Total liabilities 240,150,957 262,163,826
Series A redeemable preferred stock, 50,050 shares authorized,
issued and outstanding at June 30, 2002 and
35,050 shares at December 31, 2001 respectively 8,222,966 6,204,559
Series B redeemable preferred stock, 50,000 shares
authorized, issued and outstanding at June 30, 2002 and
35,000 shares at December 31, 2001 respectively 8,213,501 6,195,708
Shareholders' equity (deficit):
Class A common stock, $.01 par value; 500,000 shares
authorized, 495,000 issued and outstanding 4,950 4,950
Class B common stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding - -
Additional paid in capital in excess of par value of
common stock 4,304,320 4,304,320
Cumulative foreign currency translation adjustment (65,943) (55,636)
Retained deficit (3,273,330) (24,110,729)
------------- -------------
Total shareholders' equity (deficit) 969,997 (19,857,095)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 257,557,421 $ 254,706,998
============= =============
F-3
See accompanying notes.
Industrial Services Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
Six Months Ended June 30,
-------------------------------------------
2002 2001
-------------------------------------------
Revenues:
Product revenues $ 92,601,884 $ 85,185,827
Service revenues 14,101,517 16,616,619
---------------- ----------------
106,703,401 101,802,446
Costs and expenses:
Cost of product revenues, excluding depreciation 68,512,420 65,371,460
Cost of service revenues, excluding depreciation 10,662,565 11,006,878
Depreciation and amortization 5,902,176 8,018,269
New product development 1,120,030 1,164,818
Selling, general and administrative expenses 12,491,649 11,881,941
---------------- ----------------
98,688,840 97,443,366
---------------- ----------------
Operating income 8,014,561 4,359,080
Interest income 83,011 242,190
Interest expense (9,597,364) (11,252,234)
Other income 483,201 9,891
---------------- ----------------
Loss before income taxes and extraordinary item (1,016,591) (6,641,073)
Income tax benefit (332,299) (1,883,940)
---------------- ----------------
Loss before extraordinary item (684,292) (4,757,133)
Gain on extinguishment of debt 22,557,891 -
---------------- ----------------
Net income (loss) 21,873,599 (4,757,133)
Preferred dividends (1,036,200) (751,958)
---------------- ----------------
Net income (loss) attributable to common shareholders $ 20,837,399 $ (5,509,091)
================ ================
Basic and diluted loss per share before extraordinary item
and preferred dividends $ (1.38) $ (9.61)
================ ================
Basic and diluted net income (loss) per share attributable
to common shareholders $ 42.10 $ (11.13)
================ ================
Weighted average number of shares used in calculating
basic and diluted net income (loss) per share 495,000 495,000
================ ================
F-4
See accompanying notes.
Industrial Services Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended June 30,
-------------------------------------
2002 2001
---------------- ----------------
Revenues:
Product revenues $ 54,736,474 $ 51,442,427
Service revenues 7,410,951 8,674,634
---------------- ----------------
62,147,425 60,117,061
Costs and expenses:
Cost of product revenues, excluding depreciation 39,772,588 38,357,167
Cost of service revenues, excluding depreciation 5,718,352 5,599,820
Depreciation and amortization 2,931,191 3,873,482
New product development 470,321 569,600
Selling, general and administrative expenses 6,412,355 6,029,539
---------------- ----------------
55,304,807 54,429,608
---------------- ----------------
Operating income 6,842,618 5,687,453
Interest income 24,675 94,377
Interest expense (4,701,699) (5,500,138)
Other income (expense) 200,836 (24,106)
---------------- ----------------
Income before income taxes 2,366,430 257,586
Income tax expense 970,458 461,611
---------------- ----------------
Net income (loss) 1,395,972 (204,025)
Preferred dividends (548,055) (386,215)
---------------- ----------------
Net income (loss) attributable to common shareholders $ 847,917 $ (590,240)
================ ================
Basic and diluted income (loss) per share before
preferred dividents $ 2.82 $ (0.41)
================ ================
Basic and diluted net income (loss) per share attributable
to common shareholders $ 1.71 $ (1.19)
================ ================
Weighted average number of shares used in calculating
basic and diluted net income (loss) per share 495,000 495,000
================ ================
F-5
See accompanying notes.
Industrial Services Group, Inc. and Subsidiaries
Unaudited Consolidated Statement of Comprehensive Income (Loss)
Six months ended June 30
---------------------------------
2002 2001
------------ -------------
Net income (loss) $ 21,873,599 $ (4,757,133)
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment (10,307) 25,361
------------ -------------
Comprehensive income (loss) $ 21,863,292 $ (4,731,772)
============ =============
F-6
See accompanying notes.
Industrial Services Group, Inc. and Subsidiaries
Unaudited Consolidated Statement of Comprehensive Income (Loss)
Three months ended June 30
---------------------------------
2002 2001
------------ -------------
Net income (loss) $ 1,395,972 $ (204,025)
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment 27,231 13,230
------------ -------------
Comprehensive income (loss) $ 1,423,203 $ (190,795)
============ =============
F-7
See accompanying notes.
Industrial Services Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30,
-------------------------------
2002 2001
------------ ------------
Operating activities
Net income (loss) $ 21,873,599 $ (4,757,133)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,902,176 8,018,269
Amortization of debt issuance costs 511,085 500,483
Amortization of debt discount 535,259 543,411
Noncash interest expense 1,751,738 2,309,032
Gain on disposal of fixed assets (133,958) 29,983
Gain on extinguishment of debt (22,557,891) -
Deferred income taxes (589,102) (1,129,947)
Changes in operating assets and liabilities:
Receivables (10,736,776) (9,857,279)
Inventory (131,265) (137,298)
Other current and non-current assets 10,526 (195,367)
Accounts payable and accrued expenses 3,387,138 8,671,532
Other current and non-current liabilities (121,294) 1,693,973
------------ ------------
Net cash provided by (used in) operating activities (298,765) 5,689,659
Investing activities
Purchases of property, plant and equipment (5,540,870) (5,068,561)
Proceeds on sale of property, plant and equipment 565,875 81,340
------------ ------------
Net cash used in investing activities (4,974,995) (4,987,221)
Financing activities
Cash contributions from shareholders 3,000,000 -
Payments on long-term debt (4,070,000) (82,177)
Payments on long-term liabilities (400,000) -
Debt issuance costs incurred (41,426) (90,000)
------------ ------------
Net cash used in financing activities (1,511,426) (172,177)
Effect of exchange rate changes on cash and
cash equivalents (10,307) 25,361
------------ ------------
Net increase (decrease) in cash and cash equivalents (6,795,493) 555,622
Cash and cash equivalents at beginning of period 17,724,156 6,986,725
------------ ------------
Cash and cash equivalents at end of period $ 10,928,663 $ 7,542,347
============ ============
Cash paid for interest $ 6,620,900 $ 8,167,467
============ ============
Cash paid (received) for income taxes $ 215,135 $ (2,028,047)
============ ============
F-8
See accompanying notes.
