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
Date of Report (Date of earliest event reported): September 8, 2004
Headwaters Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 0-27808 87-0547337
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
10653 South River Front Parkway, Suite 300
South Jordan, UT 84095
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 984-9400
Not Applicable
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the
Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the
Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b)
under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c)
under the Exchange Act (17 CFR 240.13e-4(c))
This Current Report on Form 8-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 regarding future
events and our future results that are based on current expectations, estimates,
forecasts, and projections about the industries in which we operate and the
beliefs and assumptions of our management. Forward-looking statements include
Headwaters' expectations as to the managing and marketing of coal combustion
products, operations of facilities utilizing alternative fuel technologies, the
marketing of synthetic fuels, the availability of tax credits, the availability
of feed stocks, the receipt of licensing fees, royalties, and product sales
revenues, the development, commercialization, and financing of new technologies
and other strategic business opportunities and acquisitions, including without
limitation, our acquisition of Tapco Holdings, Inc., and other information about
Headwaters. Actual results may vary materially from such expectations. Words
such as "expects," "anticipates," "targets," "goals," "projects," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. In addition, any
statements that refer to projections of our future financial performance, our
anticipated growth and trends in our businesses, and other characterizations of
future events or circumstances, are forward-looking. For a discussion of the
factors that could cause actual results to differ from expectations, please see
the captions entitled "Forward-looking Statements" and "Risk Factors" in Item 7
of our Form 10-K for the year ended September 30, 2003, and the Risk Factors
described in Item 5 of our Form 8-K dated May 25, 2004 and in our Form S-3 filed
on July 20, 2004. There can be no assurance that our results of operations will
not be adversely affected by such factors. Unless legally required, we undertake
no obligation to revise or update any forward-looking statements for any reason.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of the applicable report.
Item 1.01. Entry into a Material Definitive Agreement.
On September 8, 2004, Headwaters Incorporated (the "Company" or
"Headwaters") acquired Tapco Holdings, Inc. ("Tapco") pursuant to an Agreement
and Plan of Merger (the "Agreement") dated September 8, 2004, by and among the
Company, Tapco, and Headwaters T Acquisition Corp., a Utah corporation and a
wholly-owned subsidiary of the Company ("Sub"), under which Sub merged with and
into Tapco. As a result of the Merger, Tapco is a wholly-owned subsidiary of the
Company. The Agreement and Plan of Merger is attached as Exhibit 10.89 which is
incorporated herein.
Tapco is a leading manufacturer of specialty siding accessories and
professional tools used in exterior residential home improvement and
construction. The total purchase price for the acquisition, excluding estimated
expenses to be incurred by the Company, was $715 million in cash. The purchase
price included the repayment at closing of Tapco's indebtedness under its bank
credit agreement and senior subordinated notes. Tapco stockholders will realize
the tax benefits, principally associated with the exercise of Tapco employee
nonqualified stock options. The transaction, including fees and expenses and the
refinancing of the Company's existing bank debt, was financed with borrowings
under the Company's new $865 million senior secured credit facilities entered
into on September 8, 2004, consisting of a $75 million revolving credit
facility, $640 million first lien term loans and $150 million second lien term
loans, as well as cash on hand. A description of the senior secured credit
facilities is included below under Item 2.03 Creation of a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement of a
Registrant and is hereby incorporated by reference to this Item.
To the Company's knowledge, there is no material relationship between
Tapco and the Company or any of its affiliates, any director or officer of the
Company, or any associate of any such director or officer.
Item 2.01: Completion of Acquisition or Disposition of Assets
On September 8, 2004, the Company acquired Tapco pursuant to an
Agreement and Plan of Merger, under which a wholly-owned subsidiary of the
Company merged with and into Tapco. As a result of the merger, Tapco is now a
wholly-owned subsidiary of the Company. A description of the Agreement and Plan
of Merger and the acquisition of Tapco Holdings, Inc. is included above under
Item 1.01 Entry into a Material Definitive Agreement and is hereby incorporated
by reference to this Item.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant.
As stated in Item 1.01 above, the Company financed its acquisition of
Tapco with borrowings under new $865 million senior secured credit facilities.
The $865 million senior secured credit facilities (the "Credit Facilities")
consists of a Credit Agreement ("Credit Agreement") dated September 8, 2004,
with the Lenders, Morgan Stanley Senior Funding, as administrative agent, Morgan
Stanley & Co. Incorporated, as collateral agent and JPMorgan Chase Bank, as
syndication agent, and a Second Lien Credit Agreement ("Second Lien Credit
Agreement"), dated as of September 8, 2004, with the Lenders, from time to time
parties thereto, Morgan Stanley Senior Funding Inc., JPMorgan Chase Bank and
Morgan Stanley & Co. Incorporated, as collateral agent. The Credit Agreement
consists of a $75 million revolving credit facility (the "Revolver") and a $640
million first lien term loan (the "1st Lien Term Loan"). The Second Lien Credit
Agreement consists of a $150 million second lien term loan ("2nd Lien Term
Loan"). There were no amounts drawn on the Revolver at closing, but it will be
available for the Company's future working capital and general corporate
purposes.
All obligations under the Credit Facilities are unconditionally
guaranteed by the Company's direct and indirect wholly-owned subsidiaries,
subject to certain exceptions. The Credit Facilities are secured by perfected
first and second priority liens and security interests in all shares of capital
stock and inter-company debt of the Company and its subsidiaries and all
material present and future property and assets of the Company and its
wholly-owned subsidiaries, subject to certain exceptions.
The Revolver bears interest, at the Company's option, at either the
London Interbank Offered Rate ("LIBOR") plus an assumed margin ranging from
1.75% to 2.5%, or the Base Rate plus an assumed margin ranging from minus 0.75%
to plus 1.50%. The fees for the unused commitments for the Revolver range from
0.50% to 0.75%. The margins and the commitment fees are determined quarterly in
accordance with a defined rate spread based upon the ratio (the "Total Leverage
Ratio") of the Company's average total funded indebtedness for the preceding
four quarters to earnings before interest, taxes, depreciation, depletion and
amortization ("EBITDA") for the twelve months ended on the last day of the most
recent calendar quarter. The assumed margins for the Revolver for the first six
months are 2.50% for LIBOR and 1.50% for Base Rate loans. The 1st Lien Term Loan
bears interest, at the Company's option, at either LIBOR plus an assumed margin
of 2.75% or the Base Rate plus an assumed margin of 1.75%. The 2nd Lien Term
Loan bears interest, at the Company's option, at either LIBOR plus an assumed
margin of 6.00% or the Base Rate plus an assumed margin of 5.00%. Base Rate is
the higher of the rate announced by Morgan Stanley Senior Funding and the
overnight rate charged by the Federal Reserve Bank of New York plus 0.50%. The
Company is required, within 90 days after the closing date, to enter into a
transaction that will limit its LIBOR interest rate on $300 million of the 1st
Lien Term Loan to a maximum of 5.0%.
The Company paid the Lenders origination fees equal to 1.75% of the
total amount committed for the Revolver and the 1st Lien Term Loan and 2.5% of
the amount committed for the 2nd Lien Term Loan.
Amounts outstanding under the Revolving Credit Facility shall be repaid
in full by September 8, 2009. The Lenders may accelerate the maturity of the
term loans and the Revolver if an event of default, as defined under the Credit
Agreement and Second Lien Credit Agreement, as applicable, occurs. The 1st Lien
Term Loan shall be repaid in full by April 30, 2011, subject to amortization of
1% per annum and the remainder in three installments due November, February and
April of the final year. The 2nd Lien Term Loan shall be repaid in full by
September 1, 2012. Borrowings under the 1st Lien Term Loan and the 2nd Lien Term
Loan may not be re-borrowed once repaid. There are mandatory prepayments of the
1st Lien Term Loan in the event of certain asset sales and debt and equity
issuances and from excess cash flow. Optional prepayments on the 1st Lien Term
Loan are permitted without penalty or premium. Optional prepayments on the 2nd
Lien Term Loan are limited during the first two years after the closing up to
$50 million. The Company will pay a premium of 4% on all optional prepayments on
the 2nd Lien Term Loan made during the first year, 3% on all optional
prepayments during the second year, 2% on all optional prepayments made on such
loans between the second and third years after closing and a 1% premium on all
optional prepayments on such loans between the third and fourth years after
closing.
The Lenders are entitled in connection with the syndication of the
Credit Facilities to make such adjustments to the pricing and other terms of the
Credit Facilities as the Lead Arrangers may in their discretion deem advisable,
subject to certain limitations.
The 1st Lien Term Loan and the Revolver are subject to financial
covenants, including (i) a maximum Total Leverage Ratio of 5.00:1.00 in 2004
declining to 3.50:1.00 in 2010, (ii) a maximum ratio of consolidated senior
funded indebtedness minus subordinated indebtedness to EBITDA of 4.00:1.00 in
2004 declining to 2.50:1:00 in 2010, and (iii) a minimum ratio of EBITDA plus
rent payments for the four preceding fiscal quarters to scheduled payments of
principal and interest on all indebtedness for the next four fiscal quarters of
4:00:1.00 in 2004 declining to 2.5:1.00 in 2010, as well as customary negative
and affirmative covenants, including limitations on additional indebtedness;
repurchasing capital stock; capital expenditures limited to $50 million in 2004
and increasing to $60 million in 2011; mergers, acquisitions and partnerships;
dividends and other restricted payments; and asset sales and sale-leaseback
transactions. Acquisitions will be limited to $50 million each fiscal year, of
which the cash consideration may not exceed $30 million, unless the Total
Leverage Ratio is less than or equal to 3.50:1:00, after giving effect to an
acquisition, in which case the foregoing limitation does not apply. The 2nd Lien
Term Loan is subject to separate customary covenants, not more onerous than
those to which the 1st Lien Term Loan and the Revolver are subject, including
(i) restrictions on indebtedness, contingent obligations, dividends, affiliate
transactions, liens, sale and leaseback transactions, asset sales, mergers and
acquisitions, and investments, and (ii) a maximum Total Leverage Ratio of
5.5:1.00 in 2004 and declining to 4.50:1:00 in 2006.
Item 7.01 Regulation FD Disclosure
On September 8, 2004, the Company issued a press release announcing the
acquisition of Tapco by the Company pursuant to an Agreement and Plan of Merger
dated September 8, 2004, by and among the Company, Tapco, and Headwaters T
Acquisition Corp., a Utah corporation and a wholly-owned subsidiary of the
Company ("Sub"), under which Sub merged with and into Tapco. As a result of the
Merger, Tapco is a wholly-owned subsidiary of the Company. The press release is
attached hereto as Exhibit 99.1.
On September 9, 2004, the Company issued a press release announcing the
grant of stock options to certain employees of Tapco, which grants were made
outside of the Company's existing plans. The press release is attached hereto as
Exhibit 99.2.
To supplement our consolidated financial statements presented in
accordance with generally accepted accounting principles ("GAAP"), we use a
non-GAAP measure that we refer to as EBITDA. We define EBITDA as net income
adjusted to exclude depreciation, amortization, net interest expense and income
taxes. EBITDA has been reconciled to net income. EBITDA is provided to enhance
the user's overall understanding of our current financial performance, our
ability to service our debt, our compliance with current debt covenants and our
ability to fund future growth. Specifically, we believe EBITDA provides useful
information to management, investors and debt holders and is a financial measure
used by the financial markets and rating agencies to analyze and compare
companies on the basis of operating performance and liquidity. Maintenance of
certain EBITDA measures are required under our Credit Facilities. EBITDA should
be considered in addition to results prepared in accordance with GAAP, but
should not be considered a substitute for or superior to GAAP results and may
not be comparable with similarly titled measures reported by other companies.
We have provided EBITDA in the press release at Exhibit 99.1. Certain
of our debt covenants require the calculation of EBITDA and we believe this
measure provides creditors and investors with another tool to evaluate our
ability to repay debt.
The information in this Item 7.01 of this Current Report on Form 8-K is
being furnished and shall not be deemed "filed" for the purposes of Section 18
of the Securities Exchange Act of 1934, or otherwise subject to the liabilities
of that Section. The information in this Item 7.01 of this Current Report on
Form 8-K shall not be incorporated by reference into any registration statement
or other document filed pursuant to the Securities Act of 1933, except as shall
be expressly set forth by specific reference in such a filing.
Item 8.01: Other Events.
The following is a description of our company with the consummation
of the Tapco acquisition, including competitive strengths and business
strategies and an overview of Tapco's business:
Headwaters is a diversified growth company providing products,
technologies and services to the energy, construction and home improvement
industries. Headwaters has grown dramatically over the last several years, both
organically and through strategic acquisitions that have allowed us to diversify
and pursue growth opportunities. Headwaters' acquisition strategy has
concentrated on opportunities that complement existing business lines, command
leading market positions, are accretive to earnings and generate significant
cash flow.
We conduct our business primarily through the following business units,
each of which is a leader in its market:
Headwaters Resources (formerly known as ISG Resources) is the largest
manager and marketer of coal combustion products ("CCPs") in the United States.
We create commercial value for CCPs using CCPs primarily as a replacement for
portland cement in a variety of concrete products. CCPs, such as fly ash and
bottom ash, are created when coal is burned and have traditionally been an
environmental and economic burden for coal-fueled power generators but, when
properly managed, can result in additional revenue for the utilities. Headwaters
manages approximately 20 million tons annually on an exclusive basis for many of
the nation's largest coal-fueled utilities, as well as from other industrial
clients. We have greatly expanded the commercial use of CCPs. As a result, we
have increased sales of high value CCPs used principally as a replacement for
portland cement in concrete from approximately 3.5 million tons in 1995 to
approximately 6 million tons in 2003. We have access to up to six million
additional tons of high value CCPs each year that are currently sent to
landfills, but could be used in higher-value applications, depending on demand,
treatment or available storage and transportation. Concrete made with fly ash is
stronger, more durable, less permeable and more corrosion resistant than
concrete made without fly ash. Further, concrete made with fly ash is easier to
work with than concrete made without fly ash due, in part, to its better pumping
and forming properties. Presently, fly ash replaces approximately 10% of the
portland cement used in concrete manufactured in the United States as compared
with 25% in Europe. Broader recognition of the performance, economic and
environmental benefits of fly ash has led the United States Environmental
Protection Agency ("EPA") and many state regulators to recommend or specify its
use.
