-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PyIMdIgfffzzLw/2/rd8vRO8WSFEtg00ALWdZqdrzAQdevk/tyHV3io1jp7HEvTa hnPtNU5EWCCME5gCML+00A== 0001038838-04-000809.txt : 20040913 0001038838-04-000809.hdr.sgml : 20040913 20040913065354 ACCESSION NUMBER: 0001038838-04-000809 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040908 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20040913 DATE AS OF CHANGE: 20040913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEADWATERS INC CENTRAL INDEX KEY: 0001003344 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRODUCTS OF PETROLEUM & COAL [2990] IRS NUMBER: 870547337 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27808 FILM NUMBER: 041026630 BUSINESS ADDRESS: STREET 1: 10653 SOUTH RIVERFRONT PARKWAY STREET 2: SUITE 300 CITY: SOUTH JORDAN STATE: UT ZIP: 84095 BUSINESS PHONE: 801-984-9400 MAIL ADDRESS: STREET 1: 10653 SOUTH RIVERFRONT PARKWAY STREET 2: SUITE 300 CITY: SOUTH JORDAN STATE: UT ZIP: 84095 FORMER COMPANY: FORMER CONFORMED NAME: COVOL TECHNOLOGIES INC DATE OF NAME CHANGE: 19951113 8-K 1 form8k090804.txt FORM 8-K DATED SEPTEMBER 8, 2004 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 ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-27808 87-0547337 - ----------------------------- -------------- ----------------------- (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 ------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 984-9400 Not Applicable ------------------------------------------------------------ (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) EX-10.89 2 ex1089form8k090804.txt AGREEMENT AND PLAN OF MERGER 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 [Headwaters will supplementally furnish a copy of omitted schedules to this agreement to the SEC upon request.] Table of Contents Page ARTICLE I THE MERGER Section 1.1 The Merger...................................................1 Section 1.2 Effective Time...............................................1 Section 1.3 Articles of Incorporation and Bylaws.........................1 Section 1.4 Directors and Officers of the Surviving Corporation..........2 Section 1.5 Effects of the Merger........................................2 Section 1.6 Subsequent Actions...........................................2 Section 1.7 Conversion and Cancellation of Capital Stock and Options.....2 ARTICLE II THE CLOSING; PAYMENT FOR CAPITAL STOCK AND OPTIONS Section 2.1 The Closing..................................................3 Section 2.2 Conversion of Shares; Cancellation of Options................4 Section 2.3 Payment of Merger Consideration..............................4 Section 2.4 Lost Certificates............................................5 Section 2.5 Stock Transfer Books.........................................5 Section 2.6 [Intentionally Omitted]......................................5 Section 2.7 Repayment of Indebtedness....................................5 Section 2.8 Escrow Deposit...............................................5 Section 2.9 Deposit of Transaction Tax Benefits and Creditable Tax Refunds..................................................5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 3.1 Organization; Qualification of Company.......................7 Section 3.2 Authorization................................................7 Section 3.3 Execution; Validity of Agreement.............................8 Section 3.4 Capitalization...............................................8 Section 3.5 Consents and Approvals; No Violations........................8 Section 3.6 Subsidiaries.................................................9 Section 3.7 Financial Statements.........................................9 Section 3.8 Company Debt.................................................9 Section 3.9 Absence of Certain Changes...................................9 Section 3.10 Title to Properties; Encumbrances...........................10 Section 3.11 Real Property...............................................10 Section 3.12 Leases......................................................10 Section 3.13 Contracts and Commitments...................................11 Section 3.14 Customers and Suppliers.....................................12 Section 3.15 Insurance...................................................12 Section 3.16 Litigation..................................................12 Section 3.17 Environmental Matters.......................................12 Section 3.18 Compliance with Laws........................................12 Section 3.19 Employee Benefits...........................................13 Section 3.20 Tax Matters.................................................14 Section 3.21 Intellectual Property.......................................14 Section 3.22 Labor Matters...............................................15 Section 3.23 Bank Accounts...............................................15 Section 3.24 Brokers or Finders..........................................15 i Section 3.25 Disclosure Controls.........................................15 Section 3.26 No Other Representations....................................15 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER AND SUB Section 4.1 Organization................................................15 Section 4.2 Authorization; Execution; Validity of Agreement.............16 Section 4.3 Consents and Approvals; No Violations.......................16 Section 4.4 Availability of Funds.......................................16 Section 4.5 Litigation..................................................16 Section 4.6 Due Diligence...............................................17 Section 4.7 Investment Representations..................................17 Section 4.8 Brokers or Finders..........................................17 Section 4.9 No Other Representations....................................17 ARTICLE V COVENANTS Section 5.1 Publicity...................................................17 Section 5.2 Employees; Employee Benefits................................18 Section 5.3 Taxes.......................................................18 Section 5.4 Intercompany Arrangements...................................22 Section 5.5 Maintenance of Books and Records; Reasonable Access.........22 Section 5.6 Directors' and Officers' Insurance and Indemnification......22 Section 5.7 Notice of Action by Written Consent.........................24 Section 5.8 Appointment of Sellers' Representative......................24 ARTICLE VI SURVIVAL; INDEMNIFICATION Section 6.1 Survival....................................................25 Section 6.2 Indemnification.............................................26 Section 6.3 Limitations on Indemnification..............................27 Section 6.4 Escrow; Sole and Exclusive Remedy...........................28 ARTICLE VII DEFINITIONS AND INTERPRETATION Section 7.1 Definitions.................................................28 Section 7.2 Interpretation..............................................37 ARTICLE VIII MISCELLANEOUS Section 8.1 Fees and Expenses...........................................37 Section 8.2 Amendment and Modification..................................37 Section 8.3 Notices.....................................................38 Section 8.4 Counterparts................................................38 Section 8.5 Entire Agreement; No Third Party Beneficiaries..............38 Section 8.6 Severability................................................38 Section 8.7 Governing Law...............................................39 Section 8.8 Venue.......................................................39 Section 8.9 Time of Essence.............................................39 Section 8.10 Extension; Waiver...........................................39 Section 8.11 Assignment..................................................39 ii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of September 8, 2004, by and among Headwaters Incorporated, a Delaware corporation ("Purchaser"), Headwaters T Acquisition Corp., a Utah corporation ("Sub"), and Tapco Holdings, Inc., a Michigan corporation (the "Company"). Certain capitalized terms used in this Agreement have the meanings assigned to them in Article VII. WHEREAS, the Board of Directors of each of Purchaser, Sub and the Company has approved, and deems it advisable and in the best interests of its shareholders to consummate the acquisition of the Company by Purchaser, which acquisition is to be effected by the merger of Sub with and into the Company, with the Company being the surviving entity (the "Merger"), upon the terms and subject to the conditions set forth herein. WHEREAS, the shareholders of each of Sub and the Company, including all of the holders of Preferred Shares, have approved the Merger, upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I THE MERGER Section 1.1. The Merger. The Merger shall be effected and Sub shall be merged with and into Company at the Effective Time with the separate corporate existence of Sub ceasing and the Company continuing as the surviving corporation. The surviving corporation of the Merger shall be herein referred to as the "Surviving Corporation". The Surviving Corporation shall become a direct wholly-owned subsidiary of Purchaser and shall succeed to and assume all the rights and obligations of Sub and the Company in accordance with the MBCA. Section 1.2. Effective Time. Immediately upon execution of this Agreement, the parties shall file a certificate of merger (the "Certificate of Merger"), executed in accordance with the relevant provisions of the MBCA, and shall make all other filings or recordings required under the MBCA. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the State of Michigan (the time the Merger becomes effective being the "Effective Time"). Section 1.3. Articles of Incorporation and Bylaws. (a) The Articles of Incorporation of Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided therein or by applicable Law. (b) The Bylaws of Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended as provided therein or by applicable Law. Section 1.4. Directors and Officers of the Surviving Corporation. (a) The directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. (b) The officers of Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. Section 1.5. Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the MBCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Sub shall be vested in the Surviving Corporation, and all debts, liabilities and duties of the Company and Sub shall become the debts, liabilities and duties of the Surviving Corporation. Section 1.6. Subsequent Actions. If at any time after the Effective Time any deeds, bills of sale, assignments, assurances or any other actions or things are reasonably necessary to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either of the Company or Sub acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger, then the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of either the Company or Sub, all such deeds, bills of sale, instruments of conveyance, assignments and assurances and to take and do, in the name and on behalf of each such corporation or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title or interest in, to and under such rights, properties or assets in the Surviving Corporation. Section 1.7. Conversion and Cancellation of Capital Stock and Options. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any securities of the Company or Sub: (a) Company Preferred Stock. Each issued and outstanding share (each, a "Preferred Share" and, collectively, the "Preferred Shares") of Series A Redeemable Convertible Preferred Stock, par value $.01 per share, of the Company (the "Company Preferred Stock") shall be converted automatically into the right to receive at the Effective Time $218.138 per share (the "Preferred Merger Consideration"), payable in cash, without interest, to the holder of such Preferred Share upon surrender of a certificate that formerly evidenced such Preferred Share. At the Effective Time, all shares of Company Preferred Stock upon which consideration is payable pursuant to this Section 1.7(a) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Preferred 2 Share shall cease to have any rights with respect thereto, except the right to receive the consideration provided for in this Agreement. (b) Company Common Stock. Each issued and outstanding share (a "Common Share," and collectively the "Common Shares," and together with the Preferred Shares the "Shares") of common stock, par value $.3333 per share, of the Company (the "Company Common Stock"), other than shares to be cancelled in accordance with Section 1.7(d), shall be converted automatically into the right to receive at the Effective Time $46.179 per share (the "Common Merger Consideration"), payable in cash, without interest, to the holder of such Common Share upon surrender of a Common Certificate that formerly evidenced such Common Share. At the Effective Time, all shares of Company Common Stock with respect to which the Common Merger Consideration is payable pursuant to this Section 1.7(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing Common Shares shall cease to have any rights with respect thereto, except the right to receive the Common Merger Consideration. (c) Common Stock of Sub. Each share of common stock, par value $.01 per share, of Sub issued and outstanding immediately prior to the Effective Time shall automatically be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. (d) Cancellation of Treasury Stock and Sub Owned Stock. Each Share and each Option that is owned by the Purchaser, Sub, Company or any Subsidiary of the Company shall automatically be cancelled and retired and shall cease to exist and no consideration shall be delivered with respect thereto or in exchange therefor. (e) Stock Options. Immediately prior to the Effective Time, each outstanding option to purchase shares of Company Common Stock ("Options") shall be cancelled in exchange for a cash payment made by Purchaser at the Effective Time to the holders of such Options, of the amount (the "Option Payment") equal to the product of (a) the excess, if any, of (i) the Common Merger Consideration over (ii) the per share exercise price of such Options and (b) the number of shares of Company Common Stock subject to such Options which have not been exercised or otherwise remain outstanding as of the Closing, whether or not then vested and exercisable. All amounts payable pursuant to this Section 1.7(e) or under the Escrow Agreement shall be subject to Sections 2.2(b) and 2.3(b) and to any required withholding of Taxes and shall be paid without interest. ARTICLE II THE CLOSING; PAYMENT FOR CAPITAL STOCK AND OPTIONS Section 2.1. The Closing. Immediately following the execution and delivery of this Agreement on the date hereof (the "Closing Date"), the closing of the Merger (the "Closing") shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Palo Alto, California. 3 Section 2.2. Conversion of Shares; Cancellation of Options. (a) As of the Effective Time, (i) each Common Share issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive the Common Merger Consideration, (ii) each Preferred Share issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive the Preferred Merger Consideration, (iii) all Shares shall automatically be canceled and retired and shall cease to exist, (iv) each holder of a certificate which immediately prior to the Effective Time represented Common Shares (each, a "Common Certificate") shall cease to have any rights with respect thereto, except the right to receive the Common Merger Consideration, without interest, per Common Share represented thereby upon surrender of such Common Certificate in accordance with this Section 2.2, and (v) each holder of a certificate which immediately prior to the Effective Time represented Preferred Shares (each, a "Preferred Certificate") shall cease to have any rights with respect thereto, except the right to receive the Preferred Merger Consideration, without interest, per Preferred Share represented thereby upon surrender of such Preferred Certificate in accordance with this Section 2.2. (b) Immediately prior to the Effective Time, each Option shall be cancelled and shall cease to exist and each Optionholder shall cease to have any rights with respect thereto except the right to receive the Option Payment per Option, without interest, upon delivery in accordance with this Article II of a duly executed option cancellation agreement substantially in the form of Exhibit A hereto (an "Option Cancellation Agreement"). Section 2.3. Payment of Merger Consideration. (a) Simultaneous with the Closing, Purchaser shall pay to each Shareholder who delivers to Purchaser on or before the Closing Date his, her or its Common Certificates or Preferred Certificates, as the case may be, together with a duly executed letter of transmittal substantially in the form of Exhibit B hereto (a "Letter of Transmittal"), the aggregate Common Merger Consideration and Preferred Merger Consideration payable thereon to an account designated by such Shareholder by wire transfer in immediately available funds. From and after the Closing, upon surrender of a Common Certificate or Preferred Certificate for cancellation to the Surviving Corporation, together with a Letter of Transmittal, duly executed, the holder of such Common Certificate or Preferred Certificate shall be entitled to receive from the Surviving Corporation and Purchaser, jointly and severally, in exchange therefor cash which such holder has the right to receive pursuant to the provisions of this Article II after taking into account all the Shares then held by such holder under all such Common Certificate or Preferred Certificate so surrendered. (b) Simultaneous with the Closing, Purchaser shall pay to each Optionholder who delivers to Purchaser his, her or its duly executed Option Cancellation Agreement the Option Payment payable in connection therewith to an account designated by such Optionholder prior to the closing by wire transfer in immediately available funds. From and after the Closing, upon surrender of a duly executed Option Cancellation Agreement to the Surviving Corporation by an Optionholder, such Optionholder shall be entitled to receive from the Surviving Corporation and Purchaser, jointly and severally, in exchange therefor the Option Payment. 