INDUSTRIAL SERVICES GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Industrial Quality Services, Inc. was formed in September 1997 by Citicorp
Venture Capital, Ltd. ("CVC") and certain members of the management team of JTM
Industries, Inc ("JTM") to acquire the stock of JTM from Laidlaw Transportation,
Inc. Pursuant to the acquisition, Industrial Quality Services acquired the stock
of JTM on October 14, 1997 and JTM became a wholly owned subsidiary of
Industrial Quality Services. In January, 1998, Industrial Quality Services
changed their name to Industrial Services Group, Inc. ("the Company"). In 1998,
JTM acquired the stock of Pozzolanic Resources, Inc. ("Pozzolanic"), Power Plant
Aggregates of Iowa, Inc. ("PPA"), Michigan Ash Sales Company, d.b.a. U. S. Ash
Company, together with two affiliated companies, U.S. Stabilization, Inc. and
Flo Fil Company, Inc., (collectively, "U.S. Ash"), and Fly Ash Products, Inc.
("Fly Ash Products") (collectively, the "1998 Acquisitions"). Effective January
1, 1999, JTM, Pozzolanic, PPA, U.S. Ash, Fly Ash Products and their wholly owned
subsidiaries merged with and into ISG Resources ("ISG Resources") a newly formed
entity (the "Merger"). Pneumatic Trucking, Inc., a wholly owned subsidiary of
Michigan Ash Sales Company, was not merged into ISG Resources. Consequently,
Pneumatic became a wholly owned subsidiary of the ISG Resources.
In 1999, ISG Resources acquired the stock of Best Masonry & Tool Supply
("Best"), Mineral Specialties, Inc. ("Specialties"), Irvine Fly Ash, Inc.
("Irvine"), Lewis W. Osborne, Inc. ("Osborne"), United Terrazzo Supply Co., Inc.
("Terrazzo"), and Magna Wall, Inc. ("Magna Wall") and sold all of the
outstanding stock of Pneumatic.
In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a
wholly-owned foreign subsidiary of ISG Resources, with fly ash operations
beginning in the second half of 2000. During 2000, ISG Resources acquired all of
the partnership interest of Don's Building Supply L.L.P. ("Don's), acquired the
stock of Palestine Concrete Tile Company, Inc. and acquired certain fixed and
intangible assets from Hanson Aggregates West, Inc. ("Hanson").
Each of the above acquisitions was accounted for under the purchase method of
accounting and, accordingly, the results of operations of each acquired company
have been included in the consolidated financial statements since the respective
date of acquisition.
These financial statements reflect the consolidated financial position and
results of operations of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows of the Company, for the respective periods presented.
The results of operations for an interim period are not necessarily indicative
of the results, which may be expected for any other interim period or for the
year as a whole.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes in the Form 10-K filed by ISG
Resources, Inc. for the fiscal year ended December 31, 2001.
The consolidated balance sheet at December 31, 2001 was derived from audited
consolidated financial statements, but does not include all disclosures required
under generally accepted accounting principles.
2. Description of Business
The Company operates two principal business segments: coal combustion product
(CCP) management and building materials manufacturing and distribution. The CCP
division purchases, removes and sells fly ash and other by-products of coal
combustion to producers and consumers of building materials and construction
related products throughout the United States. The building materials division
manufactures and distributes masonry construction materials to residential and
commercial contractors primarily in Texas, California, Georgia and Florida.
3. New Product Development Costs
New product development costs consist of scientific research and development and
market development expenditures. Expenditures of $414,085 and $510,883 for the
three months ended June 30, 2002 and June 30, 2001, respectively, and
expenditures of $993,994 and $1,027,518 for the six months ended June 30, 2002
and June 30, 2001, respectively, were made for research and development
activities covering basic scientific research and application of scientific
advances to the development of new and improved products and processes.
Expenditures of $56,236 and $58,717 for the three months ended June 30, 2002 and
June 30, 2001, respectively, and expenditures of $126,036 and $137,300 for the
six months ended June 30, 2002 and June 30, 2001, respectively, were made for
market development activities related to promising new and improved products and
processes identified during research and development activities. The Company
expenses all new product development costs as they are incurred.
4. Inventories
The Company accounts for inventory balances using the lower of cost or market
method on a first-in, first-out basis. Inventories consist of:
F-9
June 30, December 31,
2002 2001
------------------ ---------------------
Raw Materials $ 999,119 $ 958,796
Finished Goods 7,661,122 7,570,180
------------------ ---------------------
$ 8,660,241 $ 8,528,976
================== =====================
5. Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with the guidelines of this accounting
principle, goodwill and indefinite lived intangible assets are no longer
amortized, but will be assessed for impairment on at least an annual basis.
Pursuant to SFAS No. 142, the Company completed its reassessment of previously
recognized intangible assets including evaluation of the remaining useful lives
of its intangibles. The Company believes the useful lives of its intangible
assets are appropriate.
Provided below is a reconciliation of previously reported financial statement
information to adjusted amounts that reflect the elimination of goodwill
amortization:
Six Months Ended Three Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
----------------- ------------------ ------------------ ----------------
Net income (loss) before extraordinary item:
As reported $ (684,292) $ (4,757,133) $ 1,395,972 $ (204,025)
Add back:
Goodwill amortization net of tax - 2,027,704 - 1,013,852
-------------- -------------- -------------- ------------
Adjusted income (loss)
before extraordinary item $ (684,292) $ (2,729,729) $ 1,395,972 $ 809,827
-------------- -------------- -------------- ------------
Adjusted loss per share
before extraordinary item $ (1.38) $ (5.51) $ 2.82 $ 1.64
-------------- -------------- -------------- ------------
Net income (loss):
As reported $ 21,873,599 $ (4,757,133) $ 1,395,372 $ (204,025)
Add back:
Goodwill amortization net of tax - 2,027,704 - 1,013,852
-------------- -------------- -------------- ------------
Adjusted net income (loss) 21,873,599 (2,729,729) 1,395,372 809,827
Preferred dividends (1,036,200) (751,958) (548,055) (386,215)
-------------- -------------- -------------- ------------
Adjusted net income (loss) attributable
to common shareholders $ 20,837,399 $ (3,481,687) $ 847,317 $ 423,612
============== ============== ============== ============
Adjusted net income (loss) per share $ 42.10 $ (7.03) $ 1.71 $ 0.86
============== ============== ============== ============
F-10
The following table as of June 30, 2002, summarizes the gross carrying value and
accumulated amortization for each major class of intangible asset based on the
Company's reassessment of previously recognized intangible assets and their
remaining amortization lives in accordance with the adoption of SFAS No. 142:
June 30, 2002 December 31, 2001
Gross Carrying Accumulated Gross Carrying Accumulated Amortizable
Amount Amortization Amount Amortization Life
------------------ ------------------- ----------------- --------------- -------------------
Supply contracts $100,148,521 $21,858,228 $100,227,490 $19,402,631 10 to 20 years
Patents 2,446,584 606,280 2,446,584 541,897 19 years
Licenses 1,000,000 550,000 1,000,000 400,000 40 months
------------------ ------------------- ----------------- ---------------
Total amortizable
intangible assets $103,595,105 $23,014,508 $103,674,074 $20,344,528
================== =================== ================= ===============
The total intangible amortization expense for these assets for the six months
ended June 30, 2002 and 2001 was $2.8 million and $3.2 million, respectively.