Headwaters Construction Materials (formerly known as American
Construction Materials) is a market leader in designing, manufacturing and
marketing architectural stone veneer under the Eldorado Stone brand and also
holds regional market leadership positions in manufacturing and marketing
concrete blocks, mortar and stucco materials. The acquisitions of the Tapco and
Eldorado Stone businesses in 2004 have significantly transformed the
Construction Materials business unit and given Headwaters a national presence in
the commercial and residential improvement market. With the recent acquisition
of Tapco, this business unit has become a market leader in residential exterior
building products accessories (such as window shutters, gable vents and mounting
blocks) under various Tapco brands. We use fly ash in the manufacture of our
block, mortar and stucco products and intend to use fly ash in our manufactured
stone products. We are one of the largest suppliers in the U.S. of manufactured
stone and market these products primarily to the new construction industry
through our national network of distributors. We believe that the opportunity
exists to introduce Eldorado Stone products into the distribution channels of
Tapco to further penetrate the home improvement market. We are a regional market
leader in the Southwest United States in the packaged mortar and stucco
business, and we believe we are the largest supplier in the Texas concrete block
market. Our block, mortar and stucco products are used in both residential and
commercial building applications.
Headwaters Energy Services (formerly known as Covol Fuels) is the
market leader in enhancing the value of coal used in power generation through
licensing proprietary technologies and selling chemical reagents that convert
coal into a solid synthetic fuel. This solid synthetic fuel can be handled,
transported and burned more efficiently than coal. In addition, this solid
synthetic fuel qualifies for tax credits under Section 29 of the Internal
Revenue Code based upon the BTU (British Thermal Unit) content of the synthetic
fuel produced and sold. We currently license our technologies to 28 of a
company-estimated 75 coal-based solid synthetic fuel facilities in the United
States. In addition, we sell our proprietary chemical reagents to 19 of these
licensee facilities, as well as to more than 10 other synthetic fuel facilities.
The sale of qualified synthetic fuel enables facility owners who comply with
certain statutory and regulatory requirements to claim federal tax credits under
Section 29, which currently expires on December 31, 2007. Section 29's intent is
to reduce dependence on foreign sources of energy by more efficiently using
domestic energy resources.
Headwaters Technology Innovation Group ("HTI") develops and
commercializes proprietary technologies to convert or upgrade fossil fuels into
higher-value products and develops nanocatalyst technologies that have multiple
industrial and chemical applications. The energy-related technologies developed
or under development include direct coal liquefaction, the conversion of
gas-to-liquid fuels and the upgrading of heavy oil to lighter materials. HTI has
also developed a proprietary nanocatalyst technology that will allow for the
custom design of catalysts on an atomic scale for multiple industrial
applications, which should reduce costs and increase the efficiency of chemical
reactions. We believe nanotechnology will assist future energy and chemical
sustainability. The ability to align, space and adhere materials at the
molecular level creates value due to the size, shape and composition of these
materials. Nanocatalysts developed by HTI have the capability to increase the
conversion of heavy oil to usable materials, maximize efficiency in chemical and
energy production, improve the environment and create other value added
opportunities.
Competitive Strengths
Headwaters' competitive strengths include:
o Diversified Company with Leading Market Shares. Headwaters is a
diversified company with each of its business units enjoying leading market
shares. Headwaters Energy Services is the market leader in enhancing the value
of coal used in power generation through technologies and chemical reagents that
convert coal derivatives into a solid synthetic fuel; Headwaters Resources is
the largest manager and marketer of CCPs in the U.S.; Eldorado is the second
largest supplier of manufactured stone in the U.S.; and Tapco has one of the
broadest lines of siding accessory products in the U.S. Our culture of
innovation has helped us to establish and maintain our leading market share in
our core products. Headwaters continuously develops innovative products and
technologies and enhances existing products in response to specific customer
needs and to establish new markets through the development of new applications
for our existing products and technologies.
o Established Nationwide Presence. Our CCP, Eldorado Stone and Tapco
businesses have an established nationwide presence. We believe we have the most
extensive CCP infrastructure in the U.S. We have over 30 stand-alone CCP
distribution terminals across North America, as well as approximately 90 plant
site supply facilities. As a result, we believe our infrastructure enables us to
supply the largest concrete construction projects in the United States. Further,
Eldorado and Tapco have extensive distribution networks that provide national
marketing and sales opportunities for our diversified portfolio of building
products. Eldorado primarily distributes its manufactured stone products on a
wholesale basis through a network of distributors, including masonry and stone
suppliers, roofing and siding materials distributors, fireplace suppliers and
other contractor specialty stores and also has a small direct sales force. Tapco
maintains an extensive distribution network that consists of substantially all
of the major vinyl siding, roofing and window distributors in the U.S. Tapco
ships to more than 9,000 locations, including Home Depot and Lowe's. We believe
Tapco's penetration of these channels is due to contractor loyalty to Tapco
products, product breadth, the services Tapco provides to distributors and
Tapco's one-to-three-day order fulfillment. We believe our extensive
distribution network will be a key factor to our success in maintaining
profitability and market share.
o Economies of Scale Associated with Tapco Manufacturing Capabilities.
Tapco has invested extensively in its facilities to develop industry-leading,
state-of-the-art manufacturing operations. For example, with injection-molded
product volumes that we believe are larger than the volume of all Tapco's
competitors combined, Tapco has enjoyed the scale necessary to invest in
advanced robotics, multi-cavity molds, automated material delivery systems and
computerized manufacturing systems, which allow for tightly controlled cycle
times. As a result, Tapco is able to produce over 140,000 different SKUs and
ship over 400,000 orders annually with average ship times we have estimated for
all orders of less than three days from receipt. Further, high volumes,
multi-cavity tool use and 24-hour plant operations significantly reduce costs
relative to competitors in the siding market. We believe that no other
competitor in the accessory industry is as favorably positioned as Tapco to
service the "big-box" retailers.
o Long-Term Exclusive Contracts and Vendor of Choice. Our businesses
are characterized by long-term customer relationships, and Headwaters Resources
and Energy Services are also supported by long-term customer contracts.
Headwaters Resources has established long-term relationships and exclusive CCP
management contracts with many of the nation's major utilities. Headwaters
Resources contracts with these utilities to provide a source of high value CCPs
that can also be used in products produced by Headwaters Construction Materials.
We provide CCP management services to more than 110 power plants. Headwaters
Energy Services has long-term exclusive contracts to license technology to
synthetic fuel facilities. Our licensees and chemical reagent customers include
major utilities in the synthetic fuel industry. In addition, our chemical
reagents are manufactured by Dow Reichhold Specialty Latex LLC ("Dow Reichhold")
under a fixed price contract and are drop-shipped to customer sites, so that
Headwaters does not produce, take shipment of or inventory the reagents. Tapco
enjoys a large customer base with over 4,500 non-retail ship-to-locations and
5,200 retail ship to locations. Tapco is the sole national vendor to Home Depot
and Lowe's for injection-molded shutters, mounting blocks and gable vents. In
addition, Tapco supports its customers through a range of services such as the
tracking of sales by product, color and size by zip code, thereby enabling
improved inventory management. These relationships provide us with stable
revenues, earnings and cash flows and also give us credibility as we expand the
markets for our portfolio of diverse products and provide access to existing
customers when introducing new products, technologies and services.
o Organic Growth Potential. We believe that each of the principal
markets that we serve offers substantial opportunities for organic growth.
Headwaters Resources continues to drive market recognition and realization of
the performance, economic and environmental benefits of CCPs. We will continue
to benefit from growing market acceptance of fly ash in the United States, which
currently has a 10% cement replacement rate as opposed to a 25% cement
replacement rate in Europe. Headwaters Construction Materials has a leading
presence in what it believes to be two of the highest growth segments of the
siding market, manufactured stone and specialty molded products.
o Strong and Stable Free Cash Flow Generation. Headwaters' long-term
contracts, relationships with vendors and customers, leading market positions,
nationwide distribution network, manufacturing scale and low maintenance working
capital and capital expenditure levels should enable us to generate substantial
free cash flow. As we continue to grow our businesses we will remain focused on
maintaining these strengths. Further, the inherent cyclicality in building
products is partially offset by product diversity across the Headwaters
Construction Materials product portfolio that include many products that are
tied to the home improvement market, which generally has been less volatile than
the new construction market. As a result of the recent acquisition of Tapco, we
have improved the balance of sales mix between the home improvement and new
construction markets.
Growth Strategy
Our execution on our growth strategy has brought us strength in
diversity. We intend to realize future growth in the following ways:
o Leverage Distribution Systems. The Tapco, Eldorado and stucco
products have a strong "pull-through" market effect on Headwaters' end
customers, primarily architects, engineers and contractors. We plan to leverage
the complementary distribution systems of Tapco, Eldorado and Headwaters'
stucco, blocks and mortar products to accelerate sales of our diverse
construction materials product portfolio. For example, Tapco's strong
distribution and marketing presence in the home improvement industry creates a
marketing and sales opportunity for Eldorado Stone that is primarily marketed
and distributed to the new construction market. Headwaters Construction
Materials has relationships with a nationwide distribution network encompassing
over 9,000 wholesale distributors as well as leading retailers like Home Depot
and Lowe's. Further, we believe strong presence in the Southwest United States
and its leading regional concrete block presence in Texas creates new
distribution channels for Tapco products. We intend to leverage these
complementary distribution networks to create a national distribution network to
market and sell our diverse portfolio of products to new customers and new
segments of the construction market.
o Leverage Manufacturing Capability. We are committed to implementing
improvements throughout our manufacturing system. We intend to capitalize on
Tapco's manufacturing expertise to seek to reduce manufacturing costs across all
of our construction materials business units. Through the application of
state-of-the-art manufacturing processes and best practices and economies of
scale, we intend to optimize our manufacturing processes, increase product
volume, reduce waste and lower costs.
o Leverage Energy and CCP Relationships. Headwaters Energy Services and
Headwaters Resources maintain longstanding relationships with many of the
largest coal-fueled electricity producers in the United States. We believe these
relationships will provide opportunities to expand and strengthen our position
among coal-fueled power generation utilities. We intend to continue to develop
and commercialize technologies that add value to coal, gas, oil and other
natural resources. These efforts will focus on upgrading heavy oil to lighter
fuel, gas-to-liquid fuels conversion and converting or upgrading fossil fuels
into higher-value products. In addition, Headwaters Resources is developing and
commercializing new technologies such as carbon fixation and ammonia removal to
improve the quality of fly ash. We believe HTI's nanocatalyst technologies will
provide us with an opportunity for commercialization of multiple custom designed
catalysts.
o Pursue Complementary and Strategic Acquisitions. We continually
evaluate the potential acquisition of companies, technologies or products that
will complement our existing business lines, manufacturing and distribution
strengths and build on our leading market positions. Acquisition opportunities
will be evaluated based on strategic fit, accretion to earnings and ability to
generate significant cash flow.
o Expand Commercial Use and Enhance Quality of CCPs. We intend to
expand our market presence geographically and continue to seek increased market
acceptance of CCPs through targeted marketing of industry decision makers, such
as architects and engineers, and through efforts to increase governmental
recommendations and mandates to use CCPs. An important part of our strategy is
to expand alternative uses of CCPs, which allows us to increase sales of CCPs as
well as attract and maintain utility customers who value our efforts to develop
the market for CCPs. Alternative uses of CCPs include roadbeds, embankments,
building products (such as concrete blocks and manufactured stone) and waste
stabilization applications. We intend to use fly ash in the production of
Eldorado manufactured stone products as a partial replacement for cement. We
intend to continue to market the environmental and performance benefits of our
CCP-based building products to industry decision makers.
o Expand Marketing. We are committed to expanding sales in markets
where we currently have leadership positions by increasing awareness of our
products among existing and potential customers. We intend to leverage Tapco's
sales and marketing organization to increase sales through the expansion of
geographical coverage of our sales efforts and increased participation in
national and local trade shows to promote brand awareness among contractors,
architects and other building professionals. We plan to continue supporting our
distributors with product literature, displays, videos, product training
programs and showroom merchandising designed to increase awareness among
homeowners and contractors about the benefits of our products.
Tapco
The following is an overview of Tapco's business:
Tapco is a leading designer, manufacturer and marketer of building
products and professional tools used in exterior residential home improvement
and construction. Tapco's building products, which are either injection-molded
or extruded primarily from polypropylene, enhance the appearance of homes and
include window shutters (decorative, functional and storm protection), gable
vents, mounting blocks for exterior fixtures, roof ventilation, exterior decor
products (window headers/mantels, sunbursts, door surrounds, exterior dentil
trim and decorative windows) and specialty siding products (replica cedar shake
and shingle siding). Professional tools include portable cutting and shaping
tools used by contractors on site to fabricate customized aluminum shapes that
complement the installation of exterior siding.
Sales are currently driven by growth in the siding market, and more
particularly in the vinyl siding market. Growth in the siding market tends to
increase demand for accessory products as does growth in new product categories
like functional shutters and specialty siding. We believe the continued growth
in vinyl siding sales is a function of home improvement activity, construction
activity and consumer acceptance. Consequently, we believe Tapco's continued
sales growth will be primarily dependent upon the future use of vinyl siding as
a function of home improvement and new construction. Vinyl siding has continued
to gain acceptance and increased penetration among all siding materials.
According to an industry report, vinyl siding accounted for nearly 50% of all
siding sales in 2002. Tapco, through the introduction of new products, extensive
marketing, logistics management and acquisitions, has continued to increase its
penetration of accessories that accompany vinyl siding sales. As a result, Tapco
believes that it has the broadest product line of its core products in the
industry with more than 140,000 SKUs and accessories complementing all vinyl
siding in the market.
Approximately 75% of Tapco's sales during 2003 were tied to the home
improvement industry, which is typically less cyclical than new construction
because remodeling is generally less expensive than a new home and is often
required to preserve the value of a home. During economic downturns, we believe
vinyl siding is often more attractive than wood or brick because of its lower
cost. We believe that the use of Tapco's products is a way for contractors to
differentiate themselves and maximize sales because the products are more
aesthetically pleasing, easy to install and provide broader customer choice. As
a result, Tapco's products have experienced strong growth rates during economic
downturns. Additionally, Tapco's professional installation tools are purchased
by contractors to allow them to work independently of other business
arrangements when there are fewer over-all jobs, which can mitigate cyclicality.