4 Section 2.4. Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed Purchaser will issue or will cause Sub to issue (or, after the Closing Date, will cause the Surviving Corporation to issue) in exchange for such lost, stolen or destroyed Certificate the cash which such holder has the right to receive pursuant to the provisions of this Article II after taking into account all the Shares then held by such holder under all such Certificates. Section 2.5. Stock Transfer Books. The stock transfer books of the Company shall be closed immediately upon the Effective Time and there shall be no further registration of transfers of Shares thereafter on the records of the Company. Section 2.6. [Intentionally Omitted]. Section 2.7. Repayment of Indebtedness. To satisfy the obligations of the Company under all outstanding Indebtedness, at the Closing, Purchaser shall transfer funds to the Company in an amount equal to the Debt Payoff Amount. Section 2.8. Escrow Deposit. Purchaser shall deposit an amount in cash equal to the Escrow Deposit in an account (the "Escrow Account") to be established by Purchaser and the Sellers' Representative with the Escrow Agent pursuant to the terms of an escrow agreement substantially in the form of Exhibit C hereto (the "Escrow Agreement"). The Escrow Account shall be administered in accordance with the terms and provisions of the Escrow Agreement for a term that shall expire at the open of business on December 31, 2005 or such later date provided in the Escrow Agreement in the event of a claim outstanding against the Escrow Account as of the open of business on December 31, 2005 (such later date, the "Escrow Fund Release Date"). Section 2.9. Deposit of Transaction Tax Benefits and Creditable Tax Refunds. (a) Purchaser shall, as soon as practicable and in no event later than four Business Days following the realization of any Transaction Tax Benefit or any Creditable Tax Refunds, deposit in the Escrow Account an amount in cash (each such amount, a "Tax Benefit Deposit") equal to the amount of the realized Transaction Tax Benefit or Creditable Tax Refunds, as the case may be, up to a maximum of $14,000,000 in the aggregate (the "Tax Benefit Basket"). Thereafter, Purchaser shall, instead of making a Tax Benefit Deposit, deliver to the Sellers' Representative: (i) an amount in cash equal to any realized Creditable Tax Refund; and (ii) an amount in cash equal to the amount of any realized Transaction Tax Benefit (each such amount, a "Refund Reimbursement") up to an amount equal to the aggregate amount of the Creditable Tax Refunds included in the Tax Benefit Basket, after which, Purchaser shall deliver to the Seller one-half of the amount of any realized Transaction Tax Benefit (each such amount, an "Excess Payment") as soon as practicable and in no event later than four Business Days following the realization of such Transaction Tax Benefit or Creditable Tax Refund. 5 Notwithstanding the foregoing, after the Escrow Fund Release Date, Purchaser shall, instead of making a Tax Benefit Deposit, deliver to the Sellers' Representative all realized Transaction Tax Benefits, subject to subsection (ii) above (after filling, and giving effect to, the Tax Benefit Basket even after the Escrow Fund Release Date), or Creditable Tax Refunds. The Sellers' Representative shall distribute any Transaction Tax Benefits, Creditable Tax Refunds, Refund Reimbursements or Excess Payments to the Sellers ratably according to their respective Ownership Percentages. Purchaser's obligations under this Section 2.9(a) to make payments to the Sellers' Representative shall expire on the Escrow Fund Release Date, except (A) with respect to realization of the Option Benefit Amount, in which case Purchaser's obligations under this Section 2.9(a) shall continue until the Option Benefit Amount is realized and delivered to Sellers' Representative subject to subsection (ii) above (after filling, and giving effect to, the Tax Benefit Basket even after the Escrow Fund Release Date); (B) with respect to delivery of all payments of Transaction Tax Benefits or Creditable Tax Refunds realized pursuant to filings made prior to the Escrow Fund Release Date, in which case Purchaser's obligations under this Section 2.9(a) shall continue until such payments are received and delivered in accordance with this Section 2.9(a); and (C) where Purchaser has failed to satisfy in all material respects its obligations under Section 5.3, in which case Purchaser's obligations under this Section 2.9(a) shall continue until the Purchaser has satisfied in all material respects its obligations under Section 5.3 and has delivered to Sellers' Representative all payments that could reasonably have resulted from the timely performance of all of its obligations under Section 5.3. (b) Without limiting the manner in which any Transaction Tax Benefit may be realized, Purchaser shall be deemed to have realized a Transaction Tax Benefit: (i) when Purchaser or Surviving Corporation (or their respective Affiliates) receives the refund for overpayment of estimated taxes requested on the Form 4466 covering the period from November 1, 2003 to and including the Closing Date; (ii) in an amount equal to the Short Period Tax Savings when Purchaser files the Form 1120 covering the period from November 1, 2003 to and including the Closing Date or causes such Form 1120 to be filed; (iii) when Purchaser or Surviving Corporation (or their respective Affiliates) receives the refund requested on the Form 1139; (iv) in an amount equal to the 163(j) Amount on December 15, 2004, unless the Purchaser provides written notice to the Sellers' Representative at least two Business Days prior to such due date that the taxable income reported with such estimated tax payment does not permit application of the 163(j) Amount to the then-due estimated tax payment and such notice is certified in writing by Purchaser's auditors. In the event that such notice is timely delivered, Purchaser or Surviving Corporation (or their respective Affiliates) shall apply the 163(j) Amount to taxable income at the earliest possible opportunity, including in connection with any Tax Return, or other opportunity to otherwise reduce Taxes due or payable by Purchaser or 6 Surviving Corporation (or their respective Affiliates), unless a similar notice of inapplicability is timely delivered, until the 163(j) Amount has been applied and realized; or (v) at any other time when (A) a refund reflecting a Transaction Tax Benefit is received from a Taxing Authority; (B) an estimated Tax payment reflecting a Transaction Tax Benefit is made to a Taxing Authority; (C) a final Tax payment is made with any Tax Return reflecting a Transaction Tax Benefit; or (D) such Transaction Tax Benefit is otherwise used to reduce Taxes payable by, or to increase refunds or other payments from a Taxing Authority to, Purchaser, the Company or Surviving Corporation, as the case may be, or their respective Affiliates. (c) Upon written request, the Sellers' Representative will cooperate with and provide reasonably requested assistance to Purchaser or the Surviving Corporation, as the case may be, in realizing the Transaction Tax Benefits set forth in items (i) through (v) above and in taking the actions set forth in Section 5.3(g). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule prepared and signed by the Company and delivered to Purchaser simultaneously with the execution hereof or as disclosed in, or as readily inferable from, the Financial Statements, the Company represents and warrants to Purchaser and Sub that all of the statements contained in this Article III are true as of the date of this Agreement (or, if made as of a specified date, as of such date). For purposes of the representations and warranties of the Company contained herein, disclosure in any section of the Disclosure Schedule of any facts or circumstances shall be deemed to be an adequate response and disclosure of such facts or circumstances with respect to all representations or warranties by the Company calling for disclosure of such information, whether or not such disclosure is specifically associated with or purports to respond to one or more or all of such representations or warranties if it is reasonably apparent on the face of the Disclosure Schedule that such disclosure is applicable. The inclusion of any information in any section of the Disclosure Schedule or other document delivered by the Company pursuant to this Agreement shall not be deemed to be an admission or evidence of the materiality of such item, nor shall it establish a standard of materiality for any purpose whatsoever. Section 3.1 Organization; Qualification of Company. The Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan; (b) has full corporate power and authority to carry on its business as it is now being conducted and to own the properties and assets it now owns; and (c) is qualified or licensed to do business as a foreign corporation in good standing in every jurisdiction in which such qualification is required, except where the failure to be so qualified or licensed would not reasonably be expected to have a Company Material Adverse Effect. Section 3.2 Authorization. The Company has the requisite power and authority to execute and deliver this Agreement and to consummate the 7 Transactions. The execution, delivery and performance by the Company of this Agreement and the consummation of the Transactions have been duly authorized by the Board of Directors of the Company. Shareholders holding over 75% of the Common Shares and Preferred Shares outstanding as of the date hereof, voting together as a class, and Shareholders holding 100% of the Preferred Shares outstanding as of the date hereof, voting separately as a class, have duly executed actions by written consent authorizing the execution and delivery by the Company of this Agreement and the consummation by it of the Transactions, which actions by written consent comply with the provisions of the MBCA and the Articles of Incorporation and Bylaws of the Company. No other action, vote or approval of the Company or the Shareholders is required to authorize the execution and delivery by the Company of this Agreement or the consummation by it of any of the Transactions. Section 3.3 Execution; Validity of Agreement. This Agreement has been duly executed and delivered by the Company, and, assuming due and valid authorization, execution and delivery hereof by Purchaser and Sub, is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of general application affecting enforcement of creditors' rights generally and (b) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. Section 3.4 Capitalization. The authorized capital stock of the Company consists of 13,000,000 shares of Company Common Stock and 245,000 shares of preferred stock, par value $.01 per share, all of which is designated as Company Preferred Stock. As of the date hereof, (a) 7,589,717 shares of Company Common Stock are issued and outstanding, (b) 245,000 shares of Company Preferred Stock are issued and outstanding (which are convertible into 1,157,306 shares of Company Common Stock) and (c) a total of 1,062,878 shares of Company Common Stock are issuable pursuant to Options. Section 3.4 of the Disclosure Schedule sets forth the name and holdings (including the Ownership Percentage) of each holder of outstanding Shares and Options (including the exercise prices of such Options) as of the date hereof. All the outstanding Shares are duly authorized, validly issued, fully paid and non-assessable. Except as set forth above, as of the date hereof, (x) there are no shares of capital stock of the Company authorized, issued or outstanding; and (y) there are no existing options, warrants, calls, pre-emptive rights, subscriptions or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company or any Company Subsidiary, obligating the Company or any Company Subsidiary to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock of the Company or any Company Subsidiary. Section 3.5 Consents and Approvals; No Violations. None of the execution, delivery or performance of this Agreement by the Company, the consummation by the Company of the Transactions or compliance by the Company with any of the provisions hereof will (a) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws of the Company, if applicable, (b) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (c) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any 8 of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company is a party or by which the Company or any of its properties or assets may be bound, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its properties or assets, excluding from the foregoing clauses (b), (c) and (d) such violations, breaches or defaults which (A) would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect or (B) would become applicable as a result of the business or activities in which Purchaser or Sub is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Purchaser or Sub. Section 3.6 Subsidiaries. Section 3.6 of the Disclosure Schedule sets forth the name, jurisdiction of incorporation and authorized capital of each Company Subsidiary. All the outstanding capital stock of each Company Subsidiary is owned directly or indirectly by the Company, free and clear of all Encumbrances and all material claims or charges of any kind, and is validly issued, fully paid and nonassessable. Each Company Subsidiary (a) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation; (b) has full corporate power and authority to carry on its business as it is now being conducted and to own the properties and assets it now owns; and (c) is duly qualified or licensed to do business as a foreign corporation in good standing in every jurisdiction in which such qualification is required except where the failure to be so qualified or licensed would not reasonably be expected to have a Company Material Adverse Effect. Section 3.7 Financial Statements. True and complete copies of the Financial Statements are included in Section 3.7 of the Disclosure Schedule. The Financial Statements have been prepared from the books and records of the Company and the Company Subsidiaries, comply in all material respects with applicable accounting requirements, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be stated in the notes thereto) and fairly present the consolidated financial position and the consolidated results of operations and cash flows of the Company and the Company Subsidiaries as of the times and for the periods referred to therein (subject, in the case of unaudited statements, to (i) normally recurring year-end adjustments and (ii) the absence of notes thereto). Section 3.8 Company Debt. After giving effect to the consummation of the Transactions (including Purchaser performing its obligations under Section 2.7), all amounts of principal and interest outstanding under each instrument evidencing Indebtedness of the Company and any Company Subsidiaries immediately prior to the Closing, shall have been repaid, defeased or otherwise satisfied (or funds shall have been deposited for the redemption, repurchase or other satisfaction in full of such Indebtedness) as of the Closing. Section 3.9 Absence of Certain Changes. Except as (a) disclosed in the Financial Statements or (b) expressly required by this Agreement, since the Balance Sheet Date, no event that would reasonably be expected to result in a Company Material Adverse Effect has occurred, and the Company represents that, since the Balance Sheet Date: (a) The business of the Company and the Company Subsidiaries has been conducted in the same manner as heretofore conducted and only in the 9 ordinary course (including with respect to the Company's working capital policies regarding the payment of accounts payable and the collection of accounts receivable); (b) Neither the Company nor any Company Subsidiary has: (i) amended its Articles of Incorporation or Bylaws or similar organizational documents, (ii) issued, sold, transferred, pledged, disposed of or encumbered any shares of any class or series of its capital stock, or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of any class or series of its capital stock (excluding issuances and sales of Shares of common stock upon the exercise of Options outstanding as of the date hereof), (iii) declared, set aside or paid any dividend or other distribution payable in cash, stock or property with respect to any shares of any class or series of its capital stock, (iv) split, combined or reclassified any shares of any class or series of its stock, (v) redeemed, purchased or otherwise acquired directly or indirectly any shares of any class or series of its capital stock, or any instrument or security which consists of or includes a right to acquire such shares or (vi) made or authorized any capital expenditure other than in accordance with the annual budget of the Company, a copy of which has been made available to Purchaser before the date hereof; (c) Neither the Company nor any Company Subsidiary has made any change in the compensation payable or to become payable to any of its employees (other than normal recurring increases in the ordinary course of business or pursuant to any Plan existing on the date hereof); (d) Neither the Company nor any Company Subsidiary has adopted a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any Company Subsidiary; and (e) Neither the Company nor any Company Subsidiary has changed in any material respect any of the accounting methods used by it unless required or permitted by GAAP. Section 3.10 Title to Properties; Encumbrances. Except for property sold since the Balance Sheet Date in the ordinary course of business, each of the Company and each Company Subsidiary has good title to all the properties and assets reflected on the Balance Sheet, free and clear of all material Encumbrances, other than Encumbrances disclosed on the Balance Sheet. This Section 3.10 does not relate to Real Property or interests in Real Property, such items being the subject of Section 3.11 hereof, nor does it relate to Intellectual Property, such items being the subject of Section 3.21 hereof. Section 3.11 Real Property. Section 3.11 of the Disclosure Schedule sets forth a complete list and the location of all Real Property. To the extent in the Company's possession or