The estimated amortization expense for the next five fiscal years beginning
January 1, 2002 is as follows:
For the year ended December 31, 2002 $5,497,213
For the year ended December 31, 2003 5,497,213
For the year ended December 31, 2004 5,197,213
For the year ended December 31, 2005 5,197,213
For the year ended December 31, 2006 5,197,213
The transitional accounting provisions of SFAS No. 142 require the Company to
identify and measure goodwill impairment at each of its reporting units. For
purposes of this measurement, the Company identified three reporting units. The
Company is in the process of evaluating the impairment, if any, of the goodwill,
in these three reporting units. Under the transitional accounting provisions of
SFAS No. 142, the Company is required to complete Step 1 (determining and
comparing the fair value of the reporting units to the reporting units' carrying
value) of the transitional impairment test within six months of adopting SFAS
No. 142. If Step 1 of the goodwill impairment test is failed in any of the
reporting units, thereby indicating a potential impairment, the Company is
required to complete Step 2 of the test for that reporting unit as soon as
possible, but no later than the end of 2002. Under Step 2, the Company is
required to calculate the implied fair value of goodwill and compare it to the
carrying value of goodwill.
The Company completed Step 1 described above, which indicated a possible
impairment. The Company is therefore required to complete Step 2, however, as a
result of the pending merger of the Company as described further in note 9
below, the completion of Step 2 in the process is still pending.
F-11
6. Long-term Debt
Long-term debt consists of the following:
June 30, December 31,
2002 2001
--------------- --------------
10% Senior Subordinated Notes due 2008 $100,000,000 $100,000,000
Secured Credit Facility 63,573,900 64,643,900
CMP Note 15,180,704 13,676,310
Debt Discount (1,430,827) (1,966,086)
Laidlaw Note - 24,807,465
--------------- --------------
$177,323,777 $201,161,589
=============== ==============
At June 30, 2002, $63,573,900 million of the Secured Credit Facility was
outstanding, with no amount being unused and available.
On January 11, 2002, an offer to retire the Laidlaw Note for $3 million in cash
to be paid on January 30, 2002 was made to American National Insurance
Corporation, the current holder of the notes. The offer was accepted by American
National and payment was made on the note on January 30, 2002. The note was
retired and a gain on extinguishment was recognized during the quarter ended
March 31, 2002 in the amount of approximately $22,560,000. The extraordinary
gain did not result in additional tax expense for the quarter because the gain
was treated as a reduction of the original purchase price of JTM for tax
purposes, which has created a permanent tax difference. As a result of the
different treatment of the gain for book and tax purposes, the extraordinary
gain was not stated net of tax effect on the accompanying statement of
operations.
7. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires alternative accounting treatment of assets
which are in the process of retirement. The Company was required to adopt SFAS
No. 143 effective January 1, 2002. As expected, there was no significant effect
on results of operations or financial position.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). The Company was required to adopt SFAS No. 144
effective January 1, 2002. The Company currently has no indicators of impairment
of any of its long-lived assets. As such, adoption of this Statement had no
impact on the Company's financial statements.
F-12
8. Reportable Segments
As discussed in note 2, the Company operates in two reportable segments: the CCP
division and the manufacturing products division. The CCP division consists
primarily of three operating regions that manage and market CCPs in North
America. The manufacturing products division consists of six legal entities:
Best, Osborne, Terrazzo, Magna Wall, Palestine, and Don's. The Company's two
reportable segments are managed separately based on fundamental differences in
their operations.
The Company evaluates financial performance based on earnings from operations
before interest expense, income taxes, depreciation, and amortization (EBITDA).
The Company derives a majority of its revenues from CCP sales and the chief
operating decision makers rely on EBITDA to assess the performance of the
segments and make decisions about resources to be allocated to the segments.
Accordingly, EBITDA is included in the information reported below. Certain
expenses are maintained at the Company's corporate headquarters and are not
allocated to the segments. Such expenses primarily include interest expense,
corporate overhead costs, and certain non-recurring gains and losses.
Inter-segment sales are generally accounted for at cost and are eliminated in
consolidation.
Amounts included in the "Other" column include financial information for the
Company's corporate, R&D and other administrative business units.
In adopting SFAS No. 142, the Company reevaluated the allocation of certain
intangible assets to the segments. Information for the three months and six
months ended June 30, 2001 has been restated to conform to this revised
presentation.