Tapco markets its products under the brands "Tapco Products,"
"Mid-America Building Products," "Mid-America Master Series," "Builders Edge,"
"Atlantic Shutter Systems," "Vantage," and "The Foundry." Tapco markets its
injection-molded building product accessories to retailers and mass
merchandisers through its Builders Edge and Vantage brands and to the
manufactured housing market through its MHP brand. In addition, Tapco markets
its tools through its Tapco brand, its functional shutters and storm protection
systems through its Atlantic Shutter Systems brand and its specialty siding
product through its Foundry brand.
Business Segment and Products
Tapco's business is organized into two segments: building products and
professional tools. Tapco's building products segment accounted for $208
million, or 88% of gross sales for the fiscal year ending October 31, 2003. The
professional tools segment accounted for $28 million, or 12% of gross sales for
the fiscal year ending October 31, 2003. Each of the building products and
professional tools segments are comprised of several different product
categories.
o Building Products. Tapco designs, manufactures and markets
injection-molded window shutters, gable vents and exterior fixture
mounting blocks. In addition, Tapco manufactures roof vents, specialty
vents, window mantels, door surrounds, accent windows, functional
shutters and specialty vinyl siding. Tapco's building products serve
the needs of the siding, roofing, and window and door installation
industries. Tapco's injection-molded products are designed to enhance
the exterior appearance of the home while delivering durability at a
lower cost compared to similar aluminum, wood and plastic products
while the functional shutters offer storm protection and also enhance
the exterior appearance of the home. The injection-molded exterior
products feature copolymer construction and stabilized molded-through
color.
o Decorative Shutters. Tapco offers what it believes to be the industry's
most complete line of standard and custom plastic window shutters, with
an extensive number of sizes and colors. Standard shutters, both open
louver and raised panel, are available in 2 widths, 14 standard
lengths, 16 colors and paintable. Style-a-Shutter, Tapco's line of
custom shutters and matching shutter components, is available in up to
13 widths, practically any length, 24 styles, 18 colors and paintable.
All of Tapco's shutters feature the patented Shutter-Lok fastening
system, which facilitates ease of installation on any siding material
including wood, aluminum, vinyl, stucco, hardboard or brick.
o Gable Vents. GableMaster gable vents accommodate any architectural
style with over 35 size and design variations available in over 220
colors including paintable and stainable. Style-a-Vent, Tapco's line of
custom vents, are available in many shapes and sizes and in two colors.
GableMaster vents not only provide the needed ventilation, but also add
an important aesthetic benefit to a home. Each gable vent features a
patented lock-on ring, which significantly reduces installation time by
eliminating the need for caulking or channeling and, like Tapco's
shutters, can be easily installed on any siding material. The
GableMaster product line is screened for complete insect protection and
includes a double baffle system for weather resistance.
o Mounting Blocks. Tapco manufactures what it believes to be the
industry's most extensive line of mounting blocks, used for the
mounting of exterior fixtures such as lights, electrical outlets,
faucets, doorbells, and address plates. Each mounting block also
features a patented lock-on ring for easy installation and comes in 27
different styles and over 200 colors.
o Roof Vents. Tapco produces a broad line of roof ventilation products,
including ridge, hip, and stack covers.
o Specialty Vents. Tapco manufactures a broad line of specialty vents,
including air intake and exhaust vents, dryer vents and foundation
vents in over 200 colors including paintable.
o Functional Shutters. Tapco manufactures functional shutter systems for
storm protection and decorative applications. Accordion shutters and
hinged colonial shutters can be custom fit and custom painted. Bahama
shutters are available as raised panel shutters as well as louvered and
can also be custom fitted and custom painted.
o Door Surrounds. Tapco produces standard and custom headers. Custom
headers are available in white and paintable and standard headers are
available in 30 colors and paintable. The door surrounds are available
in any size up to 20 feet wide to fit single doors, double doors,
sliding doors and garage doors.
o Window Headers. Tapco's window headers are available in each of Tapco's
shutter colors and in 16 additional colors. Window mantels custom-fit
any window and can be installed in approximately five minutes by a
professional.
o Exterior Trim. Exterior dentil trim, which comes in either square or
scalloped, complements Tapco's other building product offerings. Both
styles are available in over 33 colors and paintable.
o Specialty siding. Tapco manufactures specialty siding (replica cedar
and shake siding) under the Foundry brand. Tapco's specialty siding
product is available in 10 different profiles and 16 different colors.
The siding can be used for accent applications or whole house
applications and can be installed easily by a professional siding
installer. The Foundry's specialty siding utilizes a proprietary
extrusion and in-line forming process for production, as opposed to the
injection-molded process utilized by most competitors. The extrusion
process allows for changes in profiles and panel dimensions at a lower
cost than injection molding. This cost savings has allowed Tapco to
sell it at a lower price point than traditional injection molded
specialty siding products. In addition, the installation process of our
specialty siding is the same as traditional siding, unlike the
specialized installation process required by competitors' specialty
siding products. The Foundry siding can be installed faster and with
less scrap than traditional vinyl siding. These characteristics
increase the profitability of using The Foundry's product relative to
other types of vinyl siding.
Professional Tools. Tapco believes it is the largest manufacturer of
portable cutting and shaping tools for the professional siding contractor in the
United States. These tools enable installers of vinyl and aluminum siding to
form virtually any required shape on-site. Tapco's principal installation tool
is the bending brake, which is provided in a variety of products. Brakes hold
sheet metal in place for bending and cutting during the installation process.
Tapco also offers a number of accessories for brakes, which are designed to
enhance their utility.
Distribution
Tapco's products are distributed throughout the United States and Canada through
four primary distribution channels: one-step distributors that sell directly to
contractors, two-step distributors that sell Tapco's products to lumberyards and
one-step distributors, retail home centers/mass merchandisers and manufactured
housing.
Tapco distributes its accessory products to the retail mass merchandiser channel
through Builders Edge(R) (Home Depot) and Vantage(R) (Lowe's) brands. Tapco
distributes its products to the manufactured housing industry through
Manufactured Housing Products, a division of Metamora Products Corporation.
Tapco also distributes its products through all of the major vinyl siding,
roofing, and window distributors. Many competitors, in contrast, manufacture
accessory products as an adjunct to their core siding business.
Tapco's large number of distribution points is due in large part to the strong
customer "pull" demand for its products. Tapco seeks to be the leader in each
meaningful distribution channel by providing the broadest selection of products
coupled with high levels of customer service. Tapco is able to secure multiple
distribution points in local markets because its products are not limited to any
of the major branded roofing, siding, window and door distributors. Many of
Tapco's competitors offer products as an adjunct to their core roofing, siding,
window or door operations. As a result, their distribution is typically limited
to the authorized distributor of their core branded products. Tapco, in
contrast, typically distributes its products through all of the various major
branded products distributors, such as Alcoa, ABT, Owens-Corning, and others.
In the building products category, Tapco differentiates its products by
distribution channel through the use of different brands, company names and
packaging. Sales to the retail home center and mass merchandiser segment, for
example, are made under the Builders Edge(R) and Vantage(R) brand and company
name, while sales to one-step and two-step distribution channels are made under
the "Master Series(R)" brand and Mid-America Building Products company name.
Sales and Marketing Organization
Tapco's sales and marketing organization supports the one-step, two-step
distribution, and retail channels through various networks of sales support. The
one- and two-step channels include a network of approximately 85 independent
sales representatives. The retail business includes a network of approximately
100 independent sales representatives, managed by two national account managers
and one vice president of sales.
Tapco maintains relationships with thousands of local contractors, professional
builders, and other end-users by participating in over 1,000 local shows and
approximately six national shows annually. Local shows, sponsored by local
distributors, enable Tapco to promote its products through hands-on comparisons
to competing products. These shows enable Tapco to receive useful feedback from
local contractors, which leads to new product ideas, as well as significant
goodwill within the trade.
Tapco supports distributors with product literature, displays, videos, product
training programs and showroom merchandising designed to increase awareness
among homeowners and contractors about the benefits of Tapco's products. In
addition, Tapco maintains a large mailing list of active contractors, which
Tapco gathers from warranty registration cards, local and national shows and
requests for videos and product literature.
Customers
Tapco has a large customer base. Because all of the one- and two-step
distributors have multiple locations and each individual location has autonomy
to stock various products from different suppliers, the number of ship-to
locations is a better measure of the breadth of sales than is the total number
of customers. In the residential home improvement and building products market,
Tapco has over 4,500 non-retail ship-to locations and over 5,200 retail ship-to
locations. Sales are broadly diversified across customers and ship-to locations.
For the fiscal year ended October 31, 2003, two customers represented
approximately 25% of Tapco's total sales.
Manufacturing Facilities and Properties
Tapco's headquarters are located in Wixom, Michigan, approximately 30 miles
northwest of Detroit. Tapco conducts its manufacturing, distribution and sales
operations through nine facilities, which total approximately 820,000 square
feet. Tapco owns most of its facilities.
Tapco's manufacturing assets include more than 100 injection molding presses,
almost all of which are automated through robotics or conveyor systems. Robotic
automation has reduced cycle times and helped reduce waste by keeping cycle
times consistent from part to part. Tapco has realized cycle time improvements
on all presses utilizing automation. Tapco's high volume allows it to invest in
multi-cavity tooling, resulting in significantly lower unit costs over single
cavity tooling. The manufacturing assets also include 5 extrusion lines.
Tapco follows strict quality control standards in its efforts to produce
products of consistent quality and free of production flaws. Any nonconforming
plastic parts are reused as raw material, thus further minimizing waste. Tapco
mandates quality control checks at each step of the manufacturing process and
maintains on-site quality control inspectors on each production line.
Suppliers and Raw Materials
Tapco has long-standing relationships with its major suppliers. Tapco purchases
raw materials, including polypropylene and styrene pellets, plastic extrusions,
and packaging materials for Tapco's building product lines. In addition, Tapco
purchases fabricated anodized aluminum, hinges and other components, and
packaging materials for its professional installation tools. Although Tapco has
a variety of suppliers, Tapco purchases these components and raw materials from
primarily one supplier on a purchase order basis. Historically, Tapco has not
experienced difficulty in obtaining raw materials or components to meet its
production requirements. From time to time, prices for some of the raw materials
used in Tapco's production/assembly process fluctuate. Although Tapco does not
have any contracts with its suppliers and purchases supplies on a purchase order
basis, Tapco occasionally makes volume purchases of materials to lock-in
pricing.
Patents and Trademarks
Tapco's products and methods are protected by almost 100 patents and it also has
47 pending patent applications worldwide. Approximately 20% of Tapco's patents
will expire at the end of term during the next eight years. While Tapco cannot
ascertain what effect the loss of such patents will have, management believes
that Tapco's products are also dependent on other proprietary design features
and the quality, functionality, design and appearance of the products. Tapco
currently has 50 issued and 29 pending U.S. and Canadian trademark
registrations.
Competition
In the residential remodeling and building products segment, Tapco competes
against numerous manufacturers. In shutters, gable vents, mounting blocks and
specialty vents, Tapco's major competitor is Aluminum Company of America. In
addition, several small, privately owned manufacturers of shutters exist, most
of which serve local or regional markets and produce low-end vacuum molded
products. In roofing ventilation products, Tapco competes against a large number
of roofing manufacturers, such as GAF Materials Corporation, Owens Corning and
CertainTeed Corp. In the professional tools segment, Tapco competes principally
with Malco and Van Mark Products Inc. Competition in each of these markets is
primarily based on quality, breadth of product-line, lead times and field and
marketing support.
Employees
As of October 31, 2003, Tapco employed more than 1,000 full-time and part-time
employees; none of the employees belong to a union. Headwaters believes that
Tapco's employee relations are good.
Item 9.01: Financial Statements and Exhibits.
(a) The following consolidated financial statements of Tapco Holdings,
Inc. are included herein:
Report of Independent Auditors
Consolidated Balance Sheets as of October 31, 2002 and 2003
and Unaudited as of July 31, 2004
Consolidated Statements of Income for the Years Ended
October 31, 2001, 2002 and 2003 and Unaudited Nine Months
Ended July 31, 2003 and 2004
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2001, 2002 and 2003 and Unaudited Nine Months
Ended July 31, 2003 and 2004
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for the Years Ended October
31, 2001, 2002 and 2003 and Unaudited Nine Months Ended
July 31, 2004
Notes to Consolidated Financial Statements
(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, 2004
Pro Forma Condensed Combined Statement of Income for the Year
Ended September 30, 2003
Pro Forma Condensed Combined Statement of Income for the Nine
Months Ended June 30, 2004
Notes to Pro Forma Condensed Combined Financial Information
(c) Exhibits.
Exhibit 10.89: Agreement and Plan of Merger by and among
Headwaters Incorporated, Headwaters T
Acquisition Corp., and Tapco Holdings, Inc.,
dated as of September 8, 2004
Exhibit 99.1: Press Release dated September 8, 2004.
Exhibit 99.2: Press Release dated September 9, 2004.
Tapco Holdings, Inc.
Consolidated Financial Statements
For the years ended October 31, 2001, 2002 and 2003
and the nine months ended July 31, 2003 and 2004
Report of Independent Auditors
To the Board of Directors and Stockholders of
Tapco Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity (deficit) and
comprehensive income (loss) and of cash flows present fairly, in all material
respects, the consolidated financial position of Tapco Holdings, Inc. and its
subsidiaries at October 31, 2002 and 2003, and the results of their operations
and their cash flows for the three years in the period ended October 31, 2003,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2, effective November 1, 2002, the Company adopted
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets."
/s/ PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
December 23, 2003
Tapco Holdings, Inc.
