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): June 2, 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))
The purpose of this Form 8-K is to update pro forma financial information for
the year ended September 30, 2004.
Item 9.01: Financial Statements and Exhibits.
(b) The following unaudited pro forma financial information for
Headwaters Incorporated is included herein:
Introduction to Pro Forma Condensed Combined Statement
of Income
Pro Forma Condensed Combined Statement of Income for the Year
Ended September 30, 2004
Notes to Pro Forma Condensed Combined Statement of Income
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HEADWATERS INCORPORATED
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
Eldorado Stone
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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 700 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.
At the closing of the Eldorado acquisition, Headwaters paid consideration
consisting of cash payments to the owners of Eldorado of approximately $137,000
and cash payments of approximately $69,600 to retire Eldorado debt and related
accrued interest, for an aggregate purchase price of $206,600, which together
with expenses incurred by Headwaters to consummate the Eldorado acquisition of
approximately $3,800, constitutes total consideration of approximately $210,400.
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 in 2004.
Tapco
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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 have been included in
Headwaters' consolidated statement of income beginning September 8, 2004.
At the closing of the Tapco acquisition, Headwaters paid consideration
consisting of cash payments to the owners of Tapco of approximately $388,000 and
cash payments of approximately $327,000 to retire Tapco debt 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 $9,000, constitutes total consideration of approximately $724,000.
-3-
In order to obtain the cash necessary to acquire Tapco, retire the Tapco debt
and preferred stock, and repay Headwaters' existing senior debt, Headwaters
borrowed $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, and
$150,000 of senior secured debt under a second lien with an eight-year term,
also with a floating interest rate. The senior secured first lien credit
arrangement also includes a $60,000 revolver available to Headwaters which
carries a 0.75% commitment fee on unused amounts and a floating interest rate on
actual borrowings. Headwaters incurred approximately $18,000 of debt issue costs
in connection with the issuance of the new senior debt.
Pro Forma Condensed Combined Statement of Income
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The pro forma condensed combined statement of income for the year ended
September 30, 2004 gives effect to both acquisitions as if they had occurred on
October 1, 2003. It combines Headwaters' historical results for the year ended
September 30, 2004 with Eldorado's and Tapco's historical results from October
1, 2003 to their respective acquisition dates, after giving effect to necessary
adjustments.
The pro forma condensed combined statement of income is presented for
illustrative purposes only. Such information does not purport to be indicative
of the results of operations that actually would have resulted had the
acquisitions occurred on the date 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.
-4-
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the year ended September 30, 2004
Historical
------------------------------------------------- Pro Forma Pro Forma
(in thousands, except per-share amounts) Headwaters (1) Eldorado (2) Tapco (3) Adjustments Combined
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Revenue:
Sales of chemical reagents $ 132,603 $ 132,603
License fees 72,721 72,721
Coal combustion products revenues 210,155 210,155
Sales of construction materials 134,027 $ 78,491 $ 221,463 433,981
Other revenues 4,449 4,449
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Total revenue 553,955 78,491 221,463 853,909
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Operating costs and expenses:
Cost of chemical reagents sold 89,789 89,789
Cost of coal combustion products revenues 150,080 150,080
Cost of construction materials sold 94,566 54,599 125,596 274,761
Cost of other revenues 436 436
Depreciation and amortization 17,051 4,484 2,121 $ (4,051) A
1,582 B
(748) C
12,110 D 32,549
Research and development 7,340 7,340
Selling, general and administrative 66,936 13,759 66,040 (32,383) E 114,352
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Total operating costs and expenses 426,198 72,842 193,757 (23,490) 669,307
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Operating income 127,757 5,649 27,706 23,490 184,602
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Other income (expense):
Interest and net investment income 944 3 947
Interest expense (19,453) (3,641) (33,095) 3,252 F
389 G
(590) H
(989) I
(3,306) J
23,954 K
1,294 L
(2,572) M
(27,498) N
2,833 O
(11,027) P
(423) Q
7,847 R (63,025)
Losses on notes receivable (2,842) (2,842)
Other, net (1,299) (34) (1,333)
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Total other expense, net (22,650) (3,641) (33,126) (6,836) (66,253)
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Income (loss) before income taxes 105,107 2,008 (5,420) 16,654 118,349
Income tax benefit (provision) (40,790) 2,009 (7,068) S (45,849)
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Net income (loss) 64,317 2,008 (3,411) 9,586 72,500
Preferred stock dividend (8,483) 8,483 T
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Net income (loss) attributable to
common stockholders $ 64,317 $ 2,008 $ (11,894) $ 18,069 $ 72,500
=========================================================== =============
Basic earnings per common share $ 2.02 $ 2.28
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Diluted earnings per common share $ 1.95 $ 2.20
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Weighted-average shares outstanding:
Basic 31,774 31,774
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Diluted 33,019 33,019
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See accompanying notes.