F-13
Information about reportable segments, and reconciliation of such information to
the consolidated totals as of and for the three months and six months ended
June 30, 2002 and June 30, 2001, is as follows:
Manufacturing Consolidated
CCP Products Other Total
-------------- -------------- ------------- -------------
Three months ended 6/30/02:
Revenue $ 49,202,249 $ 12,873,341 $ 71,835 $ 62,147,425
EBITDA 11,226,580 1,406,176 (2,633,436) 9,999,320
Depreciation and
Amortization 2,678,150 180,746 72,295 2,931,191
Goodwill 44,832,605 29,015,548 - 73,848,153
Total Assets 207,515,037 48,325,588 1,716,796 257,557,421
Expenditures for PP&E 2,422,364 60,075 - 2,482,439
Three months ended 6/30/01:
Revenue $ 46,697,505 $ 13,360,252 $ 59,302 $ 60,117,059
EBITDA 10,371,545 1,576,359 (2,316,698) 9,631,206
Depreciation and
Amortization 3,116,242 658,924 98,316 3,873,482
Goodwill 46,028,319 29,865,658 - 75,893,977
Total Assets 208,089,809 48,963,708 3,346,798 260,400,315
Expenditures for PP&E 1,402,516 1,097,633 66,851 2,567,000
Six months ended 6/30/02:
Revenue $ 82,217,384 $ 24,345,027 $ 140,990 $ 106,703,401
EBITDA 17,160,176 2,558,719 (5,235,946) 14,482,949
Depreciation and
Amortization 5,390,203 366,546 145,427 5,902,176
Goodwill 44,832,605 29,015,548 - 73,848,153
Total Assets 207,515,037 48,325,588 1,716,796 257,557,421
Expenditures for PP&E 5,183,996 186,323 170,551 5,540,870
Six months ended 6/30/01:
Revenue $ 76,802,042 $ 24,877,799 $ 122,605 $ 101,802,446
EBITDA 15,253,285 2,405,590 (5,029,445) 12,629,430
Depreciation and
Amortization 6,584,907 1,272,849 160,513 8,018,269
Goodwill 46,028,319 29,865,658 - 75,893,977
Total Assets 208,089,809 48,963,708 3,346,798 260,400,315
Expenditures for PP&E 3,459,800 1,421,844 186,917 5,068,561
F-14
9. Subsequent Events
On July 16, 2002, Industrial Services Group, Inc. signed a definitive agreement
with Headwaters, Inc. to be acquired by Headwaters in exchange for consideration
which is currently estimated to be approximately $246,000,000 consisting of cash
of approximately $31,000,000, the issuance of 2,000,000 shares of Headwaters
common stock with an assumed value of $30,000,000, cash requirements of
approximately $181,000,000 to retire ISG and ISG Resources debt, and direct
costs to be incurred by Headwaters to consummate the acquisition of
approximately $4,000,000. It is anticipated that the transaction will close
during the year 2002. Further information regarding the transaction is available
in documents filed with the Securities and Exchange Commission on Form 8-K, on
July 18, 2002. After the merger, Headwaters, Inc. will allocate goodwill among
the reporting units based on fair market value at the close of the merger.
On July 2, 2002, as part of an amendment to an employment agreement, and in
connection with the aforementioned merger agreement, an agreement was reached
with an employee who had earlier been granted a phantom stock right. The
agreement is to waive the phantom stock right contingent upon the successful
completion of the merger.
10. Condensed Consolidating Financial Information
The Company's debt facilities are guaranteed by domestic subsidiaries only. ISG
Canada was formed in 2000 and had minimal operations in comparison to
consolidated results. Because ISG Canada's operations increased during 2001, it
is no longer considered a "minor" subsidiary as defined under Regulation S-X
Rule 3-10. As such, the Company is required to disclose condensed consolidating
financial information in its periodic reports.
F-15
The condensed consolidating balance sheet as of June 30, 2002 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 10,928,663 $ - $ - $ 9,797,987 $ 857,535 $ 273,141
Accounts receivable 36,990,232 - - 29,915,336 6,776,796 298,100
Inventories 8,660,241 - - 3,483,347 4,970,537 206,357
Other current assets 2,965,970 - 704,721 2,079,481 181,768 -
------------ ------------ ----------- ------------ ----------- ----------
Total current assets 59,545,106 - 704,721 45,276,151 12,786,636 777,598
Property, plant and equipment 40,074,278 - - 32,722,889 6,523,404 827,985
Investment in ISG Resources - (25,266,422) 25,266,422 - - -
Intangible assets, net 80,580,597 - - 80,580,597 - -
Goodwill 73,848,153 - - 44,832,605 29,015,548 -
Debt issuance costs 3,385,691 - 142,375 3,243,316 - -
Investment in subsidiaries - (47,769,336) - 47,769,336 - -
Other assets 123,596 - - 123,596 - -
------------ ------------ ----------- ------------ ----------- ----------
Total assets $257,557,421 $(73,035,758) $26,113,518 $254,548,490 $48,325,588 $1,605,583
============ ============ =========== ============ =========== ==========
F-16
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 18,206,472 $ - $ - $ 15,570,660 $ 2,635,812 $ -
Accrued expenses 7,235,326 - 686,505 6,312,313 236,508 -
Other current liabilities 1,840,395 - (932,884) 1,923,490 827,425 22,364
------------ ------------ ----------- ------------ ----------- ----------
Total current liabilities 27,282,193 - (246,379) 23,806,463 3,699,745 22,364
Long-term debt 177,323,777 - 13,749,877 163,573,900 - -
Deferred tax liabilities 35,204,335 - - 35,204,335 - -
Payable to Parent - - (4,796,444) 4,796,444 - -
Intercompany account payable - 28,959 - 1,675,282 (2,881,549) 1,177,308
Other liabilities 340,652 - - 159,701 180,951 -
------------ ------------ ----------- ------------ ----------- ----------
Total liabilities 240,150,957 28,959 8,707,054 229,216,125 999,147 1,199,672
Series A redeemable preferred stock 8,222,966 - 8,222,966 - - -
Series B redeemable preferred stock 8,213,501 - 8,213,501 - - -
Shareholders' equity:
Common stock 4,950 (34,773,546) 4,950 34,745,050 28,496 -
Cumulative translation adjustment (65,943) 17,609 (65,943) - - (17,609)
Additional paid in capital 4,304,320 (41,200,074) 4,304,320 - 40,552,264 647,810
Retained (deficit) earnings (3,273,330) 2,891,294 (3,273,330) (9,412,685) 6,745,681 (224,290)
------------ ------------ ----------- ------------ ----------- ----------
Total shareholders' equity 969,997 (73,064,717) 969,997 25,332,365 47,326,441 405,911
------------ ------------ ----------- ------------ ----------- ----------
Total liabilities and shareholders'
equity $257,557,421 $(73,035,758) $26,113,518 $254,548,490 $48,325,588 $1,605,583
============ ============ =========== ============ =========== ==========
F-17
The condensed consolidating balance sheet as of December 31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 17,724,156 $ - $ - $ 17,002,493 $ 477,075 $ 244,588
Accounts receivable 26,253,456 - - 20,182,923 5,875,011 195,522
Inventories 8,528,976 - - 3,923,243 4,544,632 61,101
Other current assets 2,955,103 (10,872) 731,106 2,095,752 139,117 -
------------ ------------ ----------- ------------ ----------- ----------
Total current assets 55,461,691 (10,872) 731,106 43,204,411 11,035,835 501,211
Property, plant and equipment 38,118,552 - - 30,533,497 6,745,493 839,562