Consolidated Balance Sheets
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
October 31, July 31,
2002 2003 2004
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 11,912 $ 1,630 $ 259
Trade receivables (net of allowance of $997, $1,084 and
$1,095 (unaudited), respectively) 39,275 43,179 44,995
Inventories (Note 3) 13,750 13,756 19,313
Deferred income taxes (Note 10) 1,749 2,019 1,182
Prepaids and other 1,081 985 1,184
--------------- -------------- ----------------
Total current assets 67,767 61,569 66,933
--------------- -------------- ----------------
Property, plant and equipment, net (Note 4) 57,110 59,304 61,517
Goodwill (Note 2) 48,787 50,711 50,895
Other intangible assets, net (Note 2) 8,432 9,952 9,355
Deferred financing fees, net 6,239 5,005 4,124
Other assets 84 170 156
--------------- --------------- ---------------
Total assets $ 188,419 $ 186,711 $ 192,980
=============== =============== ===============
Liabilities, preferred stock and stockholders' equity (deficit)
Current liabilities
Current portion of notes payable and long-term obligations (Note 8) $ 18,704 $ 18,661 $ 20,723
Trade accounts payable 8,805 10,348 14,518
Taxes payable (Note 10) 3,369 1,832 3,274
Accrued interest 2,551 22,362 18,580
Accrued liabilities (Note 6) 12,199 12,753 11,021
--------------- --------------- ---------------
Total current liabilities 45,628 65,956 68,116
--------------- --------------- ---------------
Long-term obligations, net of current portion (Note 8) 263,566 234,414 229,228
Other long-term liabilities 30,245 17,474 6,579
Deferred income taxes (Note 10) 5,768 9,879 10,870
--------------- --------------- ---------------
Total liabilities 345,207 327,723 314,793
--------------- --------------- ---------------
Commitments and contingencies (Note 12) - - -
Preferred stock, par value $.01, 245,000 shares authorized,
issued and outstanding (Note 9) 24,500 24,500 24,500
Stockholders' equity (deficit)
Common stock, par value $.33, 13,000,000 shares authorized,
7,589,717 shares issued and outstanding 2,530 2,530 2,530
Additional paid-in capital 89,097 89,097 89,097
Accumulated other comprehensive income (loss) (3,283) (1,249) (122)
Accumulated deficit (269,632) (255,890) (237,818)
--------------- --------------- ---------------
Total stockholders' equity (deficit) (181,288) (165,512) (146,313)
--------------- --------------- ---------------
Total liabilities, preferred stock and stockholders' equity
(deficit) $ 188,419 $ 186,711 $ 192,980
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
Tapco Holdings, Inc.
Consolidated Statements of Income
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
For the year For the nine months
ended October 31, ended July 31,
2001 2002 2003 2003 2004
(unaudited) (unaudited)
Net sales $ 165,876 $ 202,815 $ 212,816 $ 147,282 $ 171,339
Cost of sales 89,667 115,513 126,729 89,617 94,979
------------ ------------ ------------ ------------ ------------
Gross profit 76,209 87,302 86,087 57,665 76,360
Selling, general, and
administrative 27,365 33,773 34,655 25,079 28,291
(Gain) loss on sale of fixed
assets (1,537) (444) 23 12 9
------------ ------------ ------------ ------------ ------------
Income from operations 50,381 53,973 51,409 32,574 48,060
Other income (expense)
Interest expense (33,397) (31,310) (30,456) (22,672) (19,499)
Interest and dividend income 232 151 81 70 3
Other income (expense), net (201) 167 (250) 109 169
------------ ------------ ------------ ------------ ------------
Income before income taxes 17,015 22,981 20,784 10,141 28,673
Income tax provision 4,138 8,863 7,042 3,703 10,601
------------ ------------ ------------ ------------ ------------
Net income $ 12,877 $ 14,118 $ 13,742 $ 6,438 $ 18,072
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
Tapco Holdings, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
For the year
--------------------------------------- For the nine months
ended October 31, ended July 31,
2001 2002 2003 2003 2004
(unaudited) (unaudited)
Cash flow from operating activities
Net income $ 12,877 $ 14,118 $ 13,742 $ 6,438 $ 18,072
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 8,751 9,952 11,228 7,731 8,343
(Gain) loss on disposition of fixed
assets (1,537) (444) 23 12 9
Deferred taxes (2,224) 3,129 3,262 1,825 1,076
Change in other assets and liabilities,
net of assets acquired
Trade receivables (3,668) (4,913) (2,929) (4,507) (1,816)
Inventories 1,046 4,421 469 (3,196) (5,557)
Prepaids and other 679 214 (108) (562) (325)
Taxes payable (287) 10 (2,316) (852) 1,442
Trade accounts payable 129 (1,524) 622 2,690 4,110
Accrued liabilities and other 2,351 11,288 10,890 4,505 (14,512)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities 18,117 36,251 34,883 14,084 10,842
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities
Purchases of fixed assets (10,916) (18,393) (12,649) (10,870) (9,100)
Proceeds from sale of fixed assets 30 5,580 1,430 50 11
Acquisitions of businesses, net of cash
acquired (2,939) (36,733) (4,400) - -
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (13,825) (49,546) (15,619) (10,820) (9,089)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities
Debt issue costs (1,130) (518) - - -
Issuance of common stock 50 - - - -
Common stock redemption - (584) - - -
Issuance of preferred stock - 24,500 - - -
Principal payments on notes payable and
long-term obligations (65,755) (40,980) (47,713) (30,028) (26,189)
Proceeds from notes payable and long-term
obligations 21,204 42,619 18,167 19,515 23,065
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (45,631) 25,037 (29,546) (10,513) (3,124)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash (41,339) 11,742 (10,282) (7,249) (1,371)
Cash and cash equivalents - beginning of
period 41,509 170 11,912 11,912 1,630
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents - end of period $ 170 $ 11,912 $ 1,630 $ 4,663 $ 259
============ ============ ============ ============ ============
Supplemental disclosures of cash flow
information
Cash paid for
Interest $ 22,348 $ 21,852 $ 18,129 $ 15,324 $ 12,193
============ ============ ============ ============ ============
Income taxes $ 5,000 $ 5,686 $ 6,394 $ 4,109 $ 7,897
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
Tapco Holdings, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive Common Common Additional Accumulated Accumulated Total
income stock stock paid-in other deficit stockholders'
shares amount capital comprehensive equity
income (loss) (deficit)
Balance at November 1, 2000 7,609,379 $ 2,536 $ 89,625 $ - $ (296,627) $ (204,466)
========= ======= ======== ======== ========== ==========
Foreign currency translation $ 27 27 27
Issuance of common stock 2,000 1 49 50
Change in fair value of interest
rate protection agreements,
net of taxes of $2,766 (4,711) (4,711) (4,711)
Net income for the period 12,877 12,877 12,877
-------- --------- ------- -------- -------- ---------- ----------
Balance at October 31, 2001 $ 8,193 7,611,379 $ 2,537 $ 89,674 $ (4,684) $(283,750) $(196,223)
======== ========= ======= ======== ======== ========== ==========
Foreign currency translation (32) (32) (32)
Common stock redemption (21,662) (7) (577) (584)
Change in fair value of interest
rate protection agreements,
net of taxes of $786 1,433 1,433 1,433
Net income for the period 14,118 14,118 14,118
-------- --------- ------- -------- -------- ---------- ----------
Balance at October 31, 2002 $ 15,519 7,589,717 $ 2,530 $ 89,097 $ (3,283) $ (269,632) $ (181,288)
======== ========= ======= ======== ======== ========== ==========
Foreign currency translation (56) (56) (56)
Change in fair value of interest
rate protection agreements,
net of taxes of $786 2,090 2,090 2,090
Net income for the period 13,742 13,742 13,742
-------- --------- ------- -------- -------- ---------- ----------
Balance at October 31, 2003 $ 15,776 7,589,717 $ 2,530 $ 89,097 $ (1,249) $ (255,890) $ (165,512)
======== ========= ======= ======== ======== ========== ==========
Foreign currency translation
(unaudited) (60) (60) (60)
Change in fair value of interest
rate protection agreements,
net of taxes of $751 (unaudited) 1,187 1,187 1,187
Net income for the period (unaudited) 18,072 18,072 18,072
-------- --------- ------- -------- -------- ---------- ----------
Balance at July 31, 2004 (unaudited) $ 19,199 7,589,717 $ 2,530 $ 89,097 $ (122) $ (237,818) $ (146,313)
======== ========= ======= ======== ======== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1. Basis of Presentation and Nature of Operations
The accompanying financial statements have been prepared to show all of
the assets, liabilities, equity and results of operations of Tapco
Holdings, Inc. ("Tapco Holdings" or "Holdings") and its wholly-owned
subsidiaries, Tapco International Corporation ("Tapco"), Wamco
Corporation ("Wamco") and Metamora Products Corporation ("Metamora")
(collectively, the "Company"). In October 2001, the Company purchased
certain assets of Atlantic Shutter Systems ("Atlantic Shutter"). In
April 2002, the Company formed Vantage Building Products Corporation
("Vantage"), which subsequently purchased certain assets from Vantage
Products Corporation, an unaffiliated entity. In August 2003, the
Company acquired MTP, Inc. ("MTP"). Accordingly, these entities have
been consolidated as of the respective purchase dates. Intercompany
balances, transactions and stockholdings between the entities included
in the consolidated financial statements have been eliminated.
The accompanying interim consolidated statements of income and of cash
flows for the nine months ended July 31, 2003 and 2004, the
consolidated statements of stockholder's equity (deficit) and
comprehensive income (loss) for the nine months ended July 31, 2004,
and the consolidated balance sheet as of July 31, 2004, have not been
audited. However, they have been prepared in conformity with the
accounting principles stated in the audited financial statements for
the years ended October 31, 2001, 2002 and 2003. The foregoing interim
consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position
and results of operations for the interim periods presented. Interim
period operating results are not necessarily indicative of the results
to be expected for the full year.
As of October 31, 2001, 2002 and 2003 and July 31, 2004, Tapco Holdings
held all of the 1,000 outstanding shares of Tapco. The majority
shareholder of Tapco Holdings is Fremont Investors II, LLC. Fremont
Investors II, LLC, is a Delaware limited liability company formed by
Fremont Partners, L.P. ("Fremont Partners"). Fremont Partners is a
private equity fund.
Tapco is a designer and marketer of injection molded building products
manufactured by Metamora and a designer, manufacturer and marketer of
professional tools used in residential remodeling and construction.
Metamora is a manufacturer of injection molded building products,
primarily for use in the home construction industry.
Wamco is a holding company.
Builders Edge and Vantage are marketers of residential remodeling and
building products manufactured by Tapco and its subsidiaries.
Atlantic Shutter is a designer, manufacturer and marketer of functional
shutters for storm protection, security and decorative applications.
MTP is a manufacturer and marketer of specialty vinyl siding.
2. Summary of Significant Accounting Policies
Revenue recognition
-------------------
Revenue is recognized upon shipment of product to the customer.
Estimated sales rebates and allowances are accrued as the related sales
are recorded.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
-------------------------
The Company considers all highly-liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Inventories
-----------
Total inventories are valued at the lower of cost or estimated
realizable value. Inventory cost, which includes direct material,
direct labor and allocations of certain manufacturing overhead costs,
is determined using the first-in, first-out method.
Property, plant and equipment
-----------------------------
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed on a straight-line basis using
the estimated useful lives of the respective assets. The cost and
accumulated depreciation applicable to assets retired or sold are
removed from the accounts and the gain or loss on disposition is
recognized in income. The Company evaluates potential impairment of
long-lived assets when appropriate. If the carrying value of an asset
exceeds the sum of its undiscounted expected future cash flows, the
asset's carrying value is adjusted to fair value.
Concentration of credit risk
----------------------------
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable, cash and interest rate protection agreements.
Two customers accounted for approximately 22%, 23%, 25%, 25% and 23% of
total sales for the years ended October 31, 2001, 2002 and 2003 and the
nine months ended July 31, 2003 (unaudited) and 2004 (unaudited),
respectively. Amounts due from these customers included in trade
receivables were $9,435, $11,202 and $10,004 at October 31, 2002 and
2003 and July 31, 2004 (unaudited), respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company monitors its
exposure for credit losses and maintains related allowances for
doubtful accounts. Allowances are estimated based upon specific
customer balances where a risk of default has been identified and also
include a provision for non-customer specific defaults based upon
historical collection, return and write-off activity.
The Company employs interest rate protection agreements with large
financial institutions as the counterparties.
Income taxes
------------
Tapco Holdings and its subsidiaries file consolidated federal income
tax returns. The provision for income taxes has been computed on a
separate return basis. Deferred income taxes are provided on the
differences in the book and tax bases of assets and liabilities at the
statutory tax rates expected to be in effect when such differences are
reversed.
Deferred costs
--------------
Deferred debt issue costs associated with the various debt issues are
being amortized over the terms of the related loans, using the
effective interest method. Amortization approximated $1,587, $1,206
$1,294, $990 and $924 for the years ended October 31, 2001, 2002 and
2003 and the nine months ended July 31, 2003 (unaudited) and 2004
(unaudited), respectively, and is included in interest expense in the
statement of income and as a component of depreciation and amortization
in the statement of cash flows.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Goodwill and intangible assets
------------------------------
On January 1, 2002, SFAS No. 142, "Goodwill and Other Intangible
Assets," became effective. In accordance with SFAS No. 142, effective
November 1, 2002 the Company no longer records amortization expense
related to goodwill.
Had the non-amortization provisions of SFAS No. 142 been in effect
during the years ended October 31, 2001 and 2002, net income would have
been reported as follows:
October 31,
2001 2002
Net income as reported $ 12,877 $ 14,118
Goodwill amortization, net of tax 2,088 1,085
----------- -----------
Net income as adjusted $ 14,965 $ 15,203
=========== ===========
SFAS No. 142 prescribes a two-phase process for impairment testing of
goodwill. The first phase screens for impairment, while the second
phase, if necessary, measures the impairment.
The Company completed the transitional and annual goodwill impairment
testing in 2003 by comparing the fair value of the building products
reporting unit to its carrying value. Fair value was determined using a
discounted cash flows method. This evaluation indicated that goodwill
recorded was not impaired.
The changes in the carrying amount of goodwill were as follows:
October 31, July 31,
2002 2003 2004
(unaudited)
Balance - beginning of period $ 35,393 $ 48,787 $ 50,711
Additions 14,308 445 -
Adjustments 171 1,479 184
Amortization (1,085) - -
---------- ---------- ----------
Balance - end of period $ 48,787 $ 50,711 $ 50,895
========== ========== ==========
Additions to goodwill represent the acquisition of Vantage in 2002 and
MTP in 2003. Adjustments to goodwill include purchase price adjustments
related to the finalization of the purchase price allocations for
Atlantic Shutter in 2002, Vantage in 2003 and MTP in 2004.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Goodwill and other intangible assets (continued) Other intangible
assets are stated at cost less accumulated amortization and are being
amortized on a straight-line basis over their estimated useful lives.