reasonable control, true and complete copies of (a) all deeds, title insurance policies and surveys relating to the Real Property and (b) all documents evidencing all Encumbrances upon the Real Property have heretofore been made available to Purchaser. Section 3.12 Leases. A true and complete copy of each Lease has heretofore been made available to Purchaser. To the Knowledge of the Company, each Lease is valid, binding and enforceable in accordance with its terms and is in full force and effect except (a) as limited by applicable bankruptcy, 10 insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of general application affecting enforcement of creditors' rights generally and (b) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. There is no existing default by the Company or any Company Subsidiary under any of the Leases which would reasonably be expected to constitute a Company Material Adverse Effect. Section 3.13 Contracts and Commitments. (a) Section 3.13 of the Disclosure Schedule sets forth, as of the date hereof, each contract and other agreement, to which the Company or any Company Subsidiary is a party that: (i) provides for aggregate future payments by the Company or any Company Subsidiary, or to the Company or any Company Subsidiary, of more than $500,000 and has an unexpired term exceeding one year and may not be canceled upon sixty (60) days' notice without any liability, penalty or premium (excluding purchase orders, invoices and leasing transactions entered into or incurred in the ordinary course of business); (ii) was entered into by the Company or a Company Subsidiary with a shareholder, officer, director or significant employee of the Company or any Company Subsidiary; (iii) is a collective bargaining or similar agreement; (iv) involves an agreement with any bank, finance company or similar organization for Indebtedness of the Company or any Company Subsidiary; (v) materially restricts the Company or any Company Subsidiary from engaging in any line of business anywhere in the world; and (vi) is an employment agreement, consulting agreement or similar arrangement. (b) As of the date hereof, (i) there is not and, to the Knowledge of the Company, there has not been claimed or alleged by any Person with respect to any contract listed in Section 3.13 of the Disclosure Schedule any existing default or event that, with notice or lapse of time or both, would constitute a default or event of default on the part of the Company or any Company Subsidiary or, to the Knowledge of the Company, on the part of any other party thereto, except such defaults, events of default and other events that would not reasonably be expected to result in a Company Material Adverse Effect, and (ii) no consent, approval, authorization or waiver from, or notice to, any Governmental Entity or other Person is required in order to maintain in full force and effect any of the contracts listed in Section 3.13 of the Disclosure Schedule, other than (A) such consents and waivers that have been obtained and are unconditional and in full force and effect and such notices that have been 11 duly given and (B) such consents, approvals, authorizations, waivers or notices the failure of which to have or give would not reasonably be expected to have a Company Material Adverse Effect. Section 3.14 Customers and Suppliers. Since the Balance Sheet Date through the date hereof, the Company has not received written notice of an intent to terminate the business relationship of the Company or any Company Subsidiary with any customer who accounted for more than 10% of the Company's sales (on a consolidated basis) during the period since the Balance Sheet Date, or any supplier from whom the Company or the Company Subsidiaries purchased more than 10% of the goods or services (on a consolidated basis) which it purchased during the same period. Section 3.15 Insurance. Section 3.15 of the Disclosure Schedule sets forth a description of all insurance policies in effect as of the date hereof, providing coverage with respect to the business or assets of the Company or the Company Subsidiaries. Each of such policies has been issued to the Company or a Company Subsidiary. Each of such policies is valid and binding and in full force and effect in all material respects, all premiums due thereunder have been paid when due (except for any failures to pay any such premiums that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect), and neither the Company nor any Company Subsidiary has received any written notice of cancellation or termination in respect of any such policy. Section 3.16 Litigation. As of the date of this Agreement, there is no action, suit, inquiry, proceeding or, to the Knowledge of the Company, governmental investigation pending or, to the Knowledge of the Company, threatened against or involving the Company or any Company Subsidiary that would reasonably be expected to have a Company Material Adverse Effect. Section 3.17 Environmental Matters. Except as would not reasonably be expected to have a Company Material Adverse Effect, to the Knowledge of the Company, since June 23, 1999, (a) the Company and each Company Subsidiary are in material compliance with all applicable Environmental Laws, (b) neither the Company nor any Company Subsidiary has received any written notice with respect to the business of, or any property owned or leased by, the Company or any Company Subsidiary from any governmental entity or third party that remains outstanding alleging that the Company or any Company Subsidiary is not in material compliance with any Environmental Law, and (c) neither the Company nor any Company Subsidiary has caused any "release" of a "hazardous substance," as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.9601 et seq., in excess of a reportable quantity which release remains unresolved on any real property owned by the Company or any Company Subsidiary that is used for the business of the Company or any Company Subsidiary. The representations and warranties contained in this Section 3.17 constitute the sole and exclusive representations and warranties of the Company concerning environmental matters. Section 3.18 Compliance with Laws. Since June 23, 1999, the Company and the Company Subsidiaries have complied in a timely manner and in all material respects with all laws, rules and regulations, ordinances, judgments, decrees, orders, writs and injunctions of all United States federal, state, local, foreign governments and agencies thereof that apply to the business, properties or assets of the Company or any Company Subsidiary, except for violations that would not constitute a Company Material Adverse Effect. This Section 3.18 does 12 not relate to matters with respect to Taxes, which are the subject of Section 3.20, Plans, which are the subject of Section 3.19, environmental matters, which are the subject of Section 3.17, or employee and labor matters, which are the subject of Section 3.22. Section 3.19 Employee Benefits. (a) Section 3.19 of the Disclosure Schedule contains a true and complete list of all Plans. The Company has heretofore made available to Purchaser a true and complete copy of each written Plan and any amendments thereto and each agreement creating or modifying any related trust or other funding vehicle. (b) The PBGC has not instituted proceedings to terminate any Title IV Plan and no condition exists that presents a material risk that such proceedings will be instituted. (c) No Title IV Plan is a "multiemployer pension plan," as defined in Section 3(37) of ERISA, nor is any Title IV Plan a plan described in Section 4063(a) of ERISA. (d) Each Plan has been operated and administered in all respects in accordance with its terms and applicable Law, including ERISA and the Code, except as would not reasonably be expected to have a Company Material Adverse Effect. 13 (e) Each Plan intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified. Section 3.20 Tax Matters. (a) The Company and each Company Subsidiary has filed (or has had filed on their behalf) all material income Tax Returns required by applicable Law to be filed by any of them prior to or as of the Closing Date. All such Tax Returns and amendments thereto are true, complete and correct in all material respects. (b) The Company and each Company Subsidiary has paid (or has had paid on their behalf) all material Taxes due with respect to any period ending prior to or as of the Closing Date. (c) There are no liens for Taxes upon any property or assets of the Company or any Company Subsidiary, except for liens for Taxes not yet due or for Taxes being contested in good faith for which adequate reserves in accordance with GAAP have been made. (d) No federal, state, local or foreign audits, examinations, investigations or other administrative proceedings (such audits, examinations, investigations and other administrative proceedings referred to collectively as "Audits") or court proceedings are presently pending with regard to any Taxes or Tax Returns filed by or on behalf of the Company or any Company Subsidiary, except for those Audits or court proceedings the adverse resolution of which would not have a Company Material Adverse Effect. (e) There are no outstanding requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any Taxes or deficiencies against the Company or any Company Subsidiary. (f) Neither the Company nor any Company Subsidiary has engaged in any "listed transaction" within the meaning of Treasury Regulation 1.6011-4(b)(2). Section 3.21 Intellectual Property. (a) Noninfringement. To the Knowledge of the Company, the conduct of the business of the Company does not infringe or misappropriate any Intellectual Property right of any third party, and no written notice has been received alleging anything to the contrary. (b) Ownership. To the Knowledge of the Company, the Company is the sole owner of all Company Intellectual Property purported to be owned by the Company. (c) Validity. To the Knowledge of the Company, all Company Intellectual Property is valid and enforceable, and no written notice has been received alleging anything to the contrary. 14 (d) Confidentiality. To the Knowledge of the Company, or except as would not be likely to have a Company Material Adverse Effect, no Trade Secret of the Company has been disclosed to any third party other than pursuant to written non-disclosure agreements. (e) No Third Party Infringers. To the Knowledge of the Company, no third party has infringed or misappropriated any Company Intellectual Property, except as would not be likely to have a Company Material Adverse Effect. (f) No Restrictions. Except as would not be likely to have a Company Material Adverse Effect, there are no settlements, forbearances to sue, consents, judgments, orders or other obligations, other than Licenses made in the ordinary course of business, that do or may: (i) restrict the Company's rights to use any Company Intellectual Property; (ii) restrict the conduct of the business of the Company in order to accommodate a third party's Intellectual Property; or (iii) permit third parties to use any Company Intellectual Property. Section 3.22 Labor Matters. (a) There is no labor strike, slowdown, stoppage or lockout actually pending, or to the Knowledge of the Company, threatened against the Company or any Company Subsidiary. (b) Neither the Company nor any Company Subsidiary is a party to or bound by any collective bargaining agreement with any labor organization applicable to employees of the Company or any Company Subsidiary. (c) No labor union has been certified by the National Labor Relations Board as bargaining agent for any of the employees of the Company or any Company Subsidiary. (d) Neither the Company nor any Company Subsidiary has experienced any material work stoppage or other material labor difficulty during the two-year period ending on the date hereof. (e) There is no unfair labor practice charge or complaint against the Company or any Company Subsidiary pending or, to the Knowledge of the Company, threatened before the National Labor Relations Board. (f) Since January 1, 2004, neither the Company nor any Company Subsidiary has effectuated a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Company or any Company Subsidiary, and there has not occurred a "mass layoff" (as defined in the WARN Act) affecting any site of employment or facility of the Company or any Company Subsidiary. Section 3.23 Bank Accounts. Section 3.23 of the Disclosure Schedule sets forth (a) the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company or any Company Subsidiary maintains safe deposit boxes, checking accounts or other accounts of any nature the available balance of which customarily exceeds $25,000 and (b) the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto. Section 3.24 Brokers or Finders. Neither the Company nor any Seller nor any of their respective Subsidiaries or Affiliates has entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any brokers' or finder's fee or any other commission or similar fee in connection with any of the Transactions. Section 3.25 Disclosure Controls. The Company has in place the disclosure controls and procedures that are identified in Section 3.25 of the Disclosure Schedule. Section 3.26 No Other Representations. Except for the representations and warranties contained in this Article III, neither the Company nor any Person acting on behalf of the Company makes any representation or warranty, express or implied. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER AND SUB Purchaser and Sub jointly and severally represent and warrant to the Company that all of the statements contained in this Article IV are true as of the date of this Agreement. Section 4.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. Each of Purchaser and Sub has all requisite corporate or other power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to have such power, authority, and 15 governmental approvals would not have, individually or in the aggregate, a material adverse effect on Purchaser's or Sub's ability to consummate the Transactions. Section 4.2 Authorization; Execution; Validity of Agreement. Each of Purchaser and Sub has requisite corporate power and authority to execute and deliver this Agreement and to consummate the Transactions. The execution, delivery and performance by Purchaser and Sub of this Agreement and the consummation of the Transactions have been duly authorized by the Board of Directors of Purchaser and the Board of Directors of Sub, and no other corporate action on the part of Purchaser or Sub is necessary to authorize the execution and delivery by Purchaser and Sub of this Agreement or the consummation of the Transactions. No vote of, or consent by, the holders of any class or series of stock or other equity issued by Purchaser or Sub is necessary to authorize the execution and delivery by Purchaser or Sub of this Agreement or the consummation by it of the Transactions. This Agreement has been duly executed and delivered by Purchaser and Sub, and, assuming due and valid authorization, execution and delivery hereof by the Company, is a valid and binding obligation of Purchaser and Sub, enforceable against Purchaser and Sub in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of general application affecting enforcement of creditors' rights generally and (b) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. Section 4.3 Consents and Approvals; No Violations. The consummation by Purchaser and Sub of the Transactions or compliance by Purchaser and Sub with any of the provisions hereof will not (a) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws of Purchaser or the Articles of Incorporation or Bylaws of Sub, (b) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (c) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, acceleration or creation of a lien) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Purchaser, Sub or any of their respective Subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Purchaser or Sub or any of their respective Subsidiaries or any of their properties or assets, excluding from the foregoing clauses (b), (c) and (d) such violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on Purchaser's or Sub's ability to consummate the Transactions. Section 4.4 Availability of Funds. Purchaser currently has access to sufficient immediately available funds in cash to pay the consideration payable in the aggregate to all Shareholders and Optionholders pursuant to Article II, to pay the Debt Payoff Amount and to pay (or to cause Sub to pay) any other amounts payable pursuant to this Agreement and to effect the Transactions. Section 4.5 Litigation. There is no claim, action, suit, litigation or proceeding or, to the knowledge of Purchaser or Sub, governmental investigation pending or, to the knowledge of Purchaser or Sub, threatened against Purchaser, 16 Sub or any of their respective Subsidiaries by or before any court, arbitrator or Governmental Entity that, individually or in the aggregate, impedes or would reasonably be expected to impede the ability of Purchaser or Sub to complete the Closing or to effect the Transactions in all respects. Section 4.6 Due Diligence. Purchaser and Sub have conducted their own independent investigation, review and analysis of the business, operations, assets, liabilities, results of operations, financial condition, technology and prospects of the Company and the Company Subsidiaries, which investigation, review and analysis was done by Purchaser, Sub and their respective Affiliates and, to the extent Purchaser and Sub deemed appropriate, by Purchaser's and Sub's representatives. Each of Purchaser and Sub acknowledges that it and its representatives have been provided adequate access to the personnel, properties, premises and records of the Company and the Company Subsidiaries for such purpose. In entering into this Agreement, each of Purchaser and Sub acknowledges that it has relied solely upon the aforementioned investigation, review and analysis and not on any factual representations, opinions, financial projections, presentations, management summaries or data room materials of the Company, the Company Subsidiaries or any of their respective directors, officers, shareholders, employees, Affiliates, controlling persons, agents, advisors or representatives (except the specific representations and