(1) Includes Eldorado's results of operations from June 2, 2004 through September 30, 2004 and Tapco's results of operations from
September 8, 2004 through September 30, 2004.
(2) Represents Eldorado's results of operations from October 1, 2003 through June 1, 2004.
(3) Represents Tapco's results of operations from October 1, 2003 through September 7, 2004
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HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
1. Basis of Presentation
The pro forma condensed combined statement of income included herein has 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 U.S. generally
accepted accounting principles 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 700 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 in 2004. Headwaters incurred
approximately $6,200 of debt issue costs in connection with the issuance of the
convertible senior subordinated debt.
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
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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. Eldorado has experienced significant
growth over the last two years. Eldorado sells its products through an extensive
distribution network. In addition, Eldorado employs a group of talented artists
who create the molds used to produce the manufactured stone product. The quality
of these molds adds significant value to the end product. Eldorado's
manufacturing process, market presence and the quality of its product, including
product design and product breadth, are major elements contributing to
Eldorado's high value and related purchase price. These items, combined with
Eldorado's high growth and extensive distribution network are not separable and,
accordingly, contribute to a significant amount of goodwill. Approximately
$9,034 of the purchase price was allocated to identifiable intangible assets,
consisting primarily of non-compete agreements. The intangible assets are being
amortized over estimated useful lives ranging from three to ten years, with a
combined weighted average life of approximately four years. The remaining
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HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
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.
The following table sets forth a preliminary allocation of the total
consideration to the tangible and intangible assets acquired and liabilities
assumed:
(in thousands)
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Cash $ 662
Trade receivables, net 16,650
Inventories 16,610
Other assets 2,553
Property, plant and equipment 23,367
Intangible assets acquired:
Non-competition agreements (3 - 3 1/2 years) 6,252
Other (5 - 10 years) 2,782
Goodwill 160,263
Accounts payable and accrued liabilities (18,707)
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Net assets acquired $ 210,432
===============
The determination of the final purchase price is subject to potential
adjustments, including final agreement with the seller of the working capital
acquired at closing. In addition, the purchase price allocation will likely
differ from that reflected above after final asset valuation reports are
received and a detailed review of all assets and liabilities, including income
taxes, 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 annual 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 have been included in
Headwaters' consolidated statement of income beginning September 8, 2004.
HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
The following table sets forth the consideration paid to acquire Tapco:
Cash paid to Tapco stockholders $ 388,297
Cash paid to retire Tapco debt, preferred stock and
related accrued interest 326,703
Costs directly related to acquisition 9,000
--------------
Total consideration $ 724,000
==============
In order to obtain the cash necessary to acquire Tapco, retire the Tapco debt
and preferred stock, and repay Headwaters' existing senior debt, Headwaters
borrowed $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, and
$150,000 of senior secured debt under a second lien with an eight-year term,
also with a floating interest rate. The senior secured first lien credit
arrangement also includes a $60,000 revolver available to Headwaters which
carries a 0.75% commitment fee on unused amounts and a floating interest rate on
actual borrowings. Headwaters incurred approximately $18,000 of debt issue costs
in connection with the issuance of the new senior debt.
The Tapco acquisition was accounted for using the purchase method of accounting.
The consideration Headwaters paid for Tapco was negotiated at arms length and
assets acquired and liabilities assumed were recorded at their estimated fair
values as of September 8, 2004. Tapco has a leading market share in most of its
product lines with some lines having a market share greater than 75%. Tapco has
the ability to deliver its products within a few days of receiving the order
which is appealing to architects, contractors and end users of the product.
Tapco also offers wide-ranging product choices delivered through an extensive
distribution network throughout the United States. Tapco's products,
manufacturing process and distributors are currently substantially different
than those utilized by Headwaters' other business units and a substantial amount
of sales relate to the remodeling industry. As such, Tapco may further mitigate
the cyclical nature of Headwaters' construction materials business in the
future. Tapco's primary value, therefore, is due to its significant market
presence and manufacturing efficiencies. These values are largely the result of
Tapco's manufacturing and distribution capacities, product breadth and workforce
which are not separable and, accordingly, contribute to a significant amount of
goodwill
Approximately $167,300 of the estimated purchase price was allocated to
estimated identifiable intangible assets consisting primarily of customer
relationships, trade names, and patents. The estimated intangible assets have
estimated average useful lives ranging from two to twenty years, with a combined
weighted average life of approximately 15 years. The remaining purchase price
not attributable to the tangible and identifiable intangible assets was
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.