Other intangible assets consisted of the following:
October 31, 2002
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
Trade Names (15-35 years) $ 3,185 $ (128) $ 3,057
Customer list (15 years) 5,000 (167) 4,833
Patents (17 years) 552 (10) 542
---------- ----------- ----------
Total $ 8,737 $ (305) $ 8,432
========== =========== ==========
October 31, 2003
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
Trade Names (15-35 years) $ 3,185 $ (272) $ 2,913
Customer list (15 years) 5,880 (510) 5,370
Patents (17 years) 552 (53) 499
Non-competition agreements (5 years) 400 (13) 387
Technology (5 years) 810 (27) 783
---------- ----------- ----------
Total $ 10,827 $ (875) $ 9,952
========== =========== ==========
July 31, 2004
(unaudited)
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
Trade Names (15-35 years) $ 3,185 $ (361) $ 2,824
Customer list (15 years) 5,880 (804) 5,076
Patents (17 years) 552 (85) 467
Non-competition agreements (5 years) 400 (73) 327
Technology (5 years) 810 (149) 661
---------- ----------- ----------
Total $ 10,827 $ (1,472) $ 9,355
========== =========== ==========
As of October 31, 2003, total future annual amortization related to
intangible assets is expected to approximate $796 in 2004 through 2007
and $756 in 2008.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Warranty
--------
Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related
revenue is recognized. The liability associated with warranty was
included in other long-term liabilities. Warranty activity was as
follows:
October 31, July 31,
2002 2003 2004
(unaudited)
Balance - beginning of period $ 137 $ 115 $ 127
Provision for warranties issued 18 47 24
Payments (40) (35) (15)
------- ------- -------
Balance - end of period $ 115 $ 127 $ 136
======= ======= =======
Accounting for stock options
----------------------------
The Company accounts for stock-based compensation using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The stock option program
provides for the granting of options to directors, officers and key
employees of the Company for purchase of Tapco Holdings common shares.
At October 31, 2003 and July 31, 2004, the Company has Stock Option and
Stock Subscription Agreements with certain employees, which are
described more fully in Note 7. The following table illustrates the
effect on net income if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" to stock-based employee compensation:
For the year For the nine months
ended October 31, ended July 31,
2001 2002 2003 2003 2004
(unaudited) (unaudited)
Net income, as reported $ 12,877 $ 14,118 $ 13,742 $ 6,438 $ 18,072
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related tax
effects (680) (578) (622) (462) (156)
---------- ---------- ---------- ---------- ----------
Pro forma net income $ 12,197 $ 13,540 $ 13,120 $ 5,976 $ 17,916
========== ========== ========== ========== ==========
The fair value of each option was estimated on the grant date using the
Black-Scholes option pricing model, with no assumed dividends or
volatility, a weighted average risk-free interest rate of 5.0% for 2001
and 4.23% for 2002 and expected lives of five years. No options were
granted in 2003 or 2004.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Accounting for derivative instruments
-------------------------------------
All derivative instruments are recognized as assets or liabilities on
the balance sheet and measured at fair value. Changes in fair value are
recognized currently in earnings unless the instrument qualifies for
hedge accounting. Under hedge accounting, changes are recorded as a
component of other comprehensive income to the extent the hedge is
considered effective. Any ineffectiveness is recognized currently in
earnings.
New accounting pronouncements
-----------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for the Company for financial
instruments entered into or modified after May 31, 2003, and otherwise
shall be effective August 1, 2003. The adoption of SFAS No. 150 did not
have a material impact on the Company's operating results or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies the accounting guidance on derivative instruments and hedging
activities that fall within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003,
with certain exceptions, and for hedging relationships designated after
June 30, 2003. SFAS No. 149 is to be applied prospectively. The
adoption of SFAS No. 149 did not have a material impact on the
Company's operating results or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." In December 2003, the
FASB issued a revision to FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46
determines whether consolidation is required under the "controlling
financial interest" model of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," (or other existing authoritative
guidance) or, alternatively whether the variable interest model under
FIN 46 should be used to account for existing and new entities. FIN 46
is effective for the Company for variable interest entities with which
the Company becomes involved beginning January 1, 2004, and otherwise
shall be effective for the fiscal year beginning November 1, 2005. The
adoption of FIN 46 did not have a material impact on the Company's
operating results or financial position as of and for the nine months
ended July 31, 2004. The Company does not expect FIN 46 to have a
material impact on its operating results or financial position related
to variable interest entities created before December 31, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs from
Exit or Disposal Activities" which requires, among other things, that a
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 was effective
for all exit or disposal activities subsequent to December 31, 2002.
The adoption of SFAS No. 146 did not have a material impact on the
Company's operating results or financial position.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
New accounting pronouncements (continued)
-----------------------------------------
During 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 does not
prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related
guarantee. FIN 45 also requires entities to disclose certain
information about each guarantee, or group of similar guarantees, even
if the likelihood of the guarantor's having to make any payments under
the guarantee is remote. The adoption of FIN 45 did not have a material
impact on the Company's operating results or financial position.
Use of estimates
----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosure of contingent assets and
liabilities reported in its consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to July 31, 2004 classifications.
3. Inventories
The components of inventories were as follows:
October 31, July 31,
2002 2003 2004
(unaudited)
Raw materials $ 4,616 $ 4,583 $ 5,788
Work in process 867 24 35
Finished goods 8,267 9,149 13,490
---------- ---------- ----------
$ 13,750 $ 13,756 $ 19,313
========== ========== ==========
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property, plant and equipment (and the estimated useful life of the
related assets) consisted of the following:
October 31, July 31,
2002 2003 2004
(unaudited)
Land $ 912 $ 1,099 $ 1,101
Building and improvements (15-39.5 years) 14,921 17,321 17,843
Machinery and Equipment (3-10 years) 43,444 44,637 48,202
Dies and molds (3-10 years) 25,138 32,369 33,555
Office Equipment (5-10 years) 1,952 2,621 2,738
Computers and software (3-5 years) 4,062 5,447 6,709
Construction in Progress 3,258 602 2,724
---------- ---------- ----------
93,687 104,096 112,872
Less - accumulated depreciation 36,577 44,792 51,355
---------- ---------- ----------
$ 57,110 $ 59,304 $ 61,517
========== ========== ==========
5. Acquisitions
Effective August 15, 2003, the Company acquired 100% of the stock of
MTP, Inc., a manufacturer of decorative vinyl siding for a purchase
price of $4,400, net of cash of $135, (including acquisition costs of
approximately $143 included in accounts payable and other liabilities
below). The acquisition was completed to enhance the Company's
offerings of decorative building products.
The acquisition was accounted for by the purchase method of accounting
resulting in the following preliminary allocation of the purchase price
to assets acquired (and the estimated useful lives of the related
assets acquired where appropriate) and liabilities assumed as of the
date of the acquisition:
August 15,
2003
Cash $ 135
Accounts receivable 885
Inventories 1,090
Property, plant, equipment, net (4-8 years) 1,256
Customer list (15 years) 880
Technology (5 years) 810
Non-competition agreement (5 years) 400
Goodwill (indefinite lived) 445
Accounts payable and other liabilities (1,366)
----------
$ 4,535
==========
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
5. Acquisitions (continued)
The Company's methodology for allocating the purchase price to
intangible assets was determined through three established valuation
techniques, the income approach, the cost approach and the market
approach, based on valuations performed by an independent third party.
Goodwill is expected to be deductible for tax purposes.
The results of the MTP acquisition are included in the consolidated
financial statements as of the date of the purchase. Had the
acquisition been completed effective November 1, 2001, pro forma
unaudited consolidated net sales and net income would have approximated
$207,321 and $14,170 for the year ended October 31, 2002 and $218,335
and $14,164 for the year ended October 31, 2003 and $142,072 and $6,037
for the nine months ended July 31, 2003 (unaudited).
The purchase was funded through operations.
On April 26 2002, Tapco Holdings formed Vantage Building Products
Corporation ("Vantage"), which subsequently purchased certain assets
from Vantage Products Corporation, an unaffiliated entity, for a
purchase price of $30,000 (including acquisition costs of approximately
$650 included in accounts payable and other liabilities below). Vantage
Products Corporation manufactured and distributed building products
used for residential remodeling and construction and was a direct
competitor of Tapco. Tapco Holdings made the acquisition to ultimately
consolidate Vantage's operations into Tapco's existing facilities and
expand Tapco's revenue base by selling Tapco's broader line of products
to Vantage customers.
The acquisition was accounted for by the purchase method of accounting
resulting in the following allocation of the purchase price to assets
acquired (and the estimated useful lives of the related assets where
appropriate) and liabilities assumed at the date of acquisition: April
26, 2002
Accounts receivable $ 4,266
Inventories 6,420
Other assets 206
Property, plant & equipment, net (10 years) 2,639
Customer list (15 years) 5,000
Tradename (15 years) 740
Goodwill (indefinite lived) 14,308
Accounts payable and other liabilities (3,579)
----------
$ 30,000
==========
In connection with the acquisition, the Company recorded a liability of
$816 related to the closure of the manufacturing facility. This amount
is included in accounts payable and other liabilities above.
The Company's methodology for allocating the purchase price to
intangible assets was determined through three established valuation
techniques, the income approach, the cost approach and the market
approach, based on valuations performed by an independent third party.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
5. Acquisitions (continued)
The results of the Vantage acquisition are included in the consolidated
financial statements as of the date of the purchase. Had the
acquisition been completed effective November 1, 2000, pro forma
unaudited consolidated net sales and net income would have approximated
$192,345 and $12,595 for 2001 and $218,732 and $13,862 for 2002,
respectively.
Effective October 11, 2001, the Company acquired certain assets of
Atlantic Shutter for approximately $1,500. The Company acquired the
assets of Atlantic Shutter to add functional shutters to its product
line. The acquisition resulted in an allocation of approximately $1,054
of the purchase price to goodwill, $50 to a patent and the remaining
balance to tangible assets. Goodwill is not amortized but rather is
reviewed for impairment in accordance with FAS 142. The patent is being
amortized over its estimated remaining useful life. The consolidated
financial statements include the operating results of Atlantic Shutter
from the date of acquisition. Pro forma results of operations have not
been presented because the effect of this acquisition was not material.
Effective November 23, 1999, the Company acquired the remaining 50%
interest in Builders Edge and certain assets of a related management
service company for approximately $1,400 which was net of cash acquired
of approximately $2,900. Additional payments of $9,227, of which $6,737
was paid in 2002, were made based on the results of operations of
Builders Edge during fiscal 2001 and 2000 and such payments increased
goodwill. Builders Edge was accounted for by the purchase method of
accounting and resulted in an allocation of approximately $2,400 of the
purchase price to trade names and the remainder of the purchase price
to goodwill.
6. Accrued Liabilities
Accrued liabilities consisted of the following:
October 31, July 31,
2002 2003 2004
(unaudited)
Customer rebates $ 2,447 $ 3,247 $ 3,331
Compensation and related costs 4,604 2,884 3,517
Retirement 1,275 1,686 1,185
Interest rate protection agreements, current portion
(Note 8) 1,052 1,939 -
Commissions 550 944 1,358
Vantage restructuring reserve 816 - -
Other 1,455 2,053 1,630
---------- ---------- ----------
$ 12,199 $ 12,753 $ 11,021
========== ========== ==========
The Vantage restructuring reserve of $816 at October 31, 2002 was used
during the year ended October 31, 2003 for restructuring activities
identified with the establishment of the reserve. No other adjustments
were made to the reserve during the year ended October 31, 2003.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
7. Employee Benefit Plans
Profit sharing/retirement plan
------------------------------
The Company maintains the Tapco International Corporation Profit
Sharing Plan for eligible employees. Eligibility is primarily based on
years of service. Contributions are made to the plan as determined
annually by the Board of Directors. Contributions charged to operations
approximated $1,100, $1,300, $1,628, $1,229, and $1,157 for the years
ended October 31, 2001, 2002 and 2003 and the nine months ended July
31, 2003 (unaudited) and 2004 (unaudited), respectively.
Stock options
-------------
As of October 31, 2003 and July 31, 2004, Tapco Holdings has reserved
1,104,284 shares; 11.5% of its fully diluted common stock, for issuance
pursuant to grants of options to management and outside directors of
the Company. Tapco Holdings has entered into Stock Option and Stock
Subscription Agreements ("Stock Agreements") with certain employees of
the Company providing options for the purchase of up to 1,091,016
shares at exercise prices ranging from $15 to $29.50 per share. The
options have a seven year term and an optionee who is still employed by
Tapco Holdings or its subsidiaries on the anniversary of the grant date
vests 20% each year in their options and becomes fully vested after 5
years. The Stock Agreements contain certain call and put rights and
accelerated vesting provisions that may become operative in the event
of a change in control of the Company, initial public offering,
employee termination, death or disability. No significant compensation
expense has been recorded as a result of these provisions. In addition
to the option grants, management and members of the board of directors
purchased approximately $50 of common stock of Tapco Holdings pursuant
to the Stock Agreements during the year ended October 31, 2001. There
were no purchases of common stock during the years ended October 31,
2002 and 2003 or the nine months ended July 31, 2004 (unaudited).
The changes in stock options outstanding for the years ended October
31, 2001, 2002 and 2003 and the nine months ended July 31, 2004 were as
follows:
October 31, October 31, October 31, July 31,
2001 2002 2003 2004
(unaudited)
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
Outstanding
at beginning
of the period 1,045,432 $15.11 1,110,026 $16.41 1,091,016 $17.43 1,079,373 $17.43
Granted 144,643 $25.30 91,500 $26.96 - -
Exercised (10) $15.00 (43,445) $15.05 (6,986) $17.49 (8,200) $22.29
Forfeited (80,039) $15.04 (67,065) $15.05 (4,657) $17.49 (8,300) $25.81
----------- -------- ----------- -------- ----------- -------- ----------- --------
Outstanding
at end of
the period 1,110,026 $16.41 1,091,016 $17.43 1,079,373 $17.43 1,062,873 $17.33
----------- -------- ----------- -------- ----------- -------- ----------- --------
Exercisable
at end of
the period 379,919 $15.11 542,330 $15.75 746,387 $16.31 794,902 $16.64
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
7. Employee Benefit Plans (continued)
Information with respect to stock options outstanding follows:
Options Average Options Average
outstanding at remaining outstanding at remaining
October 31, 2003 contractual July 31, contractual
life (years) 2004 life (years)
(unaudited)
Exercise price
$15.00 807,057 3.0 803,057 2.1
$16.18 36,173 3.5 36,173 2.7
$25.00 135,000 4.5 135,000 3.7
$26.96 91,500 5.4 79,000 4.6
$29.50 9,643 4.0 9,643 3.2
----------- -----------
Total 1,079,373 1,062,873
=========== ===========
8. Notes Payable and Long-Term Obligations
Long-term obligations consisted of the following:
October 31, July 31,
2002 2003 2004
(unaudited)
Senior Credit Facilities
Term Loans
Tranche A, due 2006 $ 68,125 $ 50,625 $ 37,500
Tranche B, due 2007 67,920 67,218 66,692
Tranche C, due 2008 48,571 48,068 47,692
Revolver 14,000 3,000 12,000
12.5% senior subordinated notes due 2009 39,450 39,450 39,450
13.125% senior subordinated notes due 2009 7,335 7,335 7,335
Subordinated debentures 37,880 37,880 37,880
Swingline - 16 1,953
Other - 343 197
Unamortized discount, net (1,011) (860) (748)
---------- ---------- ----------
282,270 253,075 249,951
Less-current portion 18,704 18,661 20,723
---------- ---------- ----------
$263,566 $234,414 $229,228
========== ========== ==========
The annual maturities of long-term obligations at October 31, 2003 are
$18,661 in 2004, $19,278 in 2005, $35,301 in 2006, $60,789 in 2007,
$34,491 in 2008 and $84,555 thereafter.