warranties of the Company set forth in Article III of this Agreement and schedules thereto). Section 4.7 Investment Representations. Purchaser understands that no shares of capital stock of the Company Common Stock have been registered under the Securities Act or the securities laws of any state or other jurisdiction. Purchaser is acquiring the Company Common Stock for its own account for purposes of investment and not for the account of any other Person, not for resale to any other Person, and not with a view to or in connection with a sale or distribution of the Company Common Stock. Purchaser has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment for the disposition of the Company Common Stock by Purchaser. Purchaser will not sell or otherwise dispose of any shares of capital stock of the Company without registration under the Securities Act and under any applicable state or other jurisdiction's respective securities laws, or an exemption therefrom. Section 4.8 Brokers or Finders. Neither Purchaser, Sub nor any of their respective Subsidiaries or Affiliates has entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee in connection with any of the Transactions, except Morgan Stanley & Co. Incorporated, whose fees shall be borne solely by Purchaser. Section 4.9 No Other Representations. Except for the representations and warranties contained in this Article IV, neither the Purchaser, Sub nor any Person acting on behalf of the Purchaser or Sub makes any representation or warranty, express or implied. ARTICLE V COVENANTS Section 5.1 Publicity. Neither the Company, Purchaser, Sub or any of their respective Affiliates shall issue or cause the publication of any press release or other internal or external announcement or other disclosure with respect to this Agreement or the Transactions other than the initial press 17 release attached hereto as Exhibit D or after prior consultation with and approval of the Company and Purchaser, except as may be required by Law or by any listing agreement with a national securities exchange or trading market or to the extent the substance of such announcement or disclosure has previously been publicly disclosed (other than in breach of this Section 5.1). Section 5.2 Employees; Employee Benefits. (a) On and after the Closing, Purchaser shall cause the Surviving Corporation to maintain plans for the benefit of the Retained Employees which provide benefits that are not less favorable in the aggregate to such employees than the benefits provided under the Plans as of the Closing for a period of not less than one year following the Closing. On and after the Closing, Purchaser shall cause the Surviving Corporation to establish or maintain, on behalf of the Retained Employees, for a period not less than one year following the Closing (i) employee benefit plans or arrangements which provide benefits that are not less favorable in the aggregate than the benefits provided under the Plans as of the Closing, and (ii) incentive compensation and bonus plans or arrangements which provide payments not less than, and are administered consistently with, the incentive compensation and bonus Plans as of the Closing. (b) With respect to each employee benefit plan, practice or policy of Purchaser or any of its Affiliates, each Retained Employee shall be given credit under such plan practice or policy for all service with the Company or any Company Subsidiary or any predecessor employer (to the extent such credit was given by the Company or Company Subsidiary or any predecessor employer under a comparable Plan), for purposes of determining eligibility and vesting and for all other purposes for which such service is either taken into account or recognized (except where such credit would result in duplication of accrued benefits under the Plans). Such service also shall apply for purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any preexisting condition limitations. Retained Employees shall be given full credit for amounts paid under any Plan during the same calendar year in which they commence participation in a comparable employee benefit plan of Purchaser for purposes of applying deductibles, co-payments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the comparable employee benefit plan of Purchaser. Section 5.3 Taxes. (a) So long as Sellers shall be entitled to receive payments, directly or indirectly, related to the Transaction Tax Benefits or Creditable Tax Refunds under this Agreement, Purchaser shall not, and shall not cause the Surviving Corporation or any Surviving Corporation Subsidiary to, in each case directly or indirectly, without first seeking the prior written consent of the Sellers' Representative, seek any Tax Audit or other review of any kind of the Company or the Company Subsidiaries, or initiate any correspondence or communication with any Taxing Authority with respect to any Tax period that ends on or before, or that includes, the Closing Date with the objective of triggering a Tax Audit or a review of the Company's or any Company Subsidiary's Tax position for such period. In the event Purchaser takes or permits any such action without the Sellers' Representative's express written consent, the 18 Sellers shall have no liability in respect of any liability for Taxes arising in connection therewith and shall be entitled to receive all direct or indirect payments related to the Transaction Tax Benefits or Creditable Tax Refunds to which Sellers otherwise would have been entitled had such action not been taken. So long as Sellers shall be entitled to receive payments, directly or indirectly, related to the Transaction Tax Benefits or Creditable Tax Refunds under this Agreement, Purchaser shall not amend, or cause or permit the Company or any Company Subsidiary, directly or indirectly, to amend, any Tax Return for any Tax year ending on or before or including the Closing Date with respect to the Company or any Company Subsidiary without the prior written consent of Sellers' Representative, which consent shall not be unreasonably withheld. So long as Sellers shall be entitled to receive payments, directly or indirectly, related to the Transaction Tax Benefits or Creditable Tax Refunds under this Agreement, Purchaser shall not, and it shall not permit its affiliates to, without first seeking the prior written consent of the Sellers' Representative, use or apply any net operating loss or other item of the Company or any Company Subsidiary for any tax year ending on any date following the Closing Date to any period of the Company or any Company Subsidiary ending on or before the Closing Date. In the event Purchaser or any of its affiliates uses or applies any such net operating loss or other item without the Sellers' Representative's express written consent, Sellers shall have no liability in respect of any liability for Taxes arising in connection therewith and shall be entitled to receive all direct or indirect payments related to the Transaction Tax Benefits or Creditable Tax Refunds to which Sellers otherwise would have been entitled had such action not been taken. (b) So long as Sellers shall be entitled to receive payments, directly or indirectly, related to the Transaction Tax Benefits or Creditable Tax Refunds under this Agreement, Purchaser and the Surviving Corporation shall control all Tax Audits relating to Taxes for which the Sellers might be liable under the Agreement or which may affect the timing or realization of any Transaction Tax Benefits or Creditable Tax Refunds; provided, however, that the Sellers' Representative may participate in such Tax Audits, Purchaser and the Surviving Corporation will in good faith consider the advice of Sellers' Representative with respect to such Tax Audits, and that any liability for any Taxes for which the Sellers may be responsible in whole or in part may not be settled, nor may any settlement be reached or entered into that would affect the timing or realization of any Transaction Tax Benefits or Creditable Tax Refunds, without first seeking the prior written consent of the Sellers' Representative. In the event Purchaser or any of its affiliates reaches or enters into any such settlement without the Sellers' Representative's express written consent, Sellers shall have no liability in respect of any liability for Taxes arising in connection therewith and shall be entitled to receive all direct or indirect payments related to the Transaction Tax Benefits or Creditable Tax Refunds to which Sellers otherwise would have been entitled had such settlement not been reached and entered into. Purchaser shall give Sellers' Representative prompt notice of the commencement of a Tax Audit for any period that ends prior to or includes the Closing Date relating to Taxes for which Sellers may be liable under this Agreement or which may affect timing or realization of Transaction Tax Benefits or Creditable Tax Refunds which may result in direct or indirect payments to Sellers under this Agreement. Any failure or delay on the part of Purchaser to give such notice shall not affect whether the Sellers are liable for reimbursement except and to the extent that the Sellers are prejudiced thereby. Purchaser shall also afford the Sellers' Representative access to all books and records related to any Taxes for which it may be responsible and reasonable access to employees of the Company. (c) In the event of any Tax Audit relating to any Tax period beginning prior to and ending after the Closing Date, the Purchaser shall 19 control such Tax Audit but it shall give Sellers' Representative the right to participate fully in such Tax Audit and the liability for any Taxes for which the Sellers may be responsible in whole or in part may not be settled without first seeking the prior written Sellers' Representative's express written consent. In the event that Purchaser settles any such Tax Audit without Sellers' Representative's express written consent, Sellers shall have no liability in respect of any liability for Taxes arising in connection with such settlement and shall be entitled to receive all direct or indirect payments related to the Transaction Tax Benefits or Creditable Tax Refunds to which Sellers otherwise would have been entitled had such Tax Audit not been settled. (d) The Company will endeavor to terminate its Tax year as of the end of the Closing Date. (e) The Surviving Corporation shall prepare and file all Tax Returns for any period ending on or before the Closing Date and shall provide draft copies of such Tax Returns to the Sellers' Representative at least ten Business Days prior to their filing with or delivery to a Taxing Authority. Such Tax Returns shall be prepared consistent with past practice except to the extent otherwise required by law and this Agreement. Such Tax Returns must be reasonably satisfactory to the Sellers' Representative. If the Sellers' Representative objects to any Tax Return, the Sellers' Representative must notify Purchaser within five Business Days after receiving copies of such Tax Returns. Purchaser and the Sellers' Representative shall then endeavor to resolve any dispute prior to filing such Tax Return. If the dispute cannot be resolved, Purchaser and the Sellers' Representative shall mutually select an accounting firm of national reputation to review such Tax Return and resolve such dispute. The fees of such accounting firm shall be paid as apportioned by such accounting firm. The determination of such accounting firm shall be binding, final and non-appealable. Any of the time periods for making Tax filings set forth in this Section 5.3 shall be tolled for the period during which such accounting firm is resolving such disputes. (f) Notwithstanding anything herein to the contrary, except as set forth in Section 5.3(i), the Sellers' liability for any Taxes shall be subject to the limitations set forth in Article VI hereof. (g) Purchaser shall, and shall cause the Surviving Corporation to, in each case directly or indirectly, take any and all commercially reasonable actions to facilitate the realization of the Transaction Tax Benefits at the earliest possible time. Such actions shall include the following: (i) Filing an IRS Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax (the "Form 4466"), for the Company with the IRS on an expedited basis by faxing copies of a completed Form 4466 and power of attorney to the IRS and mailing originals no later than the tenth Business Day after and excluding the Closing Date; (ii) Filing an IRS Form 1120, U.S. Corporation Income Tax Return (the "Form 1120"), for the Company covering the period from November 1, 2003 to and including the Closing Date with the IRS as soon as is reasonably practicable, but no later than the ninetieth day after and excluding the Closing Date; 20 (iii) Filing an IRS Form 1139, Corporation Application for Tentative Refund (the "Form 1139"), for the Company with the IRS concurrent with, but no earlier than, the filing of the Form 1120 as soon as is reasonably practicable, but no later than the ninetieth day after and excluding the Closing Date; (iv) Giving priority to any Identified Transaction Tax Benefit over any other deduction, credit, refund, offset, benefit or other item that reduces Taxes payable by, or increases refunds or other payment of funds from a Taxing Authority to, Purchaser, the Company or Surviving Corporation or their respective Affiliates, as the case may be, other than those arising in the ordinary course (excluding any of Purchaser's expenses or other deductions or credits relating to or arising from the Transactions); (v) All other commercially reasonable actions that could give rise to realization of any Identified Transaction Tax Benefits, including the pursuit of state and local Tax refunds or the reduction of state or local Taxes of Purchaser, the Company or Surviving Corporation, or their respective Affiliates in such jurisdictions where the Company files state or local Tax Returns. Upon written request, the Sellers' Representative will cooperate with and provide reasonably requested assistance to Purchaser or the Surviving Corporation, as the case may be, in taking the actions set forth in this Section 5.3(g). (h) Purchaser shall not, and shall not cause or permit the Surviving Corporation or any of their respective Affiliates, directly or indirectly, to take any action, or fail to take any required action, with respect to a Tax Return or otherwise, with the objective of delaying, reducing, forfeiting, substitution for, disallowing, or otherwise impairing any Transaction Tax Benefits. (i) Prior to the Escrow Fund Release Date, if the IRS gives notice of disallowance or requires the repayment of any of the Transaction Tax Benefits or Creditable Tax Refunds deposited or required to be deposited into the Escrow Account or paid or required to be paid to Sellers pursuant to Section 2.9, Purchaser shall be entitled to withhold payment of or offset such disallowed amounts or required repayments or make a claim for such disallowed amounts or required repayments against the Escrow Account (such withholding, offset or claim referred to as a "Clawback Right"). After the Escrow Fund Release Date, none of Purchaser, the Surviving Corporation or their Affiliates shall have any recourse or Clawback Right for such disallowed amounts or required repayments; provided, however, in the case of Transaction Tax Benefits or Creditable Tax Refunds for which Tax Returns have been filed, but the refunds with respect thereto have not been received as of the Escrow Fund Release Date, Purchaser shall be entitled to a Clawback Right against such pending refunds, solely against and to the extent of such refunds. Notwithstanding the foregoing, Purchaser shall not be entitled to any Clawback Right (1) against the Option Benefit Amount or (2) if Purchaser has not complied with its obligations in all material respects under Section 5.3(g). To the extent that Purchaser has received a payment or offset under its Clawback Right, Purchaser may not make a claim for indemnification under Article VI with respect to the item to which the Clawback Right relates. Subject to the immediately 21 preceding sentence, the Clawback Right set forth herein is separate from and, independent of, the rights to indemnification of Purchaser set forth in Article VI hereof and shall not be subject to the limitations set forth in Sections 6.3(a) and 6.3(e). Section 5.4 Intercompany Arrangements. Simultaneously with the Closing, the Company shall pay to Fremont Partners, L.L.C. an amount in cash equal to $132,055, which represents all accrued and unpaid amounts payable through and including the Closing Date under the Management Services Agreement dated as of May 31, 1999 by and between the Company and Fremont Partners, L.L.C. Except as otherwise expressly contemplated by this Agreement, all agreements and commitments, whether written, oral or otherwise, which are solely between the Company or any Company Subsidiary, on the one hand, and any of their Affiliates (excluding the Company or any Company Subsidiary), on the other hand, shall be terminated and of no further effect, simultaneously with the Closing without any further action or liability on the part of the parties thereto. Section 5.5 Maintenance of Books and Records; Reasonable Access. Each of the parties hereto shall preserve, until at least the seventh anniversary of the Closing Date, all pre-Closing Date records possessed or to be possessed by such party relating to the Company. After the Closing Date and up until at least the seventh anniversary of the Closing Date, upon any reasonable request from Sellers' Representative, (a) the party holding such records shall (i) provide to Sellers' Representative and its accountants, counsel and other representatives reasonable access to such records during normal business hours and (ii) permit Sellers' Representative its accountants, counsel and other representatives to make copies of such records, in each case at no cost to Sellers' Representative (other than for reasonable out-of-pocket expenses), and (b) Purchaser shall, and shall cause Surviving Corporation to, provide to Sellers' Representative its accountants, counsel and other representatives reasonable access to appropriate officers and employees of the Purchaser, Surviving Corporation or any of their respective Subsidiaries. Such records may be sought under this Section 5.5 for any reasonable