Investment in ISG Resources - (24,555,023) 24,555,023 - - -
Intangible assets, net 157,177,699 - - 128,162,151 29,015,548 -
Debt issuance costs 3,855,350 - 167,875 3,687,475 - -
Investment in subsidiaries - (45,476,666) - 45,476,666 - -
Other assets 93,706 - - 93,706 - -
------------ ------------ ----------- ------------ ----------- ----------
Total assets $254,706,998 $(70,042,561) $25,454,004 $251,157,906 $46,796,876 $1,340,773
============ ============ =========== ============ =========== ==========
F-18
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable $ 14,287,253 $ - $ - $ 12,411,354 $ 1,875,899 $ -
Accrued expenses 8,270,489 - 1,189,587 6,875,103 205,799 -
Other current liabilities 1,951,850 (10,872) - 1,427,299 505,484 29,939
------------ ------------ ----------- ------------ ----------- ----------
Total current liabilities 24,509,592 (10,872) 1,189,587 20,713,756 2,587,182 29,939
Long-term debt 201,161,589 - 36,517,689 164,643,900 - -
Deferred tax liabilities 35,726,641 - - 35,726,641 - -
Payable to Parent - - (4,796,444) 4,796,444 - -
Intercompany account payable - 23,201 - 27,888 (1,120,636) 1,069,547
Other liabilities 766,004 - - 638,618 127,386 -
------------ ------------ ----------- ------------ ----------- ----------
Total liabilities 262,163,826 12,329 32,910,832 226,547,247 1,593,932 1,099,486
Series A redeemable preferred stock 6,204,559 - 6,204,559 - - -
Series B redeemable preferred stock 6,195,708 - 6,195,708 - - -
Shareholders' equity (deficit):
Common stock 4,950 (34,773,546) 4,950 34,745,050 28,496 -
Cumulative translation adjustment (55,636) 16,807 (55,636) - - (16,807)
Additional paid in capital 4,304,320 (40,960,169) 4,304,320 - 40,533,259 426,910
Retained (deficit) earnings (24,110,729) 5,662,018 (24,110,729) (10,134,391) 4,641,189 (168,816)
------------ ------------ ----------- ------------ ----------- ----------
Total shareholders' equity (deficit) (19,857,095) (70,054,890) (19,857,095) 24,610,659 45,202,944 241,287
------------ ------------ ----------- ------------ ----------- ----------
Total liabilities and shareholders'
equity (deficit) $254,706,998 $(70,042,561) $25,454,004 $251,157,906 $46,796,876 $1,340,773
============ ============ =========== ============ =========== ==========
F-19
The condensed consolidating statement of operations for the six months ended
June 30, 2002 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Revenues $106,703,401 $ - $ - $81,915,920 $24,351,199 $ 436,282
Costs and expenses:
Cost of products and services,
excluding depreciation 79,174,985 - - 59,212,166 19,557,672 405,147
Depreciation and amortization 5,902,176 - - 5,485,323 366,546 50,307
Selling, general and administrative
expenses 12,491,649 - - 10,065,531 2,402,874 23,244
New product development 1,120,030 - - 1,120,030 - -
------------ ------------ ----------- ------------ ----------- ----------
98,688,840 - - 75,883,050 22,327,092 478,698
------------ ------------ ----------- ------------ ----------- ----------
Operating income (loss) 8,014,561 - - 6,032,870 2,024,107 (42,416)
Equity interest in subsidiary income - (1,327,312) (721,706) 2,049,018 - -
Interest income (expense) (9,514,353) - (2,312,496) (7,210,999) 9,142 -
Other income (expense) net 483,201 - - 425,016 71,243 (13,058)
------------ ------------ ----------- ------------ ----------- ----------
Income (loss) before income taxes
and extraordinary item (1,016,591) (1,327,312) (3,034,202) 1,295,905 2,104,492 (55,474)
Income tax (benefit) expense (332,299) - (906,498) 574,199 - -
------------ ------------ ----------- ------------ ----------- ----------
Income (loss) before extraordinary
item (684,292) (1,327,312) (2,127,704) 721,706 2,104,492 (55,474)
Gain on extinguishment of debt 22,557,891 - 22,557,891 - - -
------------ ------------ ----------- ------------ ----------- ----------
Net income (loss) 21,873,599 (1,327,312) 20,430,187 721,706 2,104,492 (55,474)
Preferred dividends (1,036,200) - (1,036,200) - - -
------------ ------------ ----------- ------------ ----------- ----------
Net income (loss) attributable to
common shareholders $ 20,837,399 $ (1,327,312) $19,393,987 $ 721,706 $ 2,104,492 $ (55,474)
============ ============ =========== ============ =========== ==========
F-20
The condensed consolidating statement of operations for the six months ended
June 30, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Revenues $101,802,446 $ (88,808) $ - $ 76,190,317 $24,945,733 $ 755,204
------------ ------------ ----------- ------------ ----------- ----------
Costs and expenses:
Cost of products and services sold,
excluding depreciation 76,378,338 - - 55,492,567 20,199,306 686,465
Depreciation and amortization 8,018,269 - - 6,745,420 1,228,014 44,835
Selling, general, and administrative
expenses 11,881,941 - - 9,765,671 2,093,194 23,076
New product development 1,164,818 - - 1,164,818 - -
------------ ------------ ----------- ------------ ----------- ----------
97,443,366 - - 73,168,476 23,520,514 754,376
------------ ------------ ----------- ------------ ----------- ----------
Operating income 4,359,080 (88,808) - 3,021,841 1,425,219 828
Equity interest in subsidiary income - 1,588,386 (3,007,344) 1,418,958 - -
Interest expense (11,010,044) - (2,877,943) (8,122,314) (9,787) -
Other income (expense) net 9,891 88,808 - (81,615) 2,698 -
------------ ------------ ----------- ------------ ----------- ----------
Income (loss) before income tax (6,641,073) 1,588,386 (5,885,287) (3,763,130) 1,418,130 828
Income tax benefit (1,883,940) - (1,128,154) (755,786) - -
------------ ------------ ----------- ------------ ----------- ----------
Net income (loss) (4,757,133) 1,588,386 (4,757,133) (3,007,344) 1,418,130 828
Preferred dividends (751,958) - (751,958) - - -
------------ ------------ ----------- ------------ ----------- ----------
Net income (loss) attributable to
common shareholders $ (5,509,091) $ 1,588,386 $(5,509,091) $ (3,007,344) $ 1,418,130 $ 828
============ ============ =========== ============ =========== ==========
F-21
The condensed consolidating statement of cash flow information for the six
months ended June 30, 2002 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Net cash used in operating activities $ (298,765) $ 326,119 $ - $ (231,231) $ (133,079) $ (260,574)
Net cash provided by (used in)
investing activities (4,974,995) (316,615) - (5,461,848) 513,537 289,931
Net cash used in financing activities (1,511,426) - - (1,511,426) - -
Effect of exchange rate changes on
cash and cash equivalents (10,307) (9,504) - - - (803)
------------ ------------ ----------- ------------ ----------- ----------
Net increase (decrease) in cash and
cash equivalents (6,795,493) - - (7,204,505) 380,458 28,554
Cash and cash equivalents at
beginning of period 17,724,156 - - 17,002,493 477,075 244,588
------------ ------------ ----------- ------------ ----------- ----------
Cash and cash equivalents at end of
period $ 10,928,663 $ - $ - $ 9,797,988 $ 857,533 $ 273,142