Senior credit facilities
------------------------
The indebtedness under the Senior Credit Facilities, including the
Revolving Bank Credit Facility and the Term Loans, currently bear
interest at a rate based upon either (i) the Base Rate (defined as the
higher of the rate of interest publicly announced by Wells Fargo in San
Francisco, California as its "prime rate," or the federal funds
effective rate from time to time plus 0.50%), plus 1.00% in
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
8. Notes Payable and Long-Term Obligations (continued)
Senior credit facilities (continued)
------------------------------------
respect of the Tranche A Term Loans and the loans under the Revolving
Credit Facility (the "Revolving Loans"), 1.75% in respect of the
Tranche B Term Loans and 2.00% in respect of the Tranche C Term Loans,
or at the Company's option, (ii) the Eurodollar Rate (as defined in the
Senior Credit Facility Agreement) for one, two, three or six months, in
each case plus 2.25% in respect of Tranche A Term Loans and Revolving
Loans, 3.00% in respect of Tranche B Term Loans and 3.25% in respect of
the Tranche C Term Loans. Performance-based reductions of the interest
rates under the Term Loans and the Revolving Loans are available.
Interest rates on the Term Loans ranged from 3.11% to 4.39% at October
31, 2003, and from 3.09% to 4.59% at July 31, 2004 (unaudited).
The Senior Credit Facilities include a $37.5 million Revolving Bank
Credit Facility. The Revolving Loans may be repaid and reborrowed and
are subject to a commitment fee for unused availability. At October 31,
2003 and July 31, 2004 (unaudited), the aggregate availability under
the Revolving Bank Credit Facility was $34,484 and $23,547,
respectively.
Subject to customary exceptions and exclusions and release mechanisms
for similar transactions, all obligations under the Senior Credit
Facilities are unconditionally guaranteed by each of the direct and
indirect wholly owned subsidiaries of the Company, except for those
subsidiaries that are controlled foreign corporations under Section 957
of the Internal Revenue Code.
The senior credit agreement contains a number of covenants that, among
other things, restrict the ability of the Company and its subsidiaries
to grant liens, incur indebtedness, merge or consolidate with other
entities, sell assets, make loans, acquisitions, joint ventures or
other investments, make distributions to shareholders, become a general
partner in a partnership, repurchase shares of capital stock, prepay,
redeem or repurchase debt, make capital expenditures, grant negative
pledges, change the nature of its business, amend its organizational
documents or certain material agreements or materially change its
accounting policies.
12.5% senior subordinated notes due 2009
----------------------------------------
The 12.5% Senior Subordinated Notes are unsecured senior subordinated
obligations of the Company, and will mature on August 1, 2009. Each
12.5% Senior Subordinated Note bears interest at 12.5% per annum from
the Closing Date, or from the most recent Interest Payment Date to
which interest has been paid or provided for, payable semiannually in
arrears (to Holders of record at the close of business on the January
15 or July 15 immediately preceding the Interest Payment Date) on
February 1 and August 1 of each year, commencing February 1, 2000. The
annual interest rate on the 12.5% Senior Subordinated Notes will
increase by 0.5% if and to the extent that the Company and the
Guarantors fail to comply with certain obligations as contained in the
Notes until such failure is cured. The annual interest rate on the
12.5% Senior Subordinated Notes may change based on certain provisions.
The Senior Subordinated Notes are not entitled to any mandatory sinking
fund requirements. The 12.5% Notes contain restrictive covenants and
redemption provisions at various prices depending on the period and
reasons for the redemption. During November 2000, Tapco Holdings
purchased $10,750 of Tapco's 12.5% notes along with accrued interest
from an unrelated party. During April 2002, Tapco Holdings sold these
same notes at a discount to Fremont Partners III, L.P. During December
2003, the annual interest rate on the 12.5% Senior Subordinated Notes
increased to 13.75% as a result of rating changes. Interest expense
associated with these notes which was paid to Fremont Partners III,
L.P. approximated $692, $1,344 and $1,096 for the years ended October
31, 2002 and 2003 and the nine months ended July 31, 2004 (unaudited),
respectively.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
8. Notes Payable and Long-Term Obligations (continued)
13.125% senior subordinated notes due 2009
------------------------------------------
The 13.125% Senior Subordinated Notes are unsecured senior obligations
of the Company and will mature on August 1, 2009. Each 13.125% Senior
Subordinated Note bears interest at 13.125% per annum from the closing
date, or from the most recent interest payment date to which interest
has been paid or provided for, payable semi-annually in arrears on
February 1 and August 1 of each year, commencing August 1, 2002. The
annual interest rate on the 13.125% Senior Subordinated Notes will
increase by 2% if and to the extent that the Company and Guarantors
fail to comply with certain obligations as contained in the Notes until
such failure is cured. The Notes are not entitled to any mandatory
sinking fund requirements. The Notes contain restrictive covenants and
redemption provisions at various prices depending on the period and
reasons for the redemption.
Subordinated debentures
-----------------------
In connection with the Recapitalization on June 23, 1999, Tapco
Holdings issued to Fremont Investors subordinated debentures in the
aggregate principal amount of $60,000 with a maturity date of June 23,
2010. The subordinated debentures are subordinated in right of payment
to all existing and future senior indebtedness of Tapco Holdings. The
subordinated debentures bear interest at a rate of 17% per annum,
compounded annually. If there is an event of default, the interest rate
will increase to 19%. While interest will accrue and compound annually
during the first five years, all accrued interest accruing during the
first five years, except an amount equal to one year's interest on the
principal amount of the debentures will be paid during the sixth year.
Thereafter, all interest will be paid in cash. Tapco Holdings may also
pay interest in cash during such five-year period to the extent it has
cash available for such purpose. Approximately $26,236, $17,346 and
$6,443 of accrued interest was included in other long-term liabilities
at October 31, 2002, 2003 and July 31, 2004 (unaudited), respectively.
The subordinated debentures are redeemable without penalty on each
anniversary of their issuance. The subordinated debentures contain
covenants that, among other things, restrict the ability of Tapco
Holdings and its subsidiaries (including Tapco) to merge or consolidate
with other entities or sell all or a substantial part of the assets of
Tapco Holdings and its subsidiaries. During November 2000, Tapco
Holdings purchased and retired $22,120 of Fremont Debentures and paid
accrued interest of $5,564. During November 2003, Tapco Holdings paid
$20,000 to Fremont Investors for accrued interest on subordinated
debentures. The accrued interest payable for the subordinated
debentures was $37,435 at October 31, 2003 and $24,383 at July 31, 2004
(unaudited).
Unamortized Discount
--------------------
The unamortized discount relates to the sale of Tapco's 12.5% Senior
Subordinated Notes to Fremont Partners III, L.P. and Fremont Partners
III Side-by-Side, L.P. with a par value of $10,750 at a discount of
$645, and the issuance of Tapco Holdings 13.125% Senior Subordinated
Notes to Fremont Partners III, L.P. and Fremont Partners III
Side-by-Side, L.P. with a par value of $7,335 at a discount of $440 in
connection with the Vantage acquisition. The discount is being
amortized over the term of the related notes.
Interest rate protection agreements
-----------------------------------
The Company manages its exposure to changes in interest rates through
the use of interest rate protection agreements ("swaps"). These
interest rate derivatives are designated as cash flow hedges. The
effective portion of the swap's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified
into earnings when the forecasted transaction affects earnings. The
Company does not use derivatives for speculative purposes.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
8. Notes Payable and Long-Term Obligations (continued)
Interest rate protection agreements (continued)
-----------------------------------------------
During October 1999, the Company entered into an interest rate swap
agreement to hedge a portion of its interest rate risk related to its
term loan borrowings under the Senior Credit Facility. Under the
interest rate swap, which had a term of three years, the Eurodollar
Rate (used as the basis for interest payments under the Senior Credit
Facilities) was effectively fixed at 6.56% for $45,000 of borrowings.
This interest rate swap agreement expired on October 31, 2002. In April
2001, the Company entered into a second interest rate swap with a term
of three years in which the Eurodollar Rate was effectively fixed at
4.97% for $145,000 of borrowings. This interest rate swap agreement
expired on April 4, 2004. As of October 31, 2003, the notional amount
remaining on this interest rate swap was $100,000. Neither the Company
nor the counterparties were required to collateralize their respective
obligations under these agreements.
The fair value of the Company's liability associated with its interest
rate protection agreements approximated $5,258 and $1,939 at October
31, 2002 and 2003, respectively. The $1,939 balance at October 31, 2003
was included in accrued liabilities and classified as current based on
the April 2004 maturity date. Similarly, $1,052 and $4,206, of the swap
liability was included in accrued liabilities and other long-term
liabilities at October 31, 2002, respectively, based on the maturity
date. The change in the fair value of these agreements has been
included in other comprehensive income, net of tax.
Under these swaps, the Company recognized additional interest expense
of $1,203, $5,725 and $4,067, $3,067 and $1,655 during the years ended
October 31, 2001, 2002 and 2003 and the nine months ended July 31, 2003
(unaudited) and 2004 (unaudited), respectively.
9. Preferred Stock
During 2002, the Company issued 245,000 shares of preferred stock at a
price of $100 per share (initial stated amount of $24.5 million) to
Fremont Partners III, L.P. and Fremont Partners III Side-by-Side, L.P.
in connection with the Vantage acquisition. Quarterly dividends accrue
on a cumulative basis at a rate which is the greater of 3.1875% of the
stated amount or a rate that would have been payable to holders of
common stock. The dividends are not payable in cash but accrue on a
cumulative basis as an increase in the stated amount of the preferred
stock. Cumulative dividends were $1,623, $5,117 and $8,040 as of
October 31, 2002 and 2003 and July 31, 2004 (unaudited), respectively.
The preferred stock is convertible at any time into shares of the
Company's common stock. Shares of common stock are determined by
dividing the stated value of the preferred stock (including dividends
to the next quarterly dividend date) by $28.50. The Company may at any
time following an initial public offering or in connection with a
change in control transaction redeem the preferred shares at an amount
which is the greater of the stated amount plus dividends to the next
quarterly dividend date or the value based on an assumed conversion to
common stock. The minimum amount of any initial redemption shall be $5
million.
In the event of any voluntary or involuntary liquidation, the holders
of the preferred stock shall be paid out of the assets of the Company
available for distribution to its stockholders before any payment shall
be made to the holders of any shares of other junior capital stock.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
10. Income Taxes
The provision for income taxes was comprised of the following:
For the years ended October 31,
2001 2002 2003
Current
United States
Federal $ 5,913 $ 5,045 $ 3,870
State 475 596 677
---------- --------- ---------
6,388 5,641 4,547
---------- --------- ---------
Deferred
United States
Federal (2,240) 3,173 2,319
State (10) 49 176
---------- --------- ---------
(2,250) 3,222 2,495
---------- --------- ---------
$ 4,138 $ 8,863 $ 7,042
========== ========= =========
During the year ended October 31, 2001, the deferred tax liability
related to equity income which was recorded for book purposes but not
for tax purposes was reversed as earnings were remitted to Tapco in a
tax free dividend.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
10. Income Taxes (continued)
Deferred income taxes represent the tax effects of differences in the
book and tax reporting basis of assets and liabilities at the statutory
tax rates expected to be in effect when such differences reverse.
Temporary differences and carryforwards that gave rise to a significant
portion of deferred tax assets and liabilities include:
October 31,
2002 2003
Current
Deferred tax assets
Employee benefits $ 349 $ 451
Inventory provisions 45 43
Bad debt reserve 685 402
Interest rate protection agreements 396 717
Other nondeductible provisions 275 302
---------- ----------
Total current deferred tax assets 1,750 1,915
---------- ----------
Deferred tax liabilities, other items (1) 104
---------- ----------
Net current deferred tax asset $ 1,749 $ 2,019
---------- ----------
Noncurrent
Deferred tax assets
Interest rate protection agreements $ 1,584 $ -
Other nondeductible provisions 514 966
---------- ----------
Total noncurrent deferred tax assets 2,098 966
Deferred tax liabilities
Tax depreciation and basis differences (6,405) (8,963)
Other provisions (1,461) (1,882)
Investment basis differences - -
---------- ----------
Total deferred tax liability (7,866) (10,845)
---------- ----------
Net noncurrent deferred tax liability $ (5,768) $ (9,879)
========== ==========
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
10. Income Taxes (continued)
Differences between the effective income tax rate and the statutory
U.S. federal income tax rate are as follows:
For the year ended October 31,
2001 2002 2003
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Permanent items 1.3% 1.0% 0.2%
State and local income tax rate, net of
federal income tax benefit 1.8% 1.8% 2.7%
Reversal of deferred tax liability for
unremitted earnings of a subsidiary -12.8% 0.0% 0.0%
Reversal of prior year federal tax
provision 0.0% 0.0% -4.6%
Other -1.0% 0.8% 0.6%
--------- --------- ---------
Effective income tax rate 24.3% 38.6% 33.9%
========= ========= =========
During the fourth quarter of 2003, the Company determined that certain
reserves for tax positions previously taken were no longer necessary;
therefore, the Company reduced taxes payable by $959.