purpose, including to the extent reasonably required in connection with the audit, accounting, tax, litigation, federal securities disclosure or other similar needs of any shareholder or former shareholder or their respective shareholders, directors, officers, Affiliates and employees seeking such records. Notwithstanding the foregoing, any and all such records may be destroyed by a party if such destroying party sends to Sellers' Representative written notice of its intent to destroy such records, specifying in reasonable detail the contents of the records to be destroyed; such records may then be destroyed after the 30th day following such notice unless Sellers' Representative notifies the destroying party that such other party desires to obtain possession of such records, in which event the destroying party shall transfer the records to Sellers' Representative and Sellers' Representative shall pay all reasonable expenses of the destroying party in connection therewith. Section 5.6 Directors' and Officers' Insurance and Indemnification. (a) In the event of any threatened or actual claim, action, suit proceeding or investigation, whether civil, criminal or administrative, including any such claim, action, suit, proceeding or investigation by or in the right of the Company, the Surviving Corporation or any of their respective Subsidiaries, in which any Seller or any of the present or former officers or directors of the Company or any Company Subsidiary (collectively, the "D&O 22 Indemnified Parties") is, or is threatened to be, made a party by reason of the fact that he or she is or was, prior to the Closing Date, a director, officer, employee or agent of the Company or any of its Subsidiaries or is or was, prior to the Closing Date, serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at the request of the Company or any of its Subsidiaries, whether such claim arises before, on or after the Closing Date, the Surviving Corporation shall, and Purchaser shall, and shall cause the Surviving Corporation (which for the purpose of this Section 5.6 shall include any successor to the Surviving Corporation) to, indemnify and hold harmless, as and to the same extent and on the same terms and conditions permitted by the Company's Articles of Incorporation or Bylaws in effect on the date hereof (to the fullest extent permitted by applicable Laws), each such D&O Indemnified Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorneys' fees and expenses), judgments, fines and amounts paid in settlement in connection with any such claim, action, suit proceeding or investigation. In the event of any such claim, action, suit proceeding or investigation (whether arising before, on or after the Closing Date) with respect to which Purchaser, the Company or the Surviving Corporation (or any successor of the Surviving Corporation) is required to provide indemnification hereunder, (i) Purchaser may (or may cause the Surviving Corporation to), at its election, assume the defense of such matter; provided, that in the event that Purchaser or the Surviving Corporation fails to assume such defense or, under applicable standards of professional conduct, a conflict of interest on any significant issue exists between Purchaser or the Surviving Corporation, on the one hand, and any of the D&O Indemnified Parties on the other hand, the D&O Indemnified Parties may retain counsel satisfactory to them, and Purchaser or the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the D&O Indemnified Parties promptly as statements therefor are received and (ii) Purchaser shall, and shall cause the Surviving Corporation to, use its best efforts to assist in the vigorous defense of any such matter; provided, that neither Purchaser nor the Surviving Corporation, as the case may be, shall be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld). After the Closing Date, Purchaser shall guarantee the performance by the Surviving Corporation of its obligations under this Section 5.6(a). (b) Purchaser shall cause the Surviving Corporation and its Subsidiaries, for a period of six (6) years, to keep in effect in their Articles of Incorporation, Certificate of Incorporation or Bylaws provisions providing for indemnification of the D&O Indemnified Parties that are at least as favorable as the provisions of the Articles of Incorporation and Bylaws of the Company in effect as of immediately prior to the Closing. (c) Purchaser shall cause the Surviving Corporation to obtain policies of officers' and directors' liability insurance ("D&O Insurance") covering the Company's existing officers' and directors', which policies shall contain terms no less favorable to the Company's current officers and directors than the terms of the D&O Insurance currently covering the Company's existing officers' and directors', for a period of not less than six (6) years after the Closing Date; provided that in no event shall the Surviving Corporation be required to pay annual premiums for insurance under this Section 5.6(c) in excess of 300% of the aggregate premiums paid in 2003 in respect of the D&O Insurance covering the Company's directors and officers (the "2003 Premium"); and provided further, that if the Surviving Corporation is unable to obtain the amount of insurance required by this Section 5.6(c) for such aggregate premium, Purchaser shall cause the Surviving Corporation to obtain as much insurance as can be obtained for an annual premium not in excess of 300% of the 2003 Premium. 23 (d) This covenant is intended to be for the benefit of, and shall be enforceable by, each of the D&O Indemnified Parties and their respective heirs and successors. The indemnification provided for herein shall not be deemed exclusive of any other rights to which a D&O Indemnified Party is entitled, whether pursuant to Law, contract or otherwise. Purchaser shall, or shall cause the Surviving Corporation to, pay all expenses, including reasonable attorneys' fees, that may be incurred by any D&O Indemnified Party which is the prevailing party in any action or proceeding to enforce the indemnity and other obligations provided for in this Section 5.6. (e) In the event that the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary to effectuate the purpose of this Section 5.6, Purchaser shall cause the Surviving Corporation to make proper provision so that the successors and assigns of the Surviving Corporation shall succeed to the obligations set forth in this Section 5.6 and none of the actions described in clauses (i) or (ii) shall be taken until such provision is made. Section 5.7 Notice of Action by Written Consent. In accordance with the MBCA and the Articles of Incorporation and Bylaws of the Company, the Company shall, after the date hereof, promptly notify holders of the Shares who did not execute the action by written consent authorizing the execution and delivery by the Company of this Agreement and the consummation by it of the Transactions of such action by written consent. Section 5.8 Appointment of Sellers' Representative. (a) By delivery of a duly executed Letter of Transmittal, each of the Sellers irrevocably appoints Fremont Investors II, L.L.C., a Delaware limited liability company, as its true and lawful attorney-in-fact, to act as its representative ("Sellers' Representative") under this Agreement and, as such, to act, as such Seller's agent (with full power of substitution), to take such action on such Seller's behalf with respect to all matters relating to this Agreement and the Transactions, including without limitation, to negotiate, defend, settle and compromise indemnification claims, to sign receipts, consents and other documents to effect any of the Transactions and to take all actions necessary or appropriate in connection with the foregoing. All decisions and actions by the Sellers' Representative, including any agreement between the Sellers' Representative and the Purchaser relating to indemnification obligations of the Sellers under Article VI, including the defense or settlement of any claims and the making of payments with respect hereto, shall be binding upon all of the Sellers, and no Seller shall have the right to object, dissent, protest or otherwise contest the same. The Sellers' Representative shall incur no liability to the Sellers with respect to any action taken or suffered by the Sellers in reliance upon any notice, direction, instruction, consent, statement or other documents believed by the Sellers' Representative to be genuinely and duly authorized, nor for any other action or inaction with respect to the indemnification obligations of the Sellers under Article VI, including the defense or settlement of any claims and the making of payments with respect thereto. The Sellers' Representative may, in all questions arising under this Agreement rely on the advice of counsel, and for anything done, omitted or suffered in good faith by the Sellers' Representative shall not be liable to the Sellers. Sellers' Representative shall not have any duties or responsibilities 24 except those expressly set forth in this Agreement, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or shall otherwise exist against the Sellers' Representative. (b) Purchaser and the Escrow Agent shall be entitled to conclusively rely on the instructions, decisions and acts of Sellers' Representative required, permitted or contemplated to be taken by Sellers' Representative hereunder or under the Escrow Agreement, and the Escrow Agent and Purchaser are hereby relieved from any liability to any Person for any acts done by them in accordance with any instructions, decisions or acts of the Sellers' Representative. Purchaser and the Escrow Agent shall be entitled to treat as genuine, and as the document it purports to be, any letter, paper or other document furnished to it by or on behalf of Sellers' Representative, and reasonably believed by Purchaser or the Escrow Agent to be genuine and to have been signed and presented by the proper party or parties. (c) Sellers' Representative shall be entitled to rely, and shall be fully protected in relying, upon any statements furnished to it by any Seller, or Purchaser, or any other evidence deemed by Sellers' Representative to be reliable, and Sellers' Representative shall be entitled to act on the advice of counsel selected by it. Sellers' Representative shall be fully justified in failing or refusing to take any action under this Agreement unless it shall have received such advice or concurrence of such Sellers as it deems appropriate or it shall have been expressly indemnified to its satisfaction by the Sellers appointing it severally according to their respective Ownership Percentages against any and all liability and expense that Sellers' Representative may incur by reason of taking or continuing to take any such action. (d) The Sellers hereby agree to (i) indemnify the Sellers' Representative (in its capacity as such) against and to hold Sellers' Representative (in its capacity as such) harmless from, any and all losses of whatever kind which may at any time be imposed upon, incurred by or asserted against Sellers' Representative in such capacity in any way relating to or arising out of its action or failures to take action pursuant to this Agreement or in connection herewith in such capacity, and (ii) pay the Sellers' Representative for all costs and expenses incurred on behalf of the Sellers ("Representative Expenses"), promptly upon demand by the Sellers' Representative, ratably according to their respective Ownership Percentages. In addition, at Closing, Purchaser shall deliver to the Sellers' Representative an amount in cash equal to the Sellers' Closing Expenses Amount, which the Sellers' Representative shall use to pay for expenses incurred in connection with the consummation of the Transactions. The Sellers' Representative shall distribute any unused portion of the Sellers' Closing Expenses Amount to the Sellers ratably according to their respective Ownership Percentages. The agreements in this Section 5.8 shall survive termination of this Agreement. ARTICLE VI SURVIVAL; INDEMNIFICATION Section 6.1 Survival. The representations and warranties of the Company and the Purchaser and Sub in this Agreement or any document delivered pursuant hereto shall survive the Closing until December 31, 2005 and shall terminate and be of no further force or effect as of December 31, 2005. The covenants and agreements of the Company and the Purchaser and Sub in this Agreement required 25 to be performed following the Closing shall survive the Closing and shall be fully effective and enforceable for the periods therein indicated, or where not indicated, forever. Section 6.2 Indemnification. (a) Subject to the limitations set forth in this Article VI, each Seller severally (but not jointly) to the extent of such Seller's Ownership Percentage in the Escrow Account (and solely out of the Escrow Account) shall indemnify and hold harmless Purchaser and its officers, directors, employees, stockholders, representatives, agents, successors and assigns and each director of the Company (each, a "Purchaser Indemnified Party"), from and against any Losses sustained or required to be paid by Purchaser resulting from (i) any breach of any representation or warranty made by the Company in this Agreement and (ii) any breach by such Seller of any covenant, agreement or obligation of such Seller contained in this Agreement required to be performed following the Closing. (b) Subject to the limitations set forth in this Article VI, Purchaser shall indemnify and hold harmless Sellers and their respective officers, directors, employees, stockholders, members, representatives, agents, successors and assigns (each, a "Seller Indemnified Party") from and against any Loss or Losses sustained or required to be paid resulting from (i) any breach of any representation or warranty made by Purchaser in this Agreement, or (ii) any breach of any covenant, agreement or obligation of Purchaser contained in this Agreement required to be performed following the Closing. Except to the extent that indemnification by the Sellers is required pursuant to Section 6.2(a), the Company hereby releases, and the Purchaser shall cause the Company to indemnify and hold harmless, each Seller Indemnified Party from and against any Losses or potential Losses resulting from such indemnified party's relationship with the Company, including those resulting from any proceeding, judicial or administrative, or asserted by any other third party (any such proceeding being referred to as a "Third-Party Claim"). (c) In the event that any indemnified party is entitled to indemnification with respect to any Loss or potential Loss arising from any Third-Party Claim, the indemnified party shall give the indemnifying party prompt notice thereof. Any failure or delay on the part of the indemnified party to give such notice shall not affect whether an indemnifying party is liable for reimbursement except and to the extent that the indemnifying party is prejudiced thereby. The indemnifying party shall be entitled to control, contest and defend such Third-Party Claim. Such contest and defense shall be conducted by counsel chosen by the indemnifying party. So long as the indemnifying party is conducting the defense of the Third-Party Claim in accordance with this Section 6.2(c), the indemnified party shall be entitled, at its own cost and expense (which expense shall not constitute a Loss), to participate in, but not control, such contest and defense and to be represented by attorneys of its or their own choosing reasonably acceptable to the indemnifying party, provided that the indemnified party will cooperate with the indemnifying party in the conduct of such defense. Neither the indemnified party nor the indemnifying party may concede, settle or compromise any Third-Party Claim without the consent of the other party, which consent will not be unreasonably withheld, conditioned or delayed, except that the indemnifying party may settle a Third-Party Claim if the indemnifying party obtains a full release of all claims for which indemnification is required or if the settlement is solely for money damages. 