============ ============ =========== ============ =========== ==========
F-22
The condensed consolidating statement of cash flow information for the six
months ended June 30, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ------------ ----------- ------------ ----------- ----------
Net cash provided by (used in)
operating activities $ 5,689,659 $ 127,188 $ - $ 6,547,079 $ (819,604) $ (165,004)
Net cash provided by (used in)
investing activities (4,987,221) (156,267) - (5,698,484) 490,326 377,204
Net cash used in financing activities (172,177) (172,177)
Effect of exchange rate changes on
cash and cash equivalents 25,361 29,079 - - (3,718)
------------ ------------ ----------- ------------ ----------- ----------
Net increase (decrease) in cash and
cash equivalents 555,622 - - 676,418 (329,278) 208,482
Cash and cash equivalents at
beginning of period 6,986,725 - - 5,954,992 1,054,079 (22,346)
------------ ------------ ----------- ------------ ----------- ----------
Cash and cash equivalents at end
of period $ 7,542,347 $ - $ - $ 6,631,410 $ 724,801 $ 186,136
============ ============ =========== ============ =========== ==========
F-23
HEADWATERS INCORPORATED
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(dollar and share amounts in thousands)
On September 19, 2002, Headwaters acquired 100% of the common stock of
Industrial Services Group, Inc. ("ISG") and redeemed all of its outstanding
preferred stock. ISG is headquartered in Salt Lake City, Utah and is engaged
primarily in the management of long-term contracts for coal combustion products
and the distribution of related building materials and construction products
throughout the United States through its wholly-owned subsidiary, ISG Resources,
Inc. Total consideration at closing is currently estimated to be approximately
$258,056 consisting of cash of $32,700, the issuance of 2,100 shares of
Headwaters common stock with an assumed value of $32,718 (market value at
closing was approximately $26,000), cash payments of $184,638 to retire ISG debt
and related accrued interest, and direct costs incurred by Headwaters to
consummate the acquisition of approximately $8,000.
In order to obtain the cash necessary to acquire ISG and retire the ISG debt,
Headwaters issued $175,000 of new debt consisting of $155,000 of senior secured
debt with a five-year term and a floating interest rate and $20,000 of
subordinated debt with an approximate five-year term and a fixed interest rate.
ISG management participated in one-half or $10,000 of the subordinated debt.
Total cash proceeds from the issuance of new debt, net of debt discounts, was
$169,950. Headwaters incurred approximately $6,200 of debt issuance costs to
place the new debt, which has a combined effective weighted average interest
rate of approximately 9.0%.
The value of Headwaters' 2,100 shares of common stock issued was determined
using the average market price of Headwaters' stock over a five-day period,
consisting of the day the terms of acquisition were agreed to and announced and
two days prior to and two days subsequent to that day. This average price was
$15.58 per share.
The ISG acquisition will be accounted for using the purchase method of
accounting as required by Statement of Financial Accounting Standards No.141,
"Business Combinations." Assets acquired and liabilities assumed will be
recorded at their estimated fair values as of September 19, 2002. For purposes
of the accompanying pro forma information, approximately $109,000 of the
estimated purchase price was allocated to identifiable intangible assets
consisting primarily of contracts with an estimated combined useful life of 20
years. The remaining purchase price not attributable to the tangible and
identifiable intangible assets will be allocated to goodwill. The actual
consideration as well as the allocation of the amount of such consideration will
likely differ from that reflected in these unaudited pro forma condensed
combined financial statements after final valuations and other procedures have
been completed.
The following pro forma combined balance sheet gives effect to the acquisition
of ISG as if it had been completed as of June 30, 2002 and combines the
historical June 30, 2002 balance sheets for both Headwaters and ISG. The pro
forma combined statements of operations for the year ended September 30, 2001
and the nine months ended June 30, 2002 give effect to the acquisition as if it
had occurred on October 1, 2000. The pro forma combined statement of operations
for the year ended September 30, 2001 combines Headwaters' historical results
for the year ended September 30, 2001 with ISG's historical results for the year
ended December 31, 2001. The pro forma combined statement of operations for the
nine months ended June 30, 2002 combines both Headwaters' and ISG's historical
results for that nine month period. Accordingly, ISG's historical results for
the three-month period from October 1, 2001 to December 31, 2001 are included in
both the pro forma combined statement of operations for the year ended September
30, 2001 and the pro forma combined statement of operations for the nine months
ended June 30, 2002.
The pro forma combined financial statements are presented for illustrative
purposes only. Such information does not purport to be indicative of the results
of operations or financial position which actually would have resulted had the
acquisition occurred on the dates indicated, nor is it indicative of the results
that may be expected in future periods. The pro forma adjustments are based upon
information and assumptions available at the time of filing this Form 8-K. The
pro forma information should be read in conjunction with the accompanying notes
thereto.
F-24
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
as of June 30, 2002
Historical
---------------------------- Pro Forma Pro Forma
(thousands of dollars) Headwaters ISG Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 29,230 $ 10,929 $(224,783) A
169,950 B
(6,200) C
20,874 D $ -
Trade receivables, net 21,650 35,598 57,248
Inventories 231 8,660 8,891
Other current assets 1,989 4,358 6,347
--------- --------- --------- ---------
Total current assets 53,100 59,545 (40,159) 72,486
--------- --------- --------- ---------
Property, plant and equipment, net of accumulated depreciation 2,798 40,074 42,872
Other assets:
Notes and accrued interest receivable 5,584 5,584
Deferred income taxes 1,049 (1,049) E -
Intangible assets, net of accumulated amortization 10,141 80,580 28,420 F 119,141
Goodwill 4,258 73,848 (73,848) G
111,073 H 115,331
Other assets 4,179 3,510 6,200 C
(3,386) I
(555) J 9,948
--------- --------- --------- ---------
Total other assets 25,211 157,938 66,855 250,004
--------- --------- --------- ---------
Total assets $ 81,109 $ 257,557 $ 26,696 $ 365,362
========= ========= ========= =========
(continued)
See accompanying notes.