11. Financial Instruments
The following assumptions were used to estimate the fair value of
financial instruments included in the following categories:
Cash and cash equivalents, accounts and notes receivable
--------------------------------------------------------
The carrying value approximates the fair value based on their short
maturity.
Debt
----
The fair value of the Company's debt is estimated to approximate
carrying value based on the variable nature of the interest rates and
current market rates available to the Company. It is not practicable to
estimate the fair value of the Fremont Debentures.
Interest rate protection agreements
-----------------------------------
The fair value of the interest rate protection agreements approximated
a loss of $5,258 and $1,939 at October 31, 2002 and 2003, respectively.
The fair value of the interest rate protection agreements was based
principally on quoted market prices for the same or similar issues for
debt with similar terms and remaining maturities.
12. Commitments and Contingent Liabilities
The Company has certain contingent liabilities with respect to existing
or potential claims relating to legal proceedings and other matters.
The Company provides reserves for such matters when it is probable that
future costs will be incurred and such costs can be reasonably
estimated. After taking into consideration legal counsel's evaluation
of such matters and related reserves, it is management's opinion that
the Company's liability under any pending or threatened litigation
would not materially affect its financial condition or results of
operations. In connection with the recapitalization of the Company in
1999, the Company is indemnified with respect to certain of these
matters.
Tapco Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
13. Related Party Transactions
The Company is party to a management services agreement with Fremont
Partners pursuant to which Fremont Partners provides certain management
services in connection with the Company's business operations,
including strategic planning, finance, legal, tax and accounting
services. The Company pays Fremont Partners an annual management fee of
$500 to render such services. Included in accrued liabilities at
October 31, 2002 and 2003 was $125 payable to Fremont Partners related
to this management services agreement. At July 31, 2004 there was no
payable to Fremont Partners related to this management services
agreement.
HEADWATERS INCORPORATED
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(dollar and share amounts in thousands)
Eldorado Stone
- --------------
On June 2, 2004, Headwaters acquired 100% of the ownership interests of Eldorado
Stone LLC ("Eldorado") and paid off all of Eldorado's outstanding debt. Eldorado
is based in San Marcos, California and is a leading manufacturer of
architectural manufactured stone. With over 1,600 distributors, Eldorado
provides Headwaters with a national platform for expanded marketing of "green"
building products, such as mortar and stucco made with reclaimed fly ash from
coal combustion. Headwaters expects Eldorado, which is included in its
construction materials segment, to provide critical mass and improved margins in
Headwaters' efforts to expand the use of fly ash in building products.
At the closing of the Eldorado acquisition, Headwaters paid consideration
consisting of cash payments to the owners of Eldorado of approximately $137.0
million and cash payments of approximately $69.6 million to retire Eldorado debt
and related accrued interest, for an aggregate purchase price of $206.6 million,
which together with estimated expenses incurred by Headwaters to consummate the
Eldorado acquisition of approximately $3.8 million, constitutes total
consideration of approximately $210.4 million. Eldorado's results of operations
have been included in Headwaters' consolidated statement of income since June 2,
2004.
In connection with the Eldorado acquisition, Headwaters issued $172,500 of new
convertible senior subordinated debt and also borrowed funds under its senior
secured revolving credit arrangement and an arrangement with an investment
company, the latter two of which were repaid prior to June 30, 2004.
Tapco
- -----
On September 8, 2004, Headwaters acquired 100% of the ownership interests of
Tapco Holdings, Inc. ("Tapco") and paid off all of Tapco's outstanding debt.
Tapco is headquartered in Wixom, Michigan and is a leading designer,
manufacturer and marketer of specialty building products and professional tools
used in exterior residential home improvement and construction throughout the
United States and Canada. Headwaters expects the Tapco acquisition to further
diversify Headwaters' cash flow stream away from its historical reliance on
alternative energy. Tapco brings economy of scale and manufacturing expertise
that results in some of the lowest manufacturing costs in the siding accessory
industry, which is expected to improve margins in Headwaters' construction
materials segment. Headwaters may also be able to leverage Tapco's distribution
networks to accelerate sales of Headwaters' diverse construction materials
product portfolio.
At the closing of the Tapco acquisition, Headwaters paid consideration
consisting of cash payments to the owners of Tapco of approximately $415,000 and
cash payments of approximately $300,000 to retire Tapco debt, preferred stock
and related accrued interest, for an aggregate purchase price of $715,000 which,
together with estimated expenses incurred by Headwaters to consummate the Tapco
acquisition of approximately $8,500, constitutes total consideration of
approximately $723,500.
HEADWATERS INCORPORATED
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(dollar and share amounts in thousands)
In order to obtain the cash necessary to acquire Tapco, retire the Tapco debt
and preferred stock, and repay Headwaters' existing senior debt, the pro forma
financial information reflects the issuance by Headwaters of $790,000 of debt
consisting of $640,000 of senior secured debt under a first lien with a six and
one-half-year term and a floating interest rate (assumed interest rate of
4.45%), and $150,000 of senior secured debt under a second lien with an
eight-year term and a floating interest rate (assumed interest rate of 7.7%).
Pro Forma Condensed Combined Financial Statements
- -------------------------------------------------
The pro forma condensed combined balance sheet gives effect to the Tapco
acquisition as if it had been completed as of June 30, 2004 and combines the
historical June 30, 2004 balance sheet for Headwaters with the historical July
31, 2004 balance sheet for Tapco. Eldorado's balance sheet is included within
Headwaters' June 30, 2004 historical balance sheet. The pro forma condensed
combined statements of income for the year ended September 30, 2003 and the nine
months ended June 30, 2004 give effect to both acquisitions as if they had
occurred on October 1, 2002.
The pro forma condensed combined statement of income for the year ended
September 30, 2003 combines Headwaters' historical results for the fiscal year
ended September 30, 2003 with Eldorado's historical results for the fiscal year
ended December 31, 2003 and with Tapco's historical results for the fiscal year
ended October 31, 2003. The pro forma condensed combined statement of income for
the nine months ended June 30, 2004 combines Headwaters' historical results,
which include Eldorado's results for June 2004, with Eldorado's historical
results for the eight-month period ended May 31, 2004 and with Tapco's
historical results for the nine-month period ended July 31, 2004. Accordingly,
Eldorado's historical results for the three-month period from October 1, 2003 to
December 31, 2003 are included in both the pro forma condensed combined
statement of income for the year ended September 30, 2003 and the pro forma
condensed combined statement of income for the nine months ended June 30, 2004.
Eldorado revenues and net income for the three-month period ended December 31,
2003 which were included in both of these periods were $28,173 and $894,
respectively.
The pro forma condensed combined information is presented for illustrative
purposes only. Such information does not purport to be indicative of the results
of operations and financial position that actually would have resulted had the
acquisitions 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.
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
as of June 30, 2004
Historical
---------------------------------- Pro Forma Pro Forma
(thousands of dollars) Headwaters Tapco Adjustments Combined
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 2004 July 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 10,723 $ 259 $ 790,000 A
(415,723) B
(299,277) C
(8,500) D
(17,000) E
(48,750) F $ 11,732
Short-term trading investments 23,635 23,635
Trade receivables, net 75,247 44,995 120,242
Inventories 26,175 19,313 45,488
Other current assets 15,394 2,366 17,760
--------------------------------------------------- ---------------
Total current assets 151,174 66,933 750 218,857
--------------------------------------------------- ---------------
Property, plant and equipment, net 86,693 61,517 148,210
--------------------------------------------------- ---------------
Other assets:
Intangible assets, net of accumulated amortization 127,375 9,355 (9,355) G
185,500 H 312,875
Goodwill 280,656 50,895 (50,895) I
518,107 J 798,763
Debt issue costs and other assets 9,667 4,280 (4,124) K
17,000 L 26,823
--------------------------------------------------- ---------------
Total other assets 417,698 64,530 656,233 1,138,461
--------------------------------------------------- ---------------
Total assets $ 655,565 $ 192,980 $ 656,983 $ 1,505,528
=================================================== ===============
(continued)
See accompanying notes.
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET, continued
as of June 30, 2004
Historical
---------------------------------- Pro Forma Pro Forma
(thousands of dollars) Headwaters Tapco Adjustments Combined
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 2004 July 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,410 $ 14,518 $ 35,928
Accrued personnel costs 14,770 4,702 19,472
Income taxes 15,672 3,274 18,946
Other accrued liabilities 24,069 24,899 $ (18,580) M 30,388
Current portion of long-term debt 10,299 20,723 (20,657) N
(5,000) O
6,400 P 11,765
Current portion of unamortized non-refundable
license fees 9,559 9,559
--------------------------------------------- -------------
Total current liabilities 95,779 68,116 (37,837) 126,058
--------------------------------------------- -------------
Long-term liabilities:
Long-term debt 219,282 229,228 (229,097) Q
(43,750) R
633,600 S
150,000 T 959,263
Deferred income taxes 49,237 10,870 68,697 U 128,804
Unamortized non-refundable license fees and
other long-term liabilities 5,189 6,579
(6,443) V 5,325
--------------------------------------------- -------------
Total long-term liabilities 273,708 246,677 573,007 1,093,392
--------------------------------------------- -------------
Total liabilities 369,487 314,793 535,170 1,219,450
--------------------------------------------- -------------
Preferred stock 24,500 (24,500) W -
Stockholders' equity (deficit):
Common stock 34 2,530 (2,530) X 34
Capital in excess of par value 233,102 89,097 (89,097) Y 233,102
Retained earnings (accumulated deficit) 56,992 (237,818) 237,818 Z 56,992
Treasury stock, at cost (2,637) (2,637)
Other (1,413) (122) 122 AA (1,413)
--------------------------------------------- -------------
Total stockholders' equity (deficit) 286,078 (146,313) 146,313 286,078
--------------------------------------------- -------------
Total liabilities, preferred stock and stockholders'
equity (deficit) $ 655,565 $ 192,980 $ 656,983 $ 1,505,528
============================================= =============
See accompanying notes.
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the year ended September 30, 2003
Historical
(thousands of dollars and shares, -------------------------------------------- Pro Forma Pro Forma
except per share amounts) Headwaters Eldorado Tapco Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------------
(Year ended (Year ended (Year ended
Sep. 30, 2003) Dec. 31, 2003) Oct. 31, 2003)
Revenue:
Sales of chemical reagents $ 128,375 $ 128,375
License fees 35,726 35,726
Coal combustion products revenues 169,938 169,938
Sales of construction materials 49,350 $ 103,659 $ 212,816 365,825
Other revenues 4,241 4,241
-------------------------------------------------------- -----------
Total revenue 387,630 103,659 212,816 704,105
-------------------------------------------------------- -----------
Operating costs and expenses:
Cost of chemical reagents sold 87,386 87,386
Cost of coal combustion products revenues 123,146 123,146
Cost of construction materials sold 37,689 72,060 126,729 236,478
Cost of other revenues 3,919 3,919
Depreciation and amortization 12,982 6,526 1,870 $ (5,881) BB
2,285 CC
(570) DD
14,183 EE 31,395
Research and development 4,674 4,674
Selling, general and administrative 40,715 17,059 32,785 90,559
-------------------------------------------------------- -----------
Total operating costs and expenses 310,511 95,645 161,384 10,017 577,557
-------------------------------------------------------- -----------
Operating income 77,119 8,014 51,432 (10,017) 126,548
-------------------------------------------------------- -----------
Other income (expense):
Interest and net investment income 310 81 391
Interest expense (15,687) (5,349) (30,456) 4,765 FF
584 GG
(886) HH
(1,483) II
(4,959) JJ
29,162 KK
1,294 LL
(2,598) MM
(28,481) NN
1,638 OO
(11,550) PP
(375) QQ (64,381)
Losses on notes receivable and investments (2,436) (2,436)
Other, net 775 (273) 502
-------------------------------------------------------- -----------
Total other expense, net (17,038) (5,349) (30,648) (12,889) (65,924)
-------------------------------------------------------- -----------
Income before income taxes 60,081 2,665 20,784 (22,906) 60,624
Income tax provision (23,450) (7,042) 6,830 RR (23,662)
-------------------------------------------------------- -----------
Net income $ 36,631 $ 2,665 $ 13,742 $ (16,076) $ 36,962
======================================================== ===========
$ 1.35 $ 1.36
============ ===========
$ 1.30 $ 1.31
============ ===========
Basic earnings per common share
Diluted earnings per common share
Weighted-average shares outstanding:
Basic 27,083 27,083
============ ===========
Diluted 28,195 28,195
============ ===========
See accompanying notes.
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the nine months ended June 30, 2004
Historical
(thousands of dollars and shares, --------------------------------------------- Pro Forma Pro Forma
except per share amount) Headwaters(1) Eldorado(2) Tapco(3) Adjustments Combined
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue:
Sales of chemical reagents $ 98,393 $ 98,393
License fees 59,276 59,276
Coal combustion products revenues 143,363 143,363
Sales of construction materials 49,961 $ 78,491 $ 171,339 299,791
Other revenues 4,315 4,315
--------------------------------------------------------- ------------
Total revenue 355,308 78,491 171,339 605,138
--------------------------------------------------------- ------------
Operating costs and expenses:
Cost of chemical reagents sold 66,804 66,804
Cost of coal combustion products revenues 102,835 102,835
Cost of construction materials sold 38,921 54,352 94,979 188,252
Cost of other revenues 362 362
Depreciation and amortization 11,056 4,484 1,628 (4,051) BB
1,523 CC
(597) DD
10,637 EE 24,680
Research and development 5,135 5,135
Selling, general and administrative 42,340 14,006 26,663 83,009
--------------------------------------------------------- ------------
Total operating costs and expenses 267,453 72,842 123,270 7,512 471,077
--------------------------------------------------------- ------------
Operating income 87,855 5,649 48,069 (7,512) 134,061
--------------------------------------------------------- ------------
Other income (expense):
Interest and net investment income 380 3 383
Interest expense (12,633) (3,641) (19,499) 3,252 FF
389 GG
(590) HH
(989) II
(3,306) JJ
18,575 KK
924 LL
(1,949) MM
(21,360) NN
1,229 OO
(8,663) PP
(281) QQ (48,542)
Losses on notes receivable (1,038) (1,038)
Other, net (1,080) - 100 (980)
--------------------------------------------------------- ------------
Total other expense, net (14,371) (3,641) (19,396) (12,769) (50,177)
--------------------------------------------------------- ------------
Income before income taxes 73,484 2,008 28,673 (20,281) 83,884
Income tax provision (28,705) (10,601) 6,545 RR (32,761)
--------------------------------------------------------- ------------
Net income $ 44,779 $ 2,008 $ 18,072 $ (13,736) $ 51,123
========================================================= ============
Basic earnings per common share $ 1.43 $ 1.63
============= ============
Diluted earnings per common share $ 1.38 $ 1.57
============= ============
Weighted-average shares outstanding:
Basic 31,287 31,287
============= ============
Diluted 32,501 32,501
============= ============
See accompanying notes.