26 (d) If any indemnified party has a claim against any indemnifying party that does not involve a Third-Party Claim, the indemnified party shall deliver a written notice describing such claim in reasonable detail to the indemnifying party within 30 days after the discovery of the basis for such claim. Section 6.3 Limitations on Indemnification. (a) In connection with any indemnification claim by any Purchaser Indemnified Party under this Agreement, Sellers collectively shall not be liable in an aggregate amount which, if added to all other amounts paid as indemnification payments by the Sellers, would exceed an amount equal to the Escrow Amount. Notwithstanding the foregoing, Sellers shall not be required to indemnify the Purchaser Indemnified Parties for any Losses arising under this Agreement unless (i) each individual Loss is at least Seventy-Five Thousand dollars ($75,000) (the "Threshold") and (ii) until the aggregate amount of all Losses for which the Purchaser Indemnified Parties are otherwise entitled to indemnification pursuant to this Agreement exceeds an amount equal to One Million Five Hundred Thousand Dollars ($1,500,000) (the "Basket"). If at any time, the Purchaser Indemnified Parties' aggregate Losses for which the Purchaser Indemnified Parties are entitled to indemnification pursuant to this Agreement exceed the Basket, then the Sellers shall be liable only for Losses in excess of the Basket; provided, however, that if the aggregate Losses for which Purchaser Indemnified Parties are entitled to indemnification pursuant to this Agreement exceed the Basket, the Threshold shall thereafter be reduced to zero dollars ($0) for each individual Loss. (b) Notwithstanding anything herein to the contrary, while Purchaser may make an indemnification claim against Sellers under this Article VI at any time permitted pursuant to this Article VI, Purchaser shall exhaust any remedies available to it under any insurance or other contract providing for insurance coverage or indemnification with respect to such claims, prior to seeking recovery against Sellers under this Agreement. (c) Notwithstanding anything herein to the contrary, any Loss otherwise indemnifiable hereunder shall be reduced by (i) any amount actually recoverable in connection therewith under insurance or the indemnified party shall, upon receiving full payment for such Loss from the indemnifying party, assign to the indemnifying party the right to pursue recovery under such insurance and (ii) any Tax benefit arising from the payment or accrual of any such indemnified amount. In no event shall any party be liable to any other party for incidental, indirect, special or consequential damages, such as losses of revenues or profits, other than any such damages payable by any party as a result of any claim made by a third party against the indemnified party. (d) If an indemnifying party makes any payment under this Agreement in respect of any Losses, such indemnifying party shall be subrogated, to the extent of such payment, to the rights of the indemnified party against any third party (other than the indemnified party's insurers) with respect to such Losses; provided, however, that such indemnifying party shall not have any rights of subrogation with respect to any other party hereto or any of their respective Affiliates or their Affiliates' respective officers, directors, agents or employees. To the extent the indemnifying party does not have rights 27 of subrogation against any party as a result of the proviso to the proceeding sentence, the indemnified party will take commercially reasonable steps to collect from such third party in respect of such Losses, and will turn over to the indemnifying party any amounts it receives from such third party in respect of such Losses (less any and all reasonable costs and expenses associated with such collection), to the extent of the payment actually made by the indemnifying party in respect of such Losses. (e) The obligations set forth in this Article VI shall be remain in effect until December 31, 2005; provided, however, that such obligations shall continue beyond such periods with respect to any claims properly made against any indemnifying party during such periods that are not resolved at the conclusion of such periods. Section 6.4 Escrow; Sole and Exclusive Remedy. Notwithstanding anything in this Agreement to the contrary, Sellers, collectively, shall not be liable for any Losses in an aggregate amount which, if added to all other amounts paid as indemnification payments by the Sellers, would exceed the Escrow Amount. Furthermore, any indemnification obligation of the Sellers for Losses under this Agreement shall be satisfied solely by recourse to the Escrow Account, and Purchaser shall not seek any indemnification, contribution or repayment directly or indirectly (through any director or officer of the Company or otherwise) from the Sellers with respect to any matter relating to the Company or the subject matter of this Agreement (whether on the basis of a claim sounding in tort, contract, statute or otherwise) outside of the Escrow Account. On December 31, 2005, the remaining balance of the Escrow Account shall be released to the Sellers' Representative except in respect of amounts relating to any claims for indemnification properly made before such time and retained therein pursuant to the terms of the Escrow Agreement. At the end of the term of the Escrow Agreement, the parties shall cause the Escrow Agent, subject to and in accordance with the provisions of the Escrow Agreement, to deliver to the Sellers' Representative the balance of cash, if any, remaining in the Escrow Account in accordance with the terms of the Escrow Agreement. ARTICLE VII DEFINITIONS AND INTERPRETATION Section 7.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context clearly requires otherwise: "163(j) Amount" means a Transaction Tax Benefit in an amount equal to the product of (i) the disqualified interest expense of the Company and its Subsidiaries that was disallowed under Section 163(j) of the Code through and including the Closing Date, multiplied by (ii) the federal, state and local marginal Tax rate of the entity realizing such Transaction Tax Benefit. "2003 Premium" has the meaning set forth in Section 5.6(c). "Affiliate" shall have the meaning set forth in Rule 12b-2 of the Exchange Act; provided, that with respect to the Company and its Subsidiaries, "Affiliate" shall exclude Fremont Investors II, L.L.C. and Fremont Partners, L.L.C. and their respective affiliates (other than the Company and its Subsidiaries). 28 "Agreement" or "this Agreement" means this Agreement and Plan of Merger, together with the Exhibits and Appendices hereto and the Disclosure Schedule. "Audits" has the meaning set forth in Section 3.20(d). "Balance Sheet" means the most recent balance sheet of the Company and its consolidated Subsidiaries included in the Financial Statements. "Balance Sheet Date" means the date of the Balance Sheet. "Basket" has the meaning set forth in Section 6.3. "Business Day" means a day other than Saturday, Sunday or any day on which the principal commercial banks located in the State of New York are authorized or obligated to close under the laws of such state. "Certificate" shall mean either a Common Certificate or a Preferred Certificate. "Certificate of Merger" has the meaning set forth in Section 1.2. "Clawback Right" has the meaning set forth in Section 5.3(i). "Closing" has the meaning set forth in Section 2.1. "Closing Date" has the meaning set forth in Section 2.1. "Code" means the Internal Revenue Code of 1986, as amended. "Common Certificate" has the meaning set forth in Section 2.2(a). "Common Merger Consideration" has the meaning set forth in Section 1.7. "Common Share" or "Common Shares" has the meaning set forth in Section 1.7. "Company" means Tapco Holdings, Inc., a Michigan corporation. "Company Common Stock" has the meaning set forth in Section 1.7. "Company Intellectual Property" means all Intellectual Property that is purported to be owned by or exclusively licensed to the Company, in connection with the business of the Company. 29 "Company Material Adverse Effect" means any material adverse change in, or material adverse effect on, the business, financial condition or operations of the Company and all of the Company Subsidiaries, taken as a whole. "Company Preferred Stock" has the meaning set forth in Section 1.7. "Company Subsidiary" means each Person which is a Subsidiary of the Company. "Confidentiality Agreement" means a letter agreement dated June 22, 2004 between the Company and Purchaser. "Copyrights" means U.S. and foreign registered and unregistered copyrights (including those in computer software and databases), rights of publicity and all registrations and applications to register the same. "Creditable Tax Refunds" means any refund of Taxes or credit of Taxes with respect to any Tax period ending on or before the Closing Date realized by the Company, the Surviving Corporation or any of their respective Subsidiaries, other than Transaction Tax Benefits. "D&O Indemnified Party" or "D&O Indemnified Parties" has the meaning set forth in Section 5.6(a). "D&O Insurance" has the meaning set forth in Section 5.6(c). "Debt Payoff Amount" is $273,259,734, representing all Indebtedness of the Company as of immediately prior to the Closing, all of which will be paid in full by the Company at the Closing. "Disclosure Schedule" means the disclosure schedule of even date herewith prepared and signed by the Company and delivered to Purchaser simultaneously with the execution hereof as amended or supplemented by the Company pursuant to the terms hereof. "Effective Time" has the meaning set forth in Section 1.2. "Encumbrances" means any and all Liens, other than Permitted Liens. "Environmental Law" means all federal, state or local laws governing pollution or the protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 30 "Escrow Account" has the meaning set forth in Section 2.8. "Escrow Agent" means U.S. Bank National Association. "Escrow Agreement" has the meaning set forth in Section 2.8. "Escrow Amount" means the sum of the Escrow Deposit and the aggregate amount of Tax Benefit Deposits, provided, however, that in no event shall the Escrow Amount be greater than $20,000,000. "Escrow Deposit" means $6,000,000. "Escrow Fund Release Date" has the meaning set forth in Section 2.8. "Excess Payment" has the meaning set forth in Section 2.9. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Financial Statements" means the audited consolidated balance sheets of the Company as at October 31 in each of the fiscal years 2002 and 2003 together with consolidated statements of income, shareholders' equity and cash flows for each of the twelve-month periods ended as of October 31, 2001, 2002 and 2003 and the unaudited consolidated balance sheet of the Company as at July 31, 2003 and 2004 together with consolidated statements of income, shareholders' equity and cash flows for the nine-month periods then-ended. "Form 1120" has the meaning set forth in Section 5.3(g). "Form 1139" has the meaning set forth in Section 5.3(g). "Form 4466" has the meaning set forth in Section 5.3(g). "GAAP" means United States generally accepted accounting principles. "Governmental Entity" means a court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency. "Identified Transaction Tax Benefits" has the meaning set forth under the definition of "Transaction Tax Benefit." "Indebtedness" means (a) all indebtedness for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices or being disputed in good faith), (b) any 31 other indebtedness that is evidenced by a note, bond, debenture or similar instrument and (c) all guarantee obligations with respect to any of the foregoing. "Intellectual Property" means Trademarks, Patents, Copyrights, Trade Secrets and Licenses. "Knowledge of the Company" means the actual (and not constructive or imputed) knowledge, without investigation or inquiry, of Michael Burke, Patrick Dunn, Bart Gentsch, Ross Harrison, John Lawless, III, Bill McCaig, Tom McNulty, Robert Peery, Larry Petersen, Robert Sawyer, Charles Schiedegger, Jeff Schiedegger and Thomas Ward. "Law" means any constitutional provision, law, statute, rule, regulation, ordinance, treaty, order, decree, judgment, decision, certificate, holding, injunction, enforceable at law or in equity, along with the interpretation and administration thereof by any Governmental Entity charged with the interpretation or administration thereof. "Lease" means each lease pursuant to which the Company or any Company Subsidiary currently leases any Real Property or personal property (excluding leases relating solely to personal property calling for rental or similar periodic payments not exceeding $50,000 per annum). "Letter of Transmittal" has the meaning set forth in Section 2.3(a). The Letter of Transmittal shall expressly state that the Seller agrees to be bound by Section 5.8 hereof. "Licenses" means all licenses and agreements pursuant to which the Company or any Company Subsidiary has acquired rights in or to any Trademarks, Patents, Copyrights, Trade Secrets or other Intellectual Property, or licenses and agreements pursuant to which the Company or any Company Subsidiary has licensed or transferred the right to use any of the foregoing. "Liens" means any liens, charges, security interests, options, encumbrances, claims, mortgages, pledges, hypothecations, proxies, voting trusts or agreements, obligations, understandings or arrangements or other restrictions on title or transfer of any nature whatsoever. "Losses" means any actions, proceedings, claims, payments, judgments, penalties, fines, interest, Taxes (and related penalties), losses, liabilities, damages, costs (including court costs), expenses (including reasonable attorneys' fees and accounting fees) and related disbursements, including any attorneys fees and disbursements and other expenses incurred in connection with seeking indemnification under Article VI of this Agreement. "MBCA" means the Michigan Business Corporation Act. "Merger" has the meaning set forth in preamble of the Agreement. 32 "Option" or "Options" has the meaning set forth in Section 1.7(e). "Option Benefit Amount" means the value of the Transaction Tax Benefit resulting from the cash-out of Options that will only be realized if and when all amounts, if any, are released to the Sellers from the Escrow Account. "Option Cancellation Agreement" has the meaning set forth in Section 2.2. "Option Payment" has the meaning set forth in Section 1.7(e). "Optionholder" shall mean the holder of an Option. "Ownership Percentage" of any Seller, shall mean, as of any date, the ownership percentage set forth opposite such Seller's name on Section 3.4 of the Disclosure Schedule as of such date. The aggregate Ownership Percentages of the Sellers shall equal one hundred percent (100%) at all times. "Patents" means issued U.S. and foreign patents and pending patent applications, patent disclosures, and any and all divisions, continuations, continuations-in-part, reissues, reexaminations, and extensions thereof, any counterparts claiming priority therefrom, utility models, patents of importation/confirmation, certificates of invention and similar statutory rights. "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Liens" means the following: (a) Liens for Taxes not yet due and payable or which are being contested in good faith through appropriate proceedings; (b) Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen, repairmen, and similar Liens for amounts not yet due and payable or which are being contested in good faith through appropriate proceedings; (c) Liens incurred or deposits made in connection with worker's compensation, unemployment insurance or other types of social security; (d) Liens securing rental payments under capital lease agreements; (e) Liens on Real Property that do not materially interfere with the present uses of such Real Property and (f) other Liens arising in the ordinary course of business and not incurred in connection with the borrowing of money. "Person" means a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Entity or other entity or organization. "Plan" means each deferred compensation and each incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; each medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); each 33 employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Company or by any Company Subsidiary, or to which the Company or a Company Subsidiary is party, whether written or oral, for the benefit of any director, employee or former employee of the Company or any Company Subsidiary. "Preferred Certificate" has the meaning set forth in Section 2.2. "Preferred Merger Consideration" has the meaning set forth in Section 1.7. "Preferred Share" or "Preferred Shares" has the meaning set forth in Section 1.7. "Purchaser" means Headwaters Incorporated, a Delaware corporation. "Purchaser Indemnified Party" has the meaning set forth in Section 6.2(a). "Real Property" means all real property that is currently owned or leased by the Company or any Company Subsidiary or that is reflected as an asset of the Company or any Company Subsidiary on the Balance Sheet. "Refund Reimbursement" has the meaning set forth in Section 2.9. "Representative Expenses" has the meaning set forth in Section 5.8. "Retained Employee" means each person who was an active or inactive employee (including any such employee who is on any leave of absence, whether paid or unpaid, including short-or-long term disability leave or workers' compensation leave) of the Company or any Company Subsidiary immediately prior to the Closing Date. "Seller" or "Sellers" means each of the Shareholders and the Optionholders of the Company set forth in Section 3.4 of the Disclosure Schedule. "Seller Indemnified Party" has the meaning set forth in Section 6.2(b). "Sellers' Closing Expenses Amount" means $200,000. "Sellers' Representative" has the meaning set forth in Section 5.8(a). "Shareholder" or "Shareholders" means the holders of Shares. "Shares" has the meaning set forth in Section 1.7. 34 "Short Period Tax Savings" means an amount equal to (i) (A) the taxable income of the Company (excluding any of the Transaction Tax Benefits) as reported on the Form 1120, multiplied by (B) 0.35, minus (ii) the amount shown as the request for refund on the Form 4466, which represents the amount of estimated tax payments made by the Company for the period from November 1, 2003, through and including the Closing Date and the application to such period's estimated tax payments of the Company's refund from the prior tax year; provided, however, that no less than the amount of such difference between (i) and (ii) is reflected as a current liability on the Company's balance sheet prepared as of the Closing Date in the ordinary course and consistent with the Company's past practice without, however, giving effect to any of the deductions, credits, refunds or offsets that the Company is or may be entitled to take in connection with or related to the Transactions. "Sub" means Headwaters T Acquisition Corp., a Utah corporation, which is a wholly-owned subsidiary of Purchaser. "Subsidiary" means, with respect to any Person, any corporation or other organization, whether incorporated or unincorporated, of which (a) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries or (b) such Person or any other Subsidiary of such Person is a general partner (excluding any such partnership where such Person or any Subsidiary of such party does not have a majority of the voting interest in such partnership). "Surviving Corporation" has the meaning set forth in Section 1.1. "Tax" or "Taxes" means all Federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto. "Tax Audit" means any audit or assessment of Taxes, any examination or investigation by any Tax Authority or any other administrative proceeding or appeal relating to Taxes. "Tax Authority" or "Taxing Authority" means the Internal Revenue Service and any other domestic or foreign governmental authority responsible for the administration of any Taxes. "Tax Benefit Basket" has the meaning set forth in Section 2.9. "Tax Benefit Deposits" has the meaning set forth in Section 2.9. 