-7-
HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
The following table sets forth a preliminary allocation of the total estimated
consideration to the tangible and intangible assets acquired and liabilities
assumed:
(in thousands)
- --------------------------------------------------------------------------
Cash $ 10,317
Trade receivables, net 41,696
Inventories 16,835
Other assets 1,232
Net property, plant and equipment 61,376
Intangible assets acquired:
Customer relationships (15 years) 62,000
Trade names (20 years) 62,000
Patents (10 years) 40,000
Non-competition agreements (2 years) 3,300
Goodwill 527,248
Accounts payable and accrued liabilities (33,237)
Net deferred income tax liabilities (68,767)
--------------
Net assets acquired $ 724,000
==============
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
is not expected to materially increase or decrease annual depreciation and
amortization expense from the amounts recorded in 2004 and the amounts expected
to be recorded in future periods, nor is it expected to have a material effect
on the identified assets or liabilities, including goodwill.
4. Pro Forma Statement of Income and Adjustments
The pro forma condensed combined statement of income for the year ended
September 30, 2004 gives effect to both acquisitions as if they had occurred on
October 1, 2003. It combines Headwaters' historical results for the year ended
September 30, 2004 with Eldorado's and Tapco's historical results from October
1, 2003 to their respective acquisition dates, after giving effect to necessary
adjustments.
The pro forma condensed combined statement of income is presented for
illustrative purposes only. Such information does not purport to be indicative
of the results of operations that actually would have resulted had the
acquisitions occurred on the date 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 statement of income gives effect to the
following pro forma adjustments:
A Elimination of Eldorado's historical amortization of
intangible assets.
-8-
HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
B Adjustment to amortize Eldorado's new intangible assets,
$9,034, over estimated useful lives ranging from three to ten
years, with a combined weighted average life of approximately
4 years. New intangible assets primarily include non-compete
agreements.
C Elimination of Tapco's historical amortization of intangible
assets.
D Adjustment to amortize Tapco's new intangibles, $167,300, over
estimated useful lives ranging from two to twenty years, with
a combined weighted average life of approximately 15 years.
New intangible assets primarily include customer
relationships, trade names, and patents.
E Elimination of Tapco's accounting and legal fees related to
the acquisition and elimination of stock compensation expense
from redemption of common stock options related to the
acquisition.
F Elimination of Eldorado's interest on pre-acquisition debt
retired by Headwaters at closing.
G Elimination of Eldorado's historical amortization of deferred
financing costs.
H 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.
I 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.
J Adjustment to record interest on new $172,500 2.875% long-term
convertible senior subordinated debt, issued in connection
with the Eldorado acquisition.
K Elimination of Tapco's interest on pre-acquisition debt
retired by Headwaters at closing.
L Elimination of Tapco's historical amortization of deferred
financing costs.
M Adjustment to record interest for amortization of new debt
issuance costs of $18,000 related to issuance of debt for the
Tapco acquisition as follows: 1) $60 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 approximate seven-year life.
N Adjustment to record interest on new $640 million long-term
senior debt, issued for the Tapco acquisition, under a 1st
lien, using an anticipated approximate 4.6% effective interest
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HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(amounts in thousands)
rate. The effect of a 1/8% change in the effective interest
rate would be approximately $800 per year. The interest rate
on this debt at December 31, 2004 was approximately 5.4%.
O Elimination of interest and debt issuance costs from repayment
of Headwaters $48,750 senior debt with an approximate 3.35%
interest rate with proceeds from the long-term senior debt
issued for the Tapco acquisition.
P Adjustment to record interest on new $150 million long-term
senior debt, issued for the Tapco acquisition, under a 2nd
lien, using an anticipated approximate 7.85% effective
interest rate. The effect of a 1/8% change in the effective
interest rate would be approximately $187.5 per year. The
interest rate on this debt at December 31, 2004 was
approximately 7.7%.
Q Adjustment to record commitment fee for $60 million revolving
line of credit commitment fee, for new revolver facility
issued in connection with the new senior debt.
R Elimination of Tapco's unamortized debt issuance costs as of
acquisition date, and additional interest expense related to
retired Tapco debt.
S 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 37.9%.
T Elimination of preferred stock dividends paid to Tapco's
preferred stockholders as of the acquisition date.
-10-
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: February 7, 2005 HEADWATERS INCORPORATED
(Registrant)
By: /s/ Kirk A. Benson
------------------------------
Kirk A. Benson
Chief Executive Officer
(Principal Executive Officer)
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