(1) Includes Eldorado's results of operations for June 2004
(2) Includes Eldorado's results of operations for the eight-month period ended
May 31, 2004
(3) Represents Tapco's results of operations for the nine-month period ended
July 31, 2004
HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(dollar and share amounts in thousands)
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 Eldorado Stone LLC
On June 2, 2004, Headwaters acquired 100% of the ownership interests of Eldorado
Stone LLC ("Eldorado") and paid off all of Eldorado's outstanding debt. Eldorado
is based in San Marcos, California and is a leading manufacturer of
architectural manufactured stone. With over 1,600 distributors, Eldorado
provides Headwaters with a national platform for expanded marketing of "green"
building products, such as mortar and stucco made with reclaimed fly ash from
coal combustion. Headwaters expects Eldorado, which is included in its
construction materials segment, to provide critical mass and improved margins in
Headwaters' efforts to expand the use of fly ash in building products.
Eldorado's results of operations have been included in Headwaters' consolidated
statement of income since June 2, 2004.
In connection with the Eldorado acquisition, Headwaters issued $172,500 of new
convertible senior subordinated debt and also borrowed funds under its senior
secured revolving credit arrangement and an arrangement with an investment
company, the latter two of which were repaid prior to June 30, 2004.
The following table sets forth the total consideration paid for Eldorado:
Cash paid to Eldorado owners $ 136,982
Cash paid to retire Eldorado debt and related accrued interest 69,650
Costs directly related to acquisition 3,800
-----------
Total consideration at closing $ 210,432
===========
The Eldorado acquisition was accounted for using the purchase method of
accounting. The consideration Headwaters paid for Eldorado was negotiated at
arms length and assets acquired and liabilities assumed were recorded at their
estimated fair values as of June 2, 2004. Approximately $8,153 of the purchase
price was allocated to identifiable intangible assets, consisting of non-compete
agreements, trade names and trademarks and franchise contracts with existing
franchisees. The intangible assets are being amortized over estimated useful
lives ranging from three to ten years. The remaining purchase price not
attributable to the tangible and identifiable intangible assets was allocated to
goodwill, most of which is expected to be tax deductible. All of the intangible
assets and goodwill have been allocated to Headwaters' construction materials
segment.
Headwaters adjusted the preliminary purchase price allocation from what was
reflected in its Form 8-K filed on May 25, 2004 based on additional information
in more recent valuation reports and additional consideration paid, due
primarily to working capital adjustments at closing. The following table sets
forth the most recent and the preliminary allocations of the total consideration
to the tangible and intangible assets acquired and liabilities assumed:
Most Recent Preliminary
----------- -----------
Tangible assets acquired, net of liabilities assumed $ 41,358 $ 41,643
Intangible assets acquired (useful life):
Franchise contracts with existing franchisees (10 years) 814 2,000
Trademarks and trade names (5 years) 1,087 1,000
Non-compete agreements (3 years) 6,252 7,000
Goodwill (indefinite) 160,921 154,357
--------- ---------
Total consideration at closing $ 210,432 $ 206,000
========= =========
The final purchase price and the allocation thereof will likely differ from that
reflected above after final fixed asset and intangible asset valuation reports
are received, and a detailed review of all assets and liabilities, including
income taxes and potential adjustments to the working capital acquired at
closing, has been completed. Pre-acquisition contingencies, which are not
material, are included in the value of liabilities assumed as of June 2, 2004
and any change from the recorded amounts is expected to be immaterial. The final
purchase price allocation is expected to be completed by March 31, 2005. Any
changes to the purchase price allocation are not expected to materially increase
or decrease depreciation and amortization expense, but may have a material
effect on the amount of recorded goodwill.
3. Acquisition of Tapco Holdings, Inc.
On September 8, 2004, Headwaters acquired 100% of the ownership interests of
Tapco Holdings, Inc. ("Tapco") and paid off all of Tapco's outstanding debt.
Tapco is headquartered in Wixom, Michigan and is a leading designer,
manufacturer and marketer of specialty building products and professional tools
used in exterior residential home improvement and construction throughout the
United States and Canada. Headwaters expects the Tapco acquisition to further
diversify Headwaters' cash flow stream away from its historical reliance on
alternative energy. Tapco brings economy of scale and manufacturing expertise
that results in some of the lowest manufacturing costs in the siding accessory
industry, which is expected to improve margins in Headwaters' construction
materials segment. Headwaters may also be able to leverage Tapco's distribution
networks to accelerate sales of Headwaters' diverse construction materials
product portfolio. Tapco's results of operations will be included in Headwaters'
consolidated statement of income beginning September 8, 2004.
The following table sets forth the estimated consideration to be paid to acquire
Tapco:
Cash paid to Tapco stockholders $ 415,723
Cash paid to retire Tapco debt, preferred stock and
related accrued interest 299,277
Estimated costs directly related to acquisition 8,500
--------------
Total consideration $ 723,500
==============
In order to obtain the cash necessary to acquire Tapco, retire the Tapco debt
and preferred stock, and repay Headwaters' existing senior debt, the pro forma
financial information reflects the issuance by Headwaters of $790,000 of debt
consisting of $640,000 of senior secured debt under a first lien with a six and
one-half-year term and a floating interest rate (assumed interest rate of LIBOR
plus 2.75%, or 4.45%), and $150,000 of senior secured debt under a second lien
with an eight-year term and a floating interest rate (assumed interest rate of
LIBOR plus 6.00%, or 7.7%).
The senior secured first lien credit arrangement also includes a $75,000
revolver available to Headwaters which carries a 0.5% commitment fee on unused
amounts and a floating interest rate of LIBOR plus 2.75%. Headwaters expects to
incur approximately $17,000 of debt issuance costs in connection with the
issuance of the new senior debt, which has an assumed weighted-average effective
interest rate of approximately 5.1%, excluding amortization of the debt issuance
costs and the commitment fee on the unused portion of the revolver.
The consideration Headwaters paid for Tapco was negotiated at arms length and
assets acquired and liabilities assumed will be recorded at their estimated fair
values as of September 8, 2004. In accordance with SFAS No. 141, approximately
$185,500 of the estimated purchase price was allocated to estimated identifiable
intangible assets consisting of customer relationships, trade names, patents and
non-compete agreements. The estimated intangible assets have estimated average
useful lives ranging from 2 to 20 years, with an estimated weighted average life
of approximately 13 years. The remaining purchase price not attributable to the
tangible and identifiable intangible assets will be allocated to goodwill, which
is not expected to be tax deductible. All of the intangible assets and goodwill
will be allocated to Headwaters' construction materials segment.
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 $ 19,893
Intangible assets acquired, estimated (useful life):
Customer relationships (15 years) 80,000
Trade names (20 years) 62,000
Patents (10 years) 40,000
Non-compete agreements (2 years) 3,500
Goodwill (indefinite) 518,107
--------------
Total consideration at closing $ 723,500
==============
The final purchase price and the allocation thereof will differ from that
reflected above after final fixed asset and intangible asset valuation reports
are received and a detailed review of all assets and liabilities, including
income taxes, has been completed. The final purchase price allocation is
expected to be completed by June 30, 2005. The final purchase price allocation
may materially increase or decrease depreciation and amortization expense from
the estimated amounts reflected in the pro forma information and may have a
material effect on the amount of recorded goodwill.
4. Pro Forma Financial Statements and Adjustments
The pro forma condensed combined balance sheet gives effect to the Tapco
acquisition as if it had been completed as of June 30, 2004 and combines the
historical June 30, 2004 balance sheet for Headwaters with the historical July
31, 2004 balance sheet for Tapco. Eldorado's balance sheet is included within
Headwaters' June 30, 2004 historical balance sheet. The pro forma condensed
combined statements of income for the year ended September 30, 2003 and the nine
months ended June 30, 2004 give effect to both acquisitions as if they had
occurred on October 1, 2002.
The pro forma condensed combined statement of income for the year ended
September 30, 2003 combines Headwaters' historical results for the fiscal year
ended September 30, 2003 with Eldorado's historical results for the fiscal year
ended December 31, 2003 and with Tapco's historical results for the fiscal year
ended October 31, 2003. The pro forma condensed combined statement of income for
the nine months ended June 30, 2004 combines Headwaters' historical results,
which include Eldorado's results for June 2004, with Eldorado's historical
results for the eight-month period ended May 31, 2004 and with Tapco's
historical results for the nine-month period ended July 31, 2004. Accordingly,
Eldorado's historical results for the three-month period from October 1, 2003 to
December 31, 2003 are included in both the pro forma condensed combined
statement of income for the year ended September 30, 2003 and the pro forma
condensed combined statement of income for the nine months ended June 30, 2004.
Eldorado revenues and net income for the three-month period ended December 31,
2003 which were included in both of these periods were $28,173 and $894,
respectively.
The pro forma condensed combined information is presented for illustrative
purposes only. Such information does not purport to be indicative of the results
of operations and financial position that actually would have resulted had the
acquisitions 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 proceeds from new issuances of long-term debt by
Headwaters, the proceeds of which were used to pay for the
Tapco acquisition and to retire Headwaters' pre-existing
senior debt.
B Cash paid at closing to previous Tapco owners.
C Cash paid at closing to retire Tapco debt, preferred stock and
related accrued interest.
D Cash to be paid for estimated expenses incurred by Headwaters
for the Tapco acquisition.
E Cash to be paid for estimated debt issuance costs related to
the senior debt of $790,000 borrowed for the acquisition.
F Cash paid to retire Headwaters' existing senior debt.
G Elimination of Tapco's historical intangible assets.
H Adjustment to record new intangible assets, primarily customer
relationships, trade names, patents and non-compete
agreements.
I Elimination of Tapco's historical goodwill.
J Adjustment to record new goodwill, based on estimated fair
values of Tapco assets acquired and liabilities assumed.
K Elimination of Tapco's historical debt issuance costs.
L Capitalization of estimated debt issuance costs related to
issuance of new senior debt for $790,000.
M Payment of current portion of Tapco's accrued interest.
N Payment of current portion of Tapco's long-term debt.
O Payment of current portion of Headwaters' pre-existing senior
debt.
P Current portion of $640,000 senior debt, under a 1st lien,
borrowed for the Tapco acquisition.
Q Payment of Tapco's long-term debt.
R Payment of long-term portion of Headwaters' pre-existing
senior debt.
S Long-term portion of $640,000 senior debt, under a 1st lien,
borrowed for the Tapco acquisition.
T Long-term portion of $150,000 senior debt, under a 2nd lien,
borrowed for the Tapco acquisition.
U Adjustment to record deferred income taxes, on increased value
of Tapco's intangible assets.
V Payment of long-term portion of Tapco's accrued interest
W Redemption of Tapco's preferred stock.
X Elimination of Tapco's historical common stock value.
Y Elimination of Tapco's historical capital in excess of par
value.
Z Elimination of Tapco's historical accumulated deficit.
AA Elimination of Tapco's historical other equity.
BB Elimination of Eldorado's historical amortization of
intangible assets.
CC Adjustment to amortize Eldorado's new intangible assets,
$8,153, over an average life of 43 months. New intangible
assets primarily include non-compete agreements, trademarks
and trade names and franchise contracts with existing
franchisees.
DD Elimination of Tapco's historical amortization of intangible
assets.
EE Adjustment to amortize Tapco's new intangibles, currently
estimated to be approximately $185,500 over an average life of
13 years. New intangibles primarily include customer
relationships, trade names, patents and non-compete
agreements.
FF Elimination of Eldorado's interest on pre-acquisition debt
retired by Headwaters at closing.
GG Elimination of Eldorado's historical amortization of deferred
financing costs.
HH Adjustment to record interest for amortization of new debt
issuance costs of $6,200 on issuance of $172,500 of
convertible senior subordinated debt issued for the Eldorado
acquisition, using an effective seven-year life.
II Adjustment to record interest on $44,000 of long-term senior
debt, issued in connection with the Eldorado acquisition,
using a 3.36% effective interest rate. The effect of a 1/8%
change in the effective interest rate would be approximately
$55.2 per year.
JJ Adjustment to record interest on new $172,500 long-term
convertible senior subordinated debt, issued in connection
with the Eldorado acquisition, using a 2.875% effective
interest rate.
KK Elimination of Tapco's interest on pre-acquisition debt
retired by Headwaters at closing.
LL Elimination of Tapco's historical amortization of deferred
financing costs.
MM Adjustment to record interest for amortization of new debt
issuance costs of $17,000 related to issuance of debt for the
Tapco acquisition as follows: 1) $75 million revolving line of
credit (unused as of date of acquisition), 2) $640 million of
senior debt under a 1st lien and, 3) $150 million of senior
debt under a 2nd lien. The debt issuance costs are amortized
using a weighted-average six and one-half year life.
NN Adjustment to record interest on new $640 million long-term
senior debt, issued for the Tapco acquisition, under a 1st
lien, using a LIBOR plus 2.75%, or 4.45%, effective interest
rate. The effect of a 1/8% change in the effective interest
rate would be approximately $800 per year.
OO Elimination of interest from repayment of Headwaters $48,750
senior debt with a 3.36% interest rate at June 30, 2004.
PP Adjustment to record interest on new $150 million long-term
senior debt, issued for the Tapco acquisition, under a 2nd
lien, using a LIBOR plus 6.0%, or 7.70%, effective interest
rate. The effect of a 1/8% change in the effective interest
rate would be approximately $187.5 per year.
QQ Adjustment to record interest for $75 million revolving line
of credit commitment fee, for new revolver facility issued in
connection with the new senior debt.
RR Combined income tax effect of Eldorado's and Tapco's
historical net income plus the profit and loss-related pro
forma adjustments, calculated using a combined effective
federal and state income tax rate of approximately 39%.
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.
Date: September 13, 2004
HEADWATERS INCORPORATED
(Registrant)
By /s/ Kirk A. Benson
------------------------------
Kirk A. Benson
Chief Executive Officer
(Principal Executive Officer)