35 "Tax Return" means any return, declaration, report, claim or application for refund, or information return or statement relating to Taxes, including any such document prepared on a consolidated, combined or unitary basis and also including any schedule or attachment thereto, and including any amendment thereof. "Third-Party Claim" has the meaning set forth in Section 6.2. "Threshold" has the meaning set forth in Section 6.3. "Title IV Plan" means a Plan that is subject to Section 302 or Title IV of ERISA or Section 412 of the Code. "Trade Secrets" means all categories of trade secrets as defined in the Uniform Trade Secrets Act, including confidential research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methods, schematics, technology, technical data, designs, drawings, flowcharts, block diagrams, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals. "Trademarks" means U.S. and foreign registered and unregistered trademarks, trade dress, service marks, logos and designs, trade names, internet domain names, corporate names and all registrations and applications in connection therewith. "Transaction Tax Benefit" shall mean any deduction, credit, refund, offset, benefit or other item that reduces Taxes payable by, or increases refunds or other payment of funds from a Taxing Authority to, Purchaser, the Company or Surviving Corporation, as the case may be, or their respective Affiliates, that arises from or is otherwise related to the consummation of the Transactions by the Company, the Surviving Corporation and their respective Subsidiaries and the Sellers, including Tax benefits arising from or related to (i)deductions arising from the retirement of debt of the Company, the Surviving Corporation and their respective Subsidiaries, including call premiums, unamortized debt issuance expenses, and related items, (ii) the 163(j) Amount; (iii) write-off of capitalized fees relating to previous financings of the Company and (iv) deductions attributable to the cash-out of Options as contemplated by this Agreement (the Transaction Tax Benefits referred to in items (i) through (iv) being referred to as the "Identified Transaction Tax Benefits"). Except as set forth in Section 2.9, a Transaction Tax Benefit shall be treated as being realized when (A) a refund reflecting such Transaction Tax Benefit is received from a Taxing Authority; (B) an estimated Tax payment reflecting such Transaction Tax Benefit is made to a Taxing Authority; (C) final Tax payment is made with any Tax Return reflecting such Transaction Tax Benefit; or (D) such Transaction Tax Benefit is otherwise used to reduce Taxes payable by, or to increase refunds or other payments from a Taxing Authority to, Purchaser, the Company or Surviving Corporation, as the case may be, or their respective Affiliates. "Transactions" means all the transactions provided for or contemplated by this Agreement. 36 "WARN Act" means the Worker Adjustment and Retraining Notification Act. Section 7.2 Interpretation. (a) The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (b) Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (c) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. (d) The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. (e) A reference to any party to this Agreement or any other agreement or document shall include such party's successors and permitted assigns. (f) A reference to any legislation or to any provision of any legislation shall include any amendment to, and any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto. (g) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. ARTICLE VIII MISCELLANEOUS Section 8.1 Fees and Expenses. All costs and expenses incurred in connection with this Agreement and the consummation of the Transactions shall be paid by the party incurring such expenses, except as specifically provided to the contrary in this Agreement. Section 8.2 Amendment and Modification. This Agreement may be amended, modified and supplemented in any and all respects, but only by a written instrument signed by all of the parties hereto expressly stating that such instrument is intended to amend, modify or supplement this Agreement. 37 Section 8.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if mailed, delivered personally, telecopied (which is confirmed) or sent by an overnight courier service, such as Federal Express, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Purchaser or Sub, to: Headwaters Incorporated 10653 South River Front Parkway Suite 300 South Jordan, UT 84095 Attention: Chief Executive Officer Telephone: 801-984-9400 Telecopy: 801-984-9410 and if to the Company or the Sellers, to: Tapco Holdings, Inc. c/o Fremont Investors II, L.L.C. 199 Fremont Street, Suite 2300 San Francisco, CA 94105 Attention: Kevin Baker Telephone: (415) 284-8701 Telecopy: (415) 284-8561 Section 8.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties. Section 8.5 Entire Agreement; No Third Party Beneficiaries. This Agreement, the Escrow Agreement and the Confidentiality Agreement (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof and (b) are not intended to confer any rights or remedies upon any Person other than the parties hereto and thereto, the D&O Indemnified Parties, any Purchaser Indemnified Party and any Seller Indemnified Party. Section 8.6 Severability. Any term or provision of this Agreement that is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction or other authority declares that any term or provision hereof is invalid, void or unenforceable, the parties agree that the court making such determination shall have the power to reduce the scope, duration, 38 area or applicability of the term or provision, to delete specific words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. Section 8.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. Section 8.8 Venue. (a) Each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any federal or state court located in Delaware in the event any dispute that the parties fail to resolve arises out of this Agreement or any of the Transactions, (ii) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, and (iii) agrees that it shall not bring any action relating to this Agreement or any of the Transactions in any court other than a federal or state court sitting in Delaware. (b) Any dispute arising out of this Agreement or the subject matter thereof, or out of any of the Transactions contemplated hereby, shall be submitted to arbitration in accordance with Section 23 of the Escrow Agreement and Section 23 of the Escrow Agreement is hereby incorporated by reference herein, INCLUDING THE WAIVER OF JURY TRIAL SET FORTH THEREIN, except that references therein to "Escrow Agreement" shall refer to this Agreement. Section 8.9 Time of Essence. Each of the parties hereto hereby agrees that, with regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. Section 8.10 Extension; Waiver. At any time prior to the Closing Date, either party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance by the other parties with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed by or on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. Section 8.11 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Purchaser may assign any or all of its rights and interests hereunder to any direct or indirect wholly owned Subsidiary of Purchaser. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Remainder of page intentionally left blank. 39 IN WITNESS WHEREOF, each of Purchaser, Sub and the Company has caused this Agreement to be executed by its authorized officer thereunto duly authorized as of the date first written above. HEADWATERS INCORPORATED By: /s/ Brett A. Hickman ------------------------------- Name: Brett A. Hickman Title: V.P. HEADWATERS T ACQUISITION CORP. By: /s/ Brett A. Hickman ------------------------------- Name: Brett A. Hickman Title: President [Signature page to Agreement and Plan of Merger] 40 TAPCO HOLDINGS, INC. By: /s/ John N. Lawless, III ------------------------------- Name: John N. Lawless Title: Chief Executive Officer [Signature page to Agreement and Plan of Merger] 41 EX-99.1 3 ex991form8k090804.txt PRESS RELEASE DATED SEPTEMBER 8, 2004 Exhibit 99.1 NEWS BULLETIN RE: Headwaters Incorporated from 10653 South River Front Parkway, Suite 300 South Jordan, UT 84095 FINANCIAL (801) 984-9400 RELATIONS BOARD NASDAQ: HDWR - -------------------------------------------------------------------------------- FOR FURTHER INFORMATION AT THE COMPANY: AT FINANCIAL RELATIONS BOARD: Sharon Madden Tricia Ross Director of Investor Relations Analyst Contact (801) 984-9400 (310) 407-6540 FOR IMMEDIATE RELEASE: September 8, 2004 HEADWATERS INCORPORATED ACQUIRES TAPCO HOLDINGS, INC. o Expands Construction Materials Pro Forma Revenue by $237 Million for LTM Ended June 30, 2004 o Expected Accretion in 2005 of $0.10 to $0.20 Earnings Per Diluted Share o Fiscal 2005 Earnings Guidance of $2.20 to $2.30 Per Share SOUTH JORDAN, UTAH, SEPTEMBER 8, 2004 - HEADWATERS INCORPORATED (NASDAQ: HDWR) today announced that it has acquired Tapco Holdings Inc., ("Tapco") a leading manufacturer of building products and professional tools used in residential remodeling and construction for $715 million in cash. Transaction Overview - -------------------- o $715 million purchase price o Purchase price funded with proceeds from senior secured credit facilities Tapco Highlights - ---------------- o Leading market share in core markets, primarily wall siding accessories o Vendor of choice for wholesale and the leading U.S. home improvement retailers based on: - Distribution capabilities - Investment in state-of-the-art manufacturing and logistics systems o Strong free cash flow and margins o Demonstrated growth during housing cycle downturns and interest rate increases - significant presence in the remodeling market -more- Page 2 of 8 o Strong management team and extensive industry experience Transaction Rationale - --------------------- o Transaction expected to be earnings accretive in the range of $0.10 to $0.20 in fiscal 2005 o Further diversifies cash flow and earnings o Increases operating cash flow that can be used to de-lever and invest in additional growth opportunities such as nanotechnology o Expands construction materials platform with product breadth, geographic strength, distribution and logistics capabilities o Provides access to Tapco's extensive distribution network comprising over 9,000 ship-to locations including retailers Home Depot and Lowe's o Enhances the stability of Headwaters' construction materials cash flow because of Tapco's presence in the less cyclical remodeling market Forecast Fiscal 2005 - -------------------- o Forecast earnings per share for fiscal 2005 of $2.20 to $2.30 o Integration of new businesses is moving forward appropriately o Growth in manufactured stone exceeding expectations o Improved construction materials margins o Solid fly ash performance Kirk A. Benson, Chairman and CEO of Headwaters, stated, "Tapco has a leading market position in the building materials market and will allow Headwaters to further expand in this area. The acquisition of Tapco will strengthen and diversify Headwaters' construction materials platform with complementary products, geographical strength, and distribution and logistics capabilities. It is consistent with Headwaters' strategy of acquiring market-leading companies with complementary distribution channels and organic growth opportunities. The acquisition of Tapco, along with the acquisition of Eldorado Stone LLC earlier in 2004, places Headwaters in what we believe to be two of the highest growth areas of the siding market: manufactured stone and specialty molded products." Tapco will become part of Headwaters Construction Materials, an expanding division of Headwaters that manufactures, distributes and sells manufactured stone, masonry mortars, blocks, stucco materials, and specialty molded siding accessories. In the last six months, Headwaters has acquired Eldorado Stone, the #2 U.S. manufacturer of architectural stone veneer, Southwest Concrete, which makes Headwaters the largest supplier of concrete block in the Texas market, and Tapco, the largest U.S. manufacturer of injection-molded siding accessories. Tapco - ----- Tapco is a leading designer, manufacturer and marketer of building products and professional tools used in exterior residential home improvement and construction. Tapco believes it has a greater than 75% market share in its core products, based on its survey of the marketplace. These products are primarily injection-molded from polypropylene and enhance the appearance of homes and include window shutters (decorative, operational, functional and storm -more- Page 3 of 8 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. 2003 Gross Sales by Product --------------------------- Shutters $114MM 48% Exterior Vents $ 33MM 14% Mounting Blocks $ 31MM 13% Other $ 30MM 13% Professional Installation Tools $ 28MM 12% 2003 Gross Sales by Channel --------------------------- Wholesale $164MM 69% Retail $ 63MM 27% Manufactured Housing $ 6MM 3% International $ 3MM 1% Tapco's products are sold primarily in the United States and Canada, with less than 5% of sales in Europe, Australia and Asia, through four principal channels: one-step distributors, two-step distributors, "do-it-yourself" mass merchandisers and manufactured housing distributors. Tapco distributes its products through substantially all major U.S. vinyl siding distributors in the one-step and two-step channels. In contrast, many of Tapco's competitors manufacture accessory products as a minor adjunct to their core siding business and generally only distribute through authorized distributors of their siding products. Tapco markets its products under various brands that are differentiated between the retail and wholesale distribution channels. These brands include: "Tapco Products," "Mid-America Building Products," "Mid-America Master Series," "Builders Edge," "Atlantic Shutter Systems," "Vantage," and "The Foundry." Sales are currently impacted 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. Headwaters believes the continued growth in vinyl siding sales is a function of home improvement activity, construction activity and consumer acceptance. Vinyl siding has continued to gain acceptance and increased market share among all siding materials, accounting 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 market share of accessories that accompany vinyl siding sales. Tapco believes that it has the broadest accessory product line in the industry with more than 140,000 SKUs of accessories complementing all vinyl siding in the market. Approximately 75% of Tapco's sales during fiscal 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 -more- Page 4 of 8 required to preserve the value of a home. During economic downturns, Headwaters believes remodeling with vinyl siding is often more attractive than remodeling with wood or brick because of its lower cost. 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. "The acquisition of Tapco fits well into our "wall" building products strategy. Almost all of Tapco's products are accessories associated with exterior wall construction. It also expands our ability to deliver wall products using a variety of raw materials and production processes through a greatly expanded distribution system," said Kirk A. Benson, Headwaters Chief Executive Officer. The Transaction - --------------- The transaction was funded with senior secured credit facilities and balance sheet cash. The permanent credit facilities were underwritten by Morgan Stanley and JPMorgan. Morgan Stanley acted as exclusive strategic M&A advisor to Headwaters on this transaction. The senior secured credit facilities consist of a $640 million first lien term loan maturing in April 2011, and a $150 million second lien term loan maturing in September 2012. The first lien term loan will amortize in quarterly installments of 1% per year with the remaining balance due in three equal installments in November, February and April of the final year. The second lien term loan is due in a single payment at maturity. The senior secured credit facilities are subject to customary covenants. In connection with the syndication of the credit facilities the lenders are entitled to make adjustments to the pricing and other terms of the credit facilities as the lead arrangers may deem advisable, subject to certain limitations. The proceeds from the new borrowings and balance sheet cash was used to complete the acquisition, repay Headwaters' current outstanding senior debt, and pay the expenses of the transaction. Use of proceeds totals approximately $810 million. Steven G. Stewart, Chief Financial Officer, commented, "We believe Headwaters' strong cash flow, coupled with Tapco's operations, provides us with the ability to meet the debt service requirements of these new higher debt levels. We are intent on paying down the debt as rapidly as possible as we have always indicated our preference of operating the business at a level of debt that is 2 to 2.5 times EBITDA. Headwaters strong generation of funds from operations of our businesses should allow us to substantially reduce the debt to EBITDA ratio by the end of 2005. Headwaters may consider a future equity offering not to exceed $175 million to reduce indebtedness, subject to market conditions and the effects of expected dilution." Pro forma Information - --------------------- The acquisition is expected to be accretive to Headwaters' fiscal 2005 EPS. On a pro forma basis Tapco would have been approximately $0.20 accretive for the LTM ended June 30, 2004, if the acquisition had occurred on July 1, 2003. It is -more- Page 5 of 8 anticipated that Tapco will be accretive to Headwaters' 2005 EPS in the range of $0.10 to $0.20. After consummation of the transaction, Headwaters has approximately $972 million in long-term debt and an indebtedness to EBITDA ratio of approximately 4.4, based on pro forma LTM results as of June 30, 2004. See the attached pro forma information and EBITDA reconciliation. The addition of Tapco continues the diversification of Headwaters' revenue and provides cash flows for future development of important technological, operational and strategic initiatives. On a LTM basis, including Tapco, Headwaters' revenues have increased in the construction materials segment. As shown in the following table, alternative energy, CCPs and construction materials represent 21%, 26%, and 53% of total pro forma revenue, respectively. Alternative Energy - 175,900 CCP's - 220,400 Construction Materials - 438,000 Total - 834,300 Acquisition Benefits Diversification of Cash Flows. The acquisition of Tapco will further diversify