F-25
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET, continued
as of June 30, 2002
Historical
---------------------------- Pro Forma Pro Forma
(thousands of dollars) Headwaters ISG Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,772 $18,206 $20,978
Accrued personnel costs 4,314 1,550 5,864
Other accrued liabilities 7,633 7,526 $(3,197) K 11,962
Current portion of unamortized non-refundable license fees 2,866 2,866
Short-term debt 81 15,500 B
20,874 D 36,455
--------- --------- --------- ---------
Total current liabilities 17,666 27,282 33,177 78,125
--------- --------- --------- ---------
Long-term liabilities:
Long-term debt 88 177,324 (177,324) L
154,450 B 154,538
Deferred income taxes 35,204 (1,049) E
2,130 M 36,285
Other long-term liabilities 297 341 638
Unamortized non-refundable license fees 5,305 5,305
--------- --------- --------- ---------
Total long-term liabilities 5,690 212,869 (21,793) 196,766
--------- --------- --------- ---------
Total liabilities 23,356 240,151 11,384 274,891
--------- --------- --------- ---------
Redeemable preferred stock 16,436 (16,436) N -
Stockholders' equity:
Common stock 25 5 2 O
(5) P 27
Capital in excess of par value 92,902 4,304 32,716 O
(4,304) P 125,618
Accumulated deficit (31,782) (3,273) 3,273 Q (31,782)
Other, primarily treasury stock (3,392) (66) 66 R (3,392)
--------- --------- --------- ---------
Total stockholders' equity 57,753 970 31,748 90,471
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 81,109 $ 257,557 $ 26,696 $ 365,362
========= ========= ========= =========
See accompanying notes.
F-26
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the year ended September 30, 2001
Historical
---------------------------------- Pro Forma Pro Forma
(thousands of dollars and shares, except per share amounts) Headwaters ISG Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------------
(Year ended (Year ended
September 30, 2001) December 31, 2001)
Revenue:
Coal combustion product sales $ 135,507 $ 135,507
Chemical reagent sales $ 22,407 22,407
Manufactured product sales 48,654 48,654
License fees 20,765 20,765
Service and other revenues 2,292 32,070 34,362
---------- ---------- ----------
Total revenue 45,464 216,231 261,695
---------- ---------- ----------
Operating costs and expenses:
Cost of coal combustion products sold 97,362 97,362
Cost of chemical reagents sold 14,524 14,524
Cost of manufactured products sold 38,448 38,448
Cost of services and other revenues 22,417 22,417
Depreciation and amortization 355 15,810 $ 266 S
(4,041) T 12,390
Selling, general and administrative 8,554 25,019 33,573
Research and development 2,400 2,308 4,708
---------- ---------- --------- ----------
Total operating costs and expenses 25,833 201,364 (3,775) 223,422
---------- ---------- --------- ----------
Operating income 19,631 14,867 3,775 38,273
---------- ---------- --------- ----------
Other income (expense):
Interest and net investment income 726 455 1,181
Interest expense (224) (22,948) 20,094 U
(15,296) V (18,374)
Losses on notes receivable and equity investments (6,265) (6,265)
Other, net 600 21 621
---------- ---------- --------- ----------
Total other expense, net (5,163) (22,472) 4,798 (22,837)
---------- ---------- --------- ----------
Income (loss) before income taxes 14,468 (7,605) 8,573 15,436
Income tax benefit 7,049 1,428 (1,810) W 6,667
---------- ---------- --------- ----------
Net income (loss) $ 21,517 $ (6,177) $ 6,763 $ 22,103
========== ========== ========= ==========
Basic net income per common share $ 0.94 $ 0.88
========== ==========
Diluted net income per common share $ 0.87 $ 0.83
========== ==========
Weighted-average shares outstanding:
Basic 22,787 2,100 X 24,887
========== ========= ==========
Diluted 24,637 2,100 X 26,737
========== ========= ==========
See accompanying notes.
F-27
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the nine months ended June 30, 2002
Historical
---------------------------------- Pro Forma Pro Forma
(thousands of dollars and shares, except per share amounts) Headwaters ISG Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Coal combustion product sales $ 100,464 $ 100,464
Chemical reagent sales $ 49,521 49,521
Manufactured product sales 35,913 35,913
License fees 21,263 21,263
Service and other revenues 4,862 21,547 26,409
---------- ---------- ----------
Total revenue 75,646 157,924 233,570
---------- ---------- ----------
Operating costs and expenses:
Cost of coal combustion products sold 71,267 71,267
Cost of chemical reagents sold 33,749 33,749
Cost of manufactured products sold 28,367 28,367
Cost of services and other revenues 4,256 16,135 20,391
Depreciation and amortization 1,000 9,821 $ 200 S
(1,002) T 10,019
Selling, general and administrative 9,383 19,448 28,831
Research and development 1,727 1,773 3,500
---------- ---------- --------- ----------
Total operating costs and expenses 50,115 146,811 (802) 196,124
---------- ---------- --------- ----------
Operating income 25,531 11,113 802 37,446
---------- ---------- --------- ----------
Other income (expense):
Interest and net investment income 432 185 617
Interest expense (68) (15,393) 14,550 U
(11,472) V (12,383)
Other, net 2,047 355 2,402
---------- ---------- --------- ----------
Total other income (expense), net 2,411 (14,853) 3,078 (9,364)
---------- ---------- --------- ----------
Income (loss) before income taxes and extraordinary item 27,942 (3,740) 3,880 28,082
Income tax benefit (provision) (11,020) 848 (1,150) W (11,322)
---------- ---------- --------- ----------
Net income (loss) before extraordinary item $ 16,922 $ (2,892) $ 2,730 $ 16,760
========== ========== ========= ==========
Basic net income per common share $ 0.70 $ 0.64
========== ==========
Diluted net income per common share $ 0.66 $ 0.61
========== ==========
Weighted-average shares outstanding:
Basic 24,007 2,100 X 26,107
========== ========= ==========
Diluted 25,562 2,100 X 27,662
========== ========= ==========
See accompanying notes.
F-28
HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share amounts)
1. Basis of Presentation
The pro forma condensed combined financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and certain footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations; however, management believes
that the disclosures are adequate to make the information presented not
misleading.
2. Acquisition of Industrial Services Group, Inc.
On September 19, 2002, Headwaters acquired 100% of the common stock of
Industrial Services Group, Inc. ("ISG") and redeemed all of its outstanding
preferred stock. ISG is headquartered in Salt Lake City, Utah and is engaged
primarily in the management of long-term contracts for coal combustion products
and the distribution of related building materials and construction products
throughout the United States through its wholly-owned subsidiary, ISG Resources,
Inc. Total consideration at closing is currently estimated to be approximately
$258,056 consisting of cash of $32,700, the issuance of 2,100 shares of
Headwaters common stock with an assumed value of $32,718 (market value at
closing was approximately $26,000), cash payments of $184,638 to retire ISG debt
and related accrued interest, and direct costs incurred by Headwaters to
consummate the acquisition of approximately $8,000.
In order to obtain the cash necessary to acquire ISG and retire the ISG debt,
Headwaters issued $175,000 of new debt consisting of $155,000 of senior secured
debt with a five-year term and a floating interest rate and $20,000 of
subordinated debt with an approximate five-year term and a fixed interest rate.