Headwaters' cash flow stream away from revenue associated with Section 29 business activities. On a pro forma basis, Covol Fuels represents approximately 20% of Headwaters' revenue versus approximately 33% previously. In addition, Tapco's significant presence in the remodeling market and historical strength throughout economic cycles provides balanced exposure to both the new construction and home improvement markets. Consequently, we believe this transaction will increase the operating cash flows that Headwaters can use to de-lever and invest in growth opportunities such as HTI's nanotechnology. Margin Enhancement. Tapco brings economy of scale and manufacturing expertise that results in some of the lowest manufacturing costs in the siding accessory industry, which we believe will improve margins in our construction materials segment. -more- Page 6 of 8 Strong Free Cash Flow Generation. We believe that Tapco's strong EBITDA margins will enhance Headwaters' free cash flow profile. Established Market Leader. Tapco is the vendor of choice in injection-molded accessories and adds to Headwaters' portfolio of market-leading building products brands. Access to Tapco Distribution Network. Headwaters intends to identify additional products that we can distribute through Tapco's existing network. Tapco currently ships to greater than 9,000 distribution points through thousands of distributors. The Company also may be able to leverage the distribution networks of Tapco, Eldorado and our masonry products businesses to accelerate sales of our diverse product portfolio of construction materials. For example, Tapco's strong distribution and marketing presence in the remodeling industry may create a marketing and sales opportunity for Eldorado Stone, which is primarily marketed and distributed to the new construction market. Further, Eldorado's strong presence in the Southwest United States and our leading regional concrete block presence in Texas may create new distribution channels for Tapco products. Experienced Management Team. Tapco brings an energetic management team that has increased net revenues from $165.9 million in 2001 to $236.9 million for the LTM ended June 30, 2004. "We are pleased to combine with Headwaters," said Jack Lawless, President of Tapco. "We believe that we will have an opportunity to participate with Headwaters to create one of the finest energy and building products companies in the world. Tapco's management is committed to a long and productive relationship." Future Outlook - -------------- "Headwaters has normally provided next year guidance after the end of our fiscal year," stated Steven G. Stewart, Chief Financial Officer. "The Tapco acquisition is significant and will be important to our fiscal 2005 performance. In addition, our existing business operations are performing well ahead of our original expectations. Accordingly, we are pleased to be able to provide a forecast for 2005 of between $2.20 and $2.30 earnings per diluted share. This forecast could be adjusted based upon the results of the Emerging Issues Task Force's review of contingent convertible debt instruments. Reducing our fiscal 2004 earnings forecast of $1.90 earnings per diluted share for the one time earnings event in the March quarter of $0.25 per share, our 2005 earnings forecast represents a growth rate of between 33% and 39%. Without the adjustment for the March quarter the expected growth rate would be 16% to 21%. We are excited about the financial performance of our businesses, the strong funds generated from operations, and the addition of Tapco." Headwaters will hold a conference call and web cast (with slides) today, at 2:30 p.m. ET, to discuss the Tapco acquisition. The call can be accessed live by calling 800-215-6437 or 706-634-0805 (international). The call will also be available live via the Internet by accessing Headwaters' web site at www.hdwtrs.com and clicking on the Investor Relations section. To listen to the -more- Page 7 of 8 live broadcast, please go to the web site at least fifteen minutes early to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, an online replay will be available for 90 days on www.hdwtrs.com, or a phone replay will be available from one hour after the call and through September 15, 2004 at 11:59 p.m. ET. You may access the replay by dialing 800-642-1687 or 706-645-9291 (international) and entering the passcode 9987359. About Headwaters Incorporated - ----------------------------- Headwaters Incorporated is a world leader in creating value through innovative advancements in the utilization of natural resources. The Company is focused on providing services to energy companies, conversion of fossil fuels into alternative energy products, and adding value to energy. Headwaters generates revenue from managing coal combustion products (CCPs) and from licensing its innovative chemical technology to produce an alternative fuel. Through its CCP business, building products business, and its solid alternative fuels business, the Company earns a growing revenue stream that provides the capital needed to expand and acquire synergistic new business opportunities. About Tapco - ----------- Tapco is a leading designer, manufacturer and marketer of building products and professional tools used in exterior residential remodeling and construction. Tapco's products are sold primarily in the United States and Canada, with less than 5% of sales in Europe, Australia and Asia. Tapco distributes its products through substantially all major U.S. vinyl siding distributors in the one-step and two-step channels. Tapco's web site is www.tapcoint.com. Forward Looking Statements - -------------------------- Certain statements contained in this report are forward-looking statements within the meaning of federal securities laws and Headwaters intends that such forward-looking statements be subject to the safe-harbor created thereby. Forward-looking statements include Headwaters' expectations as to the managing and marketing of coal combustion products and building products, operation of facilities utilizing alternative fuel technologies, the marketing of synthetic fuels, 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, and other information about Headwaters. Such statements that are not purely historical by nature, including those statements regarding Headwaters' future business plans, the operation of facilities, the availability of tax credits, the availability of feed stocks, and the marketability of the coal combustion products, building products, and synthetic fuel, are 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. 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. 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. In addition to matters affecting the coal combustion products, synthetic fuel and building products industries or the economy generally, factors which could cause actual results to differ from expectations stated in forward-looking statements include, among others, the factors described in the captions entitled "Forward-looking Statements" and "Risk Factors" in Item 7 in Headwaters' Annual Report on Form 10-K for the fiscal year ended September 30, 2003, Quarterly Reports on Form 10-Q, and other periodic filings and prospectuses. -more- Page 8 of 8 Although Headwaters believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, 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 this report. Our internet address is www.hdwtrs.com. There we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports can be accessed through the investor relations section of our web site.
HEADWATERS INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) for the Nine Months Ended June 30, 2004 (thousands of dollars and shares, except per-share amounts) Headwaters Tapco Eldorado Consolidated Pro Forma Nine Months Eight Months Nine Months Nine Months Ended Ended Ended Ended July 31, 2004 May 31, 2004 June 30, 2004 June 30, 2004 ------------- ---------------- ------------- -------------- Revenue: (ACTUAL) (ACTUAL) (ACTUAL) (PRO FORMA) 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 171,339 78,491 49,961 299,791 Other revenues 4,315 4,315 ------------- ---------------- ------------- -------------- Total revenue 171,339 78,491 355,308 605,138 ------------- ---------------- ------------- -------------- 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 94,979 54,352 38,921 188,252 Cost of other revenues 362 362 Depreciation and amortization 1,628 4,484 11,056 24,680 Research and development 5,135 5,135 Selling, general and administrative 26,663 14,006 42,340 83,009 ------------- ---------------- ------------- -------------- Total operating costs and expenses 123,270 72,842 267,453 471,077 ------------- ---------------- ------------- -------------- Operating income 48,069 5,649 87,855 134,061 Interest income (expense), net (19,496) (3,641) (12,253) (48,159) Other income (expense), net 100 0 (2,118) (2,018) ------------- ---------------- ------------- -------------- Income before income taxes 28,673 2,008 73,484 83,884 Income tax provision (10,601) 0 (28,705) (32,761) ------------- ---------------- ------------- -------------- Net income $ 18,072 $ 2,008 $ 44,779 $ 51,123 ============= ================ ============= ============== Basic earnings per share $ 1.43 $ 1.63 ============= ============== Diluted earnings per share $ 1.38 $ 1.57 ============= ============== Weighted average shares outstanding -- basic 31,287 31,287 ============= ============== Weighted average shares outstanding -- diluted 32,501 32,501 ============= ============== Reconciliation of actual results to pro forma results for the nine months ended June 30, 2004: Headwaters' historical net income as originally reported, including one month of Eldorado net income subsequent to June 2, 2004, date of acquisition $ 44,779 Eldorado's historical net income prior to date of acquisition 2,008 Tapco's historical net income 18,072 Net increase in amortization expense on acquired intangible assets (7,512) Net increase in interest expense on new debt facilities (12,769) Income tax effect of above adjustments 6,545 ---------------- Pro forma net income shown above $ 51,123 ================
HEADWATERS INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) for the Year Ended September 30, 2003 (thousands of dollars and shares, except per-share amounts) Headwaters Tapco Eldorado Consolidated Pro Forma Year Ended Year Ended Year Ended Year Ended October 31, December 31, September 30, September 30, 2003 2003 2003 2003 ------------- ---------------- ------------- -------------- Revenue: (ACTUAL) (ACTUAL) (ACTUAL) (PRO FORMA) 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 212,816 103,659 49,350 365,825 Other revenues 4,241 4,241 ------------- ---------------- ------------- -------------- Total revenue 212,816 103,659 387,630 704,105 ------------- ---------------- ------------- -------------- 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 126,729 72,060 37,689 236,478 Cost of other revenues 3,919 3,919 Depreciation and amortization 1,870 6,526 12,982 31,395 Research and development 4,674 4,674 Selling, general and administrative 32,785 17,059 40,715 90,559 ------------- ---------------- ------------- -------------- Total operating costs and expenses 161,384 95,645 310,511 577,557 ------------- ---------------- ------------- -------------- Operating income 51,432 8,014 77,119 126,548 Interest income (expense), net (30,375) (5,349) (15,377) (63,990) Other income (expense), net (273) 0 (1,661) (1,934) ------------- ---------------- ------------- -------------- Income before income taxes 20,784 2,665 60,081 60,624 Income tax provision (7,042) 0 (23,450) (23,662) ------------- ---------------- ------------- -------------- Net income $ 13,742 $ 2,665 $ 36,631 $ 36,962 ============= ================ ============= ============== Basic earnings per share $ $1.35 $ 1.36 ============= ============== Diluted earnings per share $ 1.30 $ 1.31 ============= ============== Weighted average shares outstanding -- basic 27,083 27,083 ============= ============== Weighted average shares outstanding -- diluted 28,195 28,195 ============= ============== Reconciliation of actual results to pro forma results for the fiscal year ended September 30, 2003: Headwaters' historical net income as reported $ 36,631 Eldorado's historical net income 2,665 Tapco's historical net income 13,742 Net increase in amortization expense on acquired intangible assets (10,017) Net increase in interest expense on new debt facilities (12,889) Income tax effect of above adjustments 6,830 ---------------- Pro forma net income shown above $ 36,962 ================
HEADWATERS INCORPORATED Reconciliation of Pro Forma EBITDA for the Last Twelve Months Ended June 30, 2004 (thousands of dollars) Pro Forma Consolidated Twelve Months Ended June 30, 2004 ------------- Headwaters: Last twelve months ("LTM") net income $ 56,025 LTM net interest expense 15,717 LTM income taxes 35,205 LTM depreciation and amortization 14,958 ------------- Headwaters LTM EBITDA 121,905 Eldorado: Pro forma EBITDA for the eleven months ended May 31, 2004 20,702 Tapco: Pro forma EBITDA for the twelve months ended July 31, 2004 77,836 ------------- Pro forma combined LTM EBITDA $ 220,443 ============= Reconciliation of Eldorado Pro Forma EBITDA: Pro forma LTM net income $ 3,134 Pro forma LTM net interest expense 6,717 Pro forma LTM income taxes 2,004 Pro forma LTM depreciation and amortization 8,847 ------------- $ 20,702 ============= Reconciliation of Tapco Pro Forma EBITDA: Pro forma LTM net income $ 7,211 Pro forma LTM net interest expense 41,365 Pro forma LTM income taxes 4,610 Pro forma LTM depreciation and amortization 24,025 Non recurring management fees 625 ------------- $ 77,836 =============
EX-99.2 4 ex992form8k090804.txt PRESS RELEASE DATED SEPTEMBER 9, 2004 Exhibit 99.2 NEWS BULLETIN RE: Headwaters Incorporated from 10653 South River Front Parkway, Suite 300 South Jordan, UT 84095 FINANCIAL (801) 984-9400 RELATIONS BOARD NASDAQ: HDWR - -------------------------------------------------------------------------------- FOR FURTHER INFORMATION AT THE COMPANY: AT FINANCIAL RELATIONS BOARD: Sharon Madden Tricia Ross Director of Investor Relations Analyst Contact (801) 984-9400 (716) 520-7064 FOR IMMEDIATE RELEASE: SEPTEMBER 9, 2004 HEADWATERS INCORPORATED'S COMPENSATION COMMITTEE GRANTS STOCK OPTIONS TO MANAGEMENT OF TAPCO HOLDINGS, INC. SOUTH JORDAN, UTAH, SEPTEMBER 9, 2004 - HEADWATERS INCORPORATED (NASDAQ: HDWR), today announced that the Compensation Committee of Headwaters' Board of Directors has granted incentive stock options to certain employees of Tapco, acquired yesterday, September 8, 2004. The options were granted outside of any stock incentive plan of the Company. When vested, the options will allow the employees to purchase common stock of Headwaters at an exercise price of $28.49 per share. The options will vest over four and one-half years, vesting 20% on March 31, 2005 and each anniversary of that date, becoming fully vested in 2009. In the case of Mr. Schiedegger, the options will vest over two and one-half years, vesting 33% on March 31, 2005 and each anniversary of that date, becoming fully vested in 2007. The options will expire in 10 years, if not exercised. The recipients of the options, and the number of options granted are as follows: John N. Lawless, III 125,000 Charles E. Schiedegger 50,000 Robert C. Sawyer 40,000 David S. Ulmer 40,000 Patrick F. Dunn 30,000 William G. Barr 10,000 Tracey Lee Anderson 3,000 Barton K. Gentsch 3,000 Alan B. Gurney 3,000 Thomas A. Ward 3,000 -more- Page 2 of 2 Headwaters expects to register these options with the SEC on Form S-8. About Headwaters Incorporated Headwaters Incorporated is a world leader in creating value through innovative advancements in the utilization of natural resources. The Company is focused on providing services to energy companies, conversion of fossil fuels into alternative energy products, and adding value to energy. Headwaters generates revenue from managing coal combustion products (CCPs) and from licensing its innovative chemical technology to produce an alternative fuel. Through its CCP business, fly ash building products business, and its solid alternative fuels business, the Company earns a growing revenue stream that provides the capital needed to expand and acquire synergistic new business opportunities. Forward Looking Statements Certain statements contained in this report are forward-looking statements within the meaning of federal securities laws and Headwaters intends that such forward-looking statements be subject to the safe-harbor created thereby. Forward-looking statements include Headwaters' expectations as to the managing and marketing of coal combustion products and building products, operation of facilities utilizing alternative fuel technologies, the marketing of synthetic fuels, 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, and other information about Headwaters. Such statements that are not purely historical by nature, including those statements regarding Headwaters' future business plans, the operation of facilities, the availability of tax credits, the availability of feed stocks, and the marketability of the coal combustion products, building products, and synthetic fuel, are 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. 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. 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. In addition to matters affecting the coal combustion products, synthetic fuel and building products industries or the economy generally, factors which could cause actual results to differ from expectations stated in forward-looking statements include, among others, the factors described in the captions entitled "Forward-looking Statements" and "Risk Factors" in Item 7 in Headwaters' Annual Report on Form 10-K for the fiscal year ended September 30, 2003, Quarterly Reports on Form 10-Q, and other periodic filings and prospectuses. Although Headwaters believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, 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 this report. Our internet address is www.hdwtrs.com. There we make available, free of charge, our annual report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports can be accessed through the investor relations section of our web site. -----END PRIVACY-ENHANCED MESSAGE-----