ISG management participated in one-half or $10,000 of the subordinated debt.
Total cash proceeds from the issuance of new debt, net of debt discounts, was
$169,950. Headwaters incurred approximately $6,200 of debt issuance costs to
place the new debt, which has a combined effective weighted average interest
rate of approximately 9.0%.
The following table sets forth the estimated consideration exchanged at closing
to acquire ISG:
Estimated consideration at closing:
Fair value of Headwaters stock (2,100 shares at $15.58 per share) $ 32,718
Cash paid to ISG stockholders 32,700
Cash paid to retire ISG debt and related accrued interest 184,638
Estimated direct costs 8,000
---------
Total $ 258,056
=========
The value of Headwaters' 2,100 shares of common stock issued was determined
using the average market price of Headwaters' stock over a five-day period,
consisting of the day the terms of acquisition were agreed to and announced and
two days prior to and two days subsequent to that day. This average price was
$15.58 per share.
F-29
The following table sets forth a preliminary allocation of the total estimated
consideration to the tangible and intangible assets acquired and liabilities
assumed:
Preliminary purchase price allocation:
Tangible assets acquired, net of liabilities assumed $ 75,317
Intangible assets acquired:
Contracts 106,000
Patents 3,000
Goodwill 111,073
Deferred income taxes, primarily related to intangible assets (37,334)
---------
Total estimated consideration at closing $ 258,056
=========
The ISG acquisition will be accounted for using the purchase method of
accounting as required by Statement of Financial Accounting Standards No.141,
"Business Combinations." Assets acquired and liabilities assumed will be
recorded at their estimated fair values as of September 19, 2002. For purposes
of the accompanying pro forma information, approximately $109,000 of the
estimated purchase price was allocated to identifiable intangible assets
consisting primarily of contracts with an estimated combined useful life of 20
years. The remaining purchase price not attributable to the tangible and
identifiable intangible assets will be allocated to goodwill. The actual
consideration as well as the allocation of the amount of such consideration will
likely differ from that reflected in these unaudited pro forma condensed
combined financial statements after final valuations and other procedures have
been completed.
Due to the provisions of Statement of Financial Accounting Standards No.142,
"Goodwill and Other Intangible Assets," which require that amortization of
goodwill be discontinued, amortization of the new goodwill has not been
reflected in the pro forma information for any period presented. Also, the
goodwill amortization recorded in ISG's results of operations has been
eliminated. Accordingly, there is no goodwill amortization reflected in the pro
forma information for any period presented.
3. Pro Forma Financial Statements and Adjustments
The pro forma combined balance sheet gives effect to the acquisition of ISG as
if it had been completed as of June 30, 2002 and combines the historical June
30, 2002 balance sheets for both Headwaters and ISG. The pro forma combined
statements of operations for the year ended September 30, 2001 and the nine
months ended June 30, 2002 give effect to the acquisition as if it had occurred
on October 1, 2000. The pro forma combined statement of operations for the year
ended September 30, 2001 combines Headwaters' historical results for the year
ended September 30, 2001 with ISG's historical results for the year ended
December 31, 2001. The pro forma combined statement of operations for the nine
months ended June 30, 2002 combines both Headwaters' and ISG's historical
results for that nine month period. Accordingly, ISG's historical results for
the three-month period from October 1, 2001 to December 31, 2001 are included in
both the pro forma combined statement of operations for the year ended September
30, 2001 and the pro forma combined statement of operations for the nine months
ended June 30, 2002. ISG's revenues and net loss for the three-month period
ended December 31, 2001 which were included in both of these periods were
$51,221 and $(2,208), respectively.
F-30
The pro forma combined financial statements are presented for illustrative
purposes only. Such information does not purport to be indicative of the results
of operations or financial position which actually would have resulted had the
acquisition occurred on the dates indicated, nor is it indicative of the results
that may be expected in future periods. The pro forma adjustments are based upon
information and assumptions available at the time of filing this Form 8-K.
The pro forma condensed combined financial statements give effect to the
following pro forma adjustments:
A Cash component of purchase price paid at closing, including transaction
costs, ($40,145) plus cash paid to retire ISG's long-term debt and
related accrued interest ($184,638).
B New issuance of long-term debt by Headwaters.
C Debt issuance costs related to new issuance of long-term debt by
Headwaters.
D Reclassification of assumed "deficiency" in cash, cash equivalents and
short-term investments to short-term debt. This pro forma "deficiency"
of $20,874 as of June 30, 2002 did not exist as of the closing date in
September 2002, due to positive cash flows for both Headwaters and ISG
during the period July 1, 2002 through September 19, 2002.
E Reclassification of Headwaters' non-current deferred tax asset against
ISG's larger non-current deferred tax liability in order to reflect a
single non-current deferred tax balance.
F Adjustment to increase identifiable intangible assets of ISG to
estimated fair value at acquisition date.
G Elimination of ISG's historical goodwill.
H Adjustment to record new goodwill, based on assumed fair values of ISG
assets acquired and liabilities assumed.
I Elimination of ISG's debt issuance costs related to debt retired as of
acquisition date.
J Reclassification of direct costs incurred by Headwaters related to
acquisition of ISG.
K Elimination of ISG's accrued interest paid by Headwaters at acquisition
date.
L Elimination of ISG's long-term debt retired by Headwaters at
acquisition date.
M Adjustment to record additional deferred income taxes on increased
value of identifiable intangible assets of ISG.
N Elimination of ISG's redeemable preferred stock, redeemed as part of
the acquisition.
O Headwaters common stock issued at closing.
P Elimination of ISG's capital accounts.
Q Elimination of ISG's accumulated deficit.
F-31
R Elimination of ISG's other equity.
S Amortization of increase in recorded value of ISG's identifiable
intangible assets, calculated using the straight-line method and a
20-year life.
T Elimination of ISG's historical non-deductible goodwill amortization
through December 31, 2001. ISG did not amortize its goodwill from
January 1, 2002 through June 30, 2002 nor is there any amortization of
the assumed goodwill, due to the implementation requirements of SFAS
142.
U Elimination of ISG's interest on long-term debt retired by Headwaters
at closing.
V Adjustment to record interest on new $175,000 long-term debt issuance
by Headwaters, calculated using a 9.0% effective interest rate, which
includes the amortization of debt discounts totaling $5,050 and
estimated debt issuance costs of $6,200. The effect of a 1/8% change in
the effective interest rate would be approximately $212 per year.
W Income tax effect of P&L-related pro forma adjustments, calculated
using a combined effective federal and state income tax rate of
approximately 40%.
X The pro forma combined net income per share amounts are based on (i)
Headwaters' historical weighted-average number of common shares
outstanding, plus (ii) the shares issued at the acquisition date